Which of the following is a red flag indicating embezzlement in source documents?

• A. Only photocopies are available as source documents instead of originals
• B. Payees on source documents do not match entries on the general ledger
• C. Some source documents are missing or altered
• D. All of the above

Answer: (C)

When evaluating source documents for embezzlement risk, the trustworthiness of the documentation trail is crucial. If some source documents are missing or altered, the evidence trail is compromised. Missing documents mean you can’t verify who authorized a payment, the amount, the date, or the recipient, which makes it easy to hide improper transfers. Alterations are even more concerning because they actively disguise the true facts of a transaction, signaling an attempt to conceal misappropriation. This direct damage to the audit trail is a clear and strong red flag.

Photocopies without the originals aren’t definitive proof of fraud; they can be a practical or policy choice in some environments. Payees on documents not matching the general ledger can raise suspicion, but discrepancies can also arise from ordinary clerical errors or naming variations, so they’re not as unequivocal a signal as missing or altered documents.