Auditing & Assurance Chapter 6

To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is

stamped "paid" by the check signer.

An auditor is considering whether the omission of the confirmation of investments impairs the auditor's ability to support a previously expressed unmodified opinion. The auditor need not perform this omitted procedure if

the results of alternative procedures that were performed compensate for the omission.

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the

risk that material misstatements exist in the financial statements.

Cash confirmations need to be mailed under the control of the __________.

auditor

Auditors are often concerned with the _______of cash, as this is where most misstatements occur.

overstatement

A reason to believe fraud occurred.

Predication

Cutoff bank statements include activity for the period _______the period being audited.

after

If the amount of a check is altered by an employee after it has cleared the bank, the change can be detected by

comparing the magnetic imprint of the amount paid to the amount written on the check face.

Each of the following is a type of known misstatement, except

differences between management and the auditor's judgment regarding estimates.

Which of the following situations most likely represents the highest risk of a misstatement arising from misappropriation of assets?

A large number of bearer bonds on hand

In preparing for the audit of cash, the auditors perform analytical procedures concerning cash balances. Which of the following would be the best source of information for use in the estimate of cash?

Cash budgets

The "relevance" of evidence.

Chain of custody

The need for money.

Economic motive

Drives people to steal to achieve more personal prestige.

Egocentric motive

The chain of custody is the crucial link of evidence to the fraud suspect.

True

Cash analyses need to be _______ to the general ledger.

reconciled

Which of the following statements is correct with respect to the elements of the "fraud triangle"?

All of these statements are correct.

It is not necessary to send confirmations on accounts that a company represents as closed during the year to get the bank to confirm zero balances.

False

Presentation and disclosure

Investigate payments to related parties

Which of the following is not considered one of the three factors increasing the probability of fraud?

Lack of training

Helping attorneys document cases.

Litigation support

Incorporating elements of unpredictability in the selection of audit procedures to be performed by auditors include all of the following except

Sending attorney letters to every attorney listed under the legal expense account

The client should request the bank to send a cutoff bank statement directly to the auditor.

True

A proof of cash

can be used to test the transactions process.

An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when the

cutoff bank statement is reconciled.

After auditing cash, it is important to evaluate proper financial statement presentation and __________ of cash.

disclosure

When auditing financial statements and finding indications of a possible misappropriation of assets, independent auditors should

do all of these.

To gather evidence regarding the bank's balance in a bank reconciliation, an auditor would examine all of the following except the

general ledger.

When an employee embezzles company funds from an electric utility company for the purpose of paying expenses of an anti-nuclear protest organization, the fraudster's motive is said to be

ideological.

The mail which includes payments should be opened by two people. This control is called

joint custody.

It is necessary to ______ the client's cutoff of cash transactions.

verify

Immediately upon receipt of cash, a responsible employee should

Prepare a remittance listing

The use of confirmations for cash balances is still considered a generally accepted audit procedure.

True

Existence and accuracy

Obtain analyses of cash balances and reconcile them to the general ledger

A habitual criminal.

Psychotic motive

During an audit of cash, the auditor is most concerned with the management assertion of

Existence

Net worth analysis.

Extended procedure

An audit plan of substantive procedures for cash would not include

request a cutoff bank statement be mailed to the client.

In the audit of cash the auditor obtains a bank cutoff statement primarily to

test the propriety of items appearing on the client's year-end bank reconciliation.

It is important to verify ______ of both cash receipts and cash disbursements.

cutoff

Existence, occurrence, accuracy, cutoff, and rights

- Count cash on hand - Confirm cash balances with financial institutions

Cutoff, existence, occurrence, rights, and completeness

- Verify the client's cutoff of cash transactions - Analyze bank transfers occurring at year-end

General sequence of steps of the audit process for an audit of cash

1. Use the understanding of the client and its environment to consider inherent risks related to cash. 2. Obtain an understanding of internal control over cash. 3. Assess the risks of material misstatement and design further audit procedures (tests of controls). 4. Perform further audit procedures - tests of controls. 5. Perform further audit procedures - substantive procedures for cash transactions and balances

Most fraud investigators utilize the fraud triangle theory. A new theory called the fraud diamond has been proposed. Which of the following is an element of the fraud diamond and is not an element of the fraud triangle?

Capability

A company employs three accounts payable clerks and one treasurer. Their responsibilities are as follows: - Clerk 1: Reviews vendor invoices for proper signature approval - Clerk 2: Enters vendor invoices into the accounting system and verifies payment terms -Clerk 3: Posts entered vendor invoices to the accounts payable ledger for payment and mails checks - Treasurer: Reviews the vendor invoices and signs each check. Which of the following would indicate a weakness in the company's internal controls?

Clerk 3 mails the checks and remittances after they have been signed.

It is always good control to have the bookkeeper prepare a list of cash receipts and then have the bookkeeper record it immediately in the accounts.

False

Application of accounting and auditing skills to the law and criminal cases.

Forensic accounting

A proactive approach to detect financial fraud.

Fraud auditing

As payments are received, one mailroom employee is assigned the responsibility of prelisting receipts and preparing the deposit slip prior to forwarding the receipts, deposit slip, and remittance advices to accounts receivable for posting. Accounts receivable personnel re-foot the deposit slip, stamp a restrictive endorsement on the back of each check, and then forward the receipts and deposit slip to the treasury department. Evaluate the internal control of the described process. Which of the following is a reasonable assessment of internal control in this process?

Inadequate internal control because of a lack of separation of duties

Which of the following management policies would increase the probability of fraud in a company?

Measuring performance and awarding bonuses based on short-term operating results

In order for auditors to be able to recognize potential fraud, they must be aware of the basic characteristics of fraud. Which of the following is not a characteristic of fraud?

Negligence on the part of executive management

A change in habits.

Red flag

Which of the following would the auditor consider to be an incompatible operation if the cashier receives remittances?

The cashier posts the receipts to the accounts receivable subsidiary ledger cards

Analyzing bank transfers at the end of the period being audited and the beginning of the next period helps detect ____________.

kiting

Cash reconciliations can be tested via __________.

reperformance

When counting cash on hand the auditor must exercise simultaneous control over all cash and other negotiable assets to prevent

replacement or substitution of stolen assets.