Chapter 6

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Fraud rationalizations include ______.

"Nobody will get hurt." "I'll pay the money back." "A successful image is important."

An employee is taking cash and making up the difference by holding the deposit until the next cash receipts are received. The best procedure to discover this fraud is ______.

measuring deposit lag time

The accountant who record cash receipts and credits to customer accounts should ______.

never handle the cash

A method to discover unrecorded transactions is a four-column bank reconciliation which is called a(n

proof of cash

Regarding bank balances, sending a confirmation request to each bank is ______.

required

True or false: The bank reconciliation is an opportunity for management to monitor the separation of duties between cash receipts and disbursements.

true

Financial statement amounts expressed each year as a proportion to a base such as sales or total assets is

vertical

Cash disbursements are typically authorized by an accounts payable department's assembly of supporting documents which is called a(n)

voucher

Substantive procedures over cash will ______.

always be performed

It is usually best to have an anonymous employee hotline responded to by ______.

an outside third-party agency

Fidelity bonds ______.

are a type of insurance policy are often recommended by auditors may include employee background checks

A typical white collar criminal has ______.

attended college no arrest record some type of religious affiliation

Detection risk is set based on the level of ____

audit risk

When a material misstatement is not prevented or detected by the client's internal controls or auditors' substantive procedures,_____ has been manifested.

audit risk

The most common motivation in business frauds is ______.

economic benefits

Comparing a suspect's spending for all purposes to known income is called

expenditure

True or false: When doing a WCGW analysis, the question the auditor should ask is, "Has the client designed and implemented a control that, if operating perfectly, would mitigate the identified risk of material misstatement?"

false

An insurance policy that covers most kinds of cash embezzlement losses is called a(n)

fidelity bond

Auditors rarely prepare a schedule of interbank transfers because of decreased

float

All ways by which people can lie, cheat, steal, and deceive other people is encompassed in the definition of

fraud

Knowingly making material misrepresentations of fact with the intent of inducing someone to believe the falsehood and act upon it, thus suffering a loss or damage is the definition of_____

fraud

Employees are provided an opportunity to furnish information about possible misdeeds when

fraud audit

Incentive/pressure, opportunity and attitude/rationalization are the conditions that make up the

fraud triangle

A typical white collar criminal is ______.

generally acting alone socially conforming

Employee fraud ______.

generally includes a cover-up is also called misappropriation of assets usually involves some type of falsification

Persons in the position to commit the largest frauds typically ______.

have long tenure are trusted hold high executive positions

Fraudsters behaviors often include ______.

irritability working late drinking too much

A possible sign that employees are stealing cash is a(n) ______ in the proportion of cash in the mix of cash and checks.

decrease

If a control is missing or ineffective ______.

the risk of material misstatement increases fraud may or may not exist

Fraud audit questioning ______.

allows employees to furnish information about possible misdeeds addresses fraud possibilities in a direct manner

Auditors observe activities while not being seen when performing

covert surveillance

For cash, ______ is always a relevant assertion in the audit plan.

existence

Asking questions such as "Where is the cash going?" and "For what purpose?" are examples of

reasonableness

The responsibility for setting the tone at the top rests with ______.

upper management

The auditor selects examples of a transaction and traces them from initial receipt to the recording in the accounting records when performing a(n)

walkthrough

Fraudsters have a high rate of repeat offenses ______ prosecuted.

when they are not

Which of the following statements are correct?

Hiring and firing policies are important components of fraud prevention. Fraudsters should be fired and perhaps prosecuted.

The crucial link of the evidence to the criminal suspect that bears directly on the relevance of evidence is referred to as the

chain of custody

Having a casino auditor gamble so cash-handling procedures may be observed is an example of ______.

covert surveillance

True or false: Auditors need to understand how to perform professional document examination and should only examine original documents.

false

Changes of financial statement numbers and ratios across several years is

horizontal

Due to the lack of predictability of the cash balance, auditors ______ use substantial analytical procedures to test cash.

make it difficult for a fraudster to steal cash detect fraudulent activity if it occurs prevent or detect misappropriations of cash

Personality red flags that may be indicative of fraud are most easily detected by ______.

managers

Comparing the date of the deposit slip to the date recorded as a debit in the general ledger to the date the deposit was credited to the bank is ______.

measuring deposit lag time

Copies of canceled checks received electronically are sufficient for ______.

reconciling an account

True or false: Employee assistance programs both benefit employees and are guaranteed to prevent fraud.

false

Which of the following statements are correct?

A control violation may be the audit team's first indication of fraud. The possibility of detection can be an effective fraud deterrent.

Which of the following statements regarding a company's fraud prevention program are true?

In an electronic payment environment, lack of controls can lead to costly fraud. It is essential that management establish a strong control environment.

Which of the following statements are correct?

Most audit clients have strong controls over cash. Tests of controls over cash often support a reduction in control risk.

Which of the following statements are correct?

Someone without access to check-writing should perform the recording function. Individuals outside of normal cash operations should prepare bank reconciliations.

At the end of each day a copy of the check listing, a report of payments recorded in accountants receivable and a copy of the bank deposit slip should be received by ______.

an independent employee

When auditing the bank reconciliation, the auditor should begin by confirming the balance(s) per ______ for each bank account.

bank

The primary document used to test the cash balance in the financial statements is the company's

bank reconciliation

Cash should ______.

be counted with the auditor's pockets empty all be counted at the same time be counted in front of a client's employee

If a client maintains a significant amount of cash on hand, a second cash count should ______.

be done on the same day

An entity's auditors, accountants and security personnel must be acquainted with the basics of fraud awareness ______.

because not all fraud schemes can be thwarted or detected

An employee assistance program can have a positive impact for an organization ______.

but are not guaranteed to prevent fraud

Giving managers and employees the freedom to do business, ______,

can mean giving them freedom that enables committing fraud

Individuals engaging in fraudulent schemes involving cash often try to conceal their crimes by removing ______they made payable to themselves or endorsed on the back with their own name. (Enter only one word per bank.)

canceled checks

All the debits to the cash accounts are found in the cash

cash receipts journal

Frequent deposits and checks in rounded and the same amounts, short time lags between deposits and withdrawals, and a low average balance compared to high levels of deposits, are all characteristic signs of a(n)

check kiting

The deliberate floating on funds between two or more bank accounts in order to make it appear that more cash is present than is really the case is called

check kiting

Proper separation of duties involves different people and departments handling

custody authorization reconciliation

The auditors' information source for validating the bank reconciliation is typically a(n)

cutoff

Fraudsters behaviors often include ______.

defensiveness inability to relax working standing up

In a computerized environment, proper separation of duties is ______.

dependent on proper password controls

Suspect items such as checks made out to "bearer" are searched for in the cash ______ journal.

disbursements

Adjusting and correcting entries that result from bank reconciliations are found in the cash ______ journal.

disbursements receipts

The company's checkbook is the cash

disbursements journal

Auditors look for erasures, alternations and photocopies where originals should be filed when performing

document examination

Auditors must gain an understanding of internal controls that are in place to mitigate assessed fraud risk and, at a minimum,______.

document that understanding in the workpapers

Although the professional standards concentrate on fraudulent financial reporting, the standards also require auditors to pay particular attention to____ fraud perpetrated against a client.

employee

Misappropriation of assets is another term for_____

employee fraud

Typical relevant assertions for cash are ______.

existence presentation and disclosure valuation

True or false: A walkthrough can be used to provide evidence of whether the client's control activities were operating effectively during the period under audit.

false

True or false: As a result of the Check Clearing for the 21st Century Act (Check 21), auditors will only be able to obtain copies of paper checks when investigating possible fraud.

false

The cutoff bank statement ______.

helps search for unrecorded liabilities qualifies as external evidence verifies the existence of year-end deposits in transit

When managers minimize the significance of a weak or missing control by rationalizing that a "long-time trusted employee" is involved, most experienced auditors will ______ their level of fraud risk awareness.

increase

Common procedures used in tests of controls are

inquiry observation

To determine if cash deposits from one bank to another were recorded properly, the auditor may prepare a schedule of

interbank transfers

For each relevant assertion identified by the auditor, professional standards require auditors to first gain an understanding of the

internal controls

Generally the mix of cash and checks cashiers receive in retail operations ______.

is relatively consistent over time

A proof of cash ______.

is used to discover unrecorded cash transactions reconciles the bank balance, bank reports of cash deposited and paid general ledger entries is an effective procedure to verify cash transactions

Auditors are required to pay particular attention to employee fraud against clients because ______.

it can result in a material financial statement misstatement clients want to know if they are being robbed

Payments are remitted by customers to an external location when a(n)

lockbox

When a fiduciary receives payments, lists the receipts, deposits the money and sends remittance advices, a(n)

lockbox

Control activities over cash disbursements are designed to ______.

make it difficult for a fraudster to steal cash prevent or detect misappropriations of cash detect fraudulent activity if it occurs

When completing a fraud examination auditors should ______.

mark the evidence on a separate tag or page

Because of the nature of cash, auditors ______ need to expand substantive audit procedures to ensure the cash balance is not materially misstated and to identify possible fraudulent activities.

may

In the fraud context, a reason for a person to take a fraudulent action that is believed to be unsharable with other is a(n)

motive

A code of conduct for employees ______.

must be supported by the control environment helps send the right message from the top is more likely to be supported if the Board chairman follows it

Personality red flags that may be indicative of fraud are ______.

often hidden from view not easily noticed by auditors

Control activities often take away the ______ for a fraudster to commit a fraud.

opportunity

Failure to count inventory on a regular basis provides ______ to commit fraud.

opportunity

Improper segregation of duties provides ______ to commit fraud.

opportunity

Incentive/pressure, attitude/rationalization and____ are the conditions that make up the fraud triangle

opportunity

Due to the lack of predictability of the cash balance, auditors ______ use substantial analytical procedures to test cash.

rarely

An attitude that says "I am underpaid and due additional compensation" is an example of fraud

rationalization

When testing cash, auditors typically ______.

rely exclusively on tests of detail

In many situations an employee initially receives cash and thus has custody. Because this cannot be avoided, good control dictates that ______.

remittance advices should be sent to the controller's office for recording cash should be deposited daily and intact

The Sarbanes-Oxley Act of 2002 ______ an anonymous employee hotline for reporting ethical problems

requires

In a computerized environment, proper separation of duties ______.

requires proper permissions

The person who authorizes payments should not be in charge of bank reconciliations in order to ensure proper

separation of duties

When auditors brainstorm about fraud, key engagement team members should ______.

set aside any prior beliefs that management is honest and has integrity

The person who authorizes cash disbursements ______.

should not have custody of checks or be in charge of record keeping for payment or bank reconciliations

It is essential that auditors maintain their professional ___ at all times throughout the engagement, including an attitude that includes a "questioning mind" when considering potential fraud

skepticism

If the internal control activities over cash are not operating effectively, auditors may need to expand ______.

substantive audit procedures

As a result of the Check Clearing for the 21st Century Act (Check 21) ______.

the benefit of float is virtually eliminated paper checks are usually destroyed

When companies process payments electronically, the required separation of duties is ______ for companies that write paper checks.

the same as

In many situations an employee initially receives cash and thus has custody. Because this cannot be avoided, good control dictates that ______.

two people should open the mail checks should be endorsed immediately


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