Chapter 6: Employee Fraud and the Audit of Cash

Which of the following is least indicative of fraudulent activity? (A) Bank reconciliation has no outstanding checks or deposits older than 15 days. (B) Internal auditors cannot locate several credit memos to support reductions of customers' balances. (C) Numerous cash refunds have been made to different people at the same post office box address. (D) Three people were absent the day the auditors handed out the paychecks and have not picked them up four weeks later.

(A) Bank reconciliation has no outstanding checks or deposits older than 15 days.

During an audit of cash, the auditor is most concerned with the management assertion of (A) Existence. (B) Valuation or allocation. (C) Occurrence. (D) Rights and obligations.

(A) Existence.

Which of the following is an effective audit procedure that an auditor might use to detect kiting between intercompany banks? (A) Prepare a schedule of the bank transfers. (B) Prepare a year-end bank reconciliation. (C) Review the composition of authenticated deposit slips. (D) Review subsequent bank statements.

(A) Prepare a schedule of the bank transfers.

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor? (A) Understating the sales journal. (B) Overstating the accounts receivable subsidiary ledger. (C) Overstating the accounts receivable control account. (D) Overstating the sales journal.

(A) Understating the sales journal.

The auditors' information source for vouching the bank reconciliation items is the (A) cutoff bank statement. (B) bank statement at audit date. (C) standard bank confirmation. (D) accounting journal at year end.

(A) cutoff bank statement.

Allison Everhart, an employee in accounts payable, believes she can run a fictitious invoice through the accounts payable system and collect the money. She knows payments are subject to an audit. Which account would be the best place to hide the fraud? (A) Wage expense. (B) Consulting service expense. (C) Inventory. (D) Property tax expense.

(B) Consulting service expense.

A good fraud prevention program should address employees' motivation to steal from the company. The best method for doing this is to (A) Require a fidelity bond on all employees. (B) Establish employee assistance programs. (C) Ensure that all accounts with high inherent risk of fraud are audited. (D) Require reconciliations of all accounts to be reviewed by a supervisor.

(B) Establish employee assistance programs.

Which of the following is not considered one of the three factors increasing the probability of fraud? (A) Motive. (B) Lack of training. (C) Opportunity. (D) Rationalization.

(B) Lack of training.

Which of the following management policies would increase the probability of fraud in a company? (A) Diversifying authority throughout divisions and subsidiaries in the organization. (B) Measuring performance and awarding bonuses based on short-term operating results. (C) Giving employees performance feedback that considers positive and constructive praise along with critical and negative observations on their work. (D) Establishing work teams that share responsibilities, performance, and bonuses based on collective efforts.

(B) Measuring performance and awarding bonuses based on short-term operating results.

A code of ethics is an important element of a fraud prevention program. Which of the following would diminish the effectiveness of a company's code of conduct? (A) The posting of the code of ethics in the company workplace. (B) The violation of the code of ethics by senior management. (C) The establishment of a chief ethics officer. (D) The establishment of a hotline for reporting unethical behavior.

(B) The violation of the code of ethics by senior management.

An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when the: (A) check register for the last month is reviewed. (B) cutoff bank statement is reconciled. (C) bank confirmation is reviewed. (D) search for unrecorded liabilities is performed.

(B) cutoff bank statement is reconciled.

To gather evidence regarding the bank's balance in a bank reconciliation, an auditor would examine all of the following except the: (A) cutoff bank statement. (B) general ledger. (C) bank confirmation. (D) year-end bank statement.

(B) general ledger.

The mail which includes payments should be opened by two people. This control is called: (A) separation of duties. (B) joint custody. (C) anti-collusion. (D) lapping.

(B) joint custody.

The phases of employee fraud does not include the (A) fraudulent act. (B) prosecution. (C) conversion of money to fraudster's use. (D) cover-up.

(B) prosecution.

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: (A) supported by a vendor's invoice. (B) stamped "paid" by the check signer. (C) prenumbered and accounted for. (D) approved for authorized purchases.

(B) stamped "paid" by the check signer.

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? (A) Motive. (B) Opportunity. (C) Capability. (D) Liquidity

(C) Capability.

If the auditor believes that a misstatement is or might be intentional and the effect on the financial statements could be material or cannot be readily determined, the auditor should do which of the following? (A) Inquire of management as to the possibility of fraud. (B) Discuss with the audit committee what should be done to prevent possible future misstatements. (C) Perform procedures to obtain additional audit evidence to determine whether fraud has occurred or is likely to have occurred. (D) Inquire of management as to the possibility of fraud and discuss with the audit committee what should be done to prevent possible future misstatements. (E) None of the choices is correct.

(C) Perform procedures to obtain additional audit evidence to determine whether fraud has occurred or is likely to have occurred.

Immediately upon receipt of cash, a responsible employee should (A) Record the amount in the cash receipts journal. (B) Update the subsidiary accounts receivable records. (C) Prepare a remittance listing. (D) Prepare a deposit slip in triplicate.

(C) Prepare a remittance listing.

Each of the following is a type of known misstatement, except: (A) an inaccuracy in processing data. (B) the misapplication of accounting principles. (C) differences between management and the auditor's judgment regarding estimates. (D) a difference between the classification of a reported financial statement element and the classification according to generally accepted accounting principles.

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

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: (A) psychotic. (B) egocentric. (C) ideological. (D) economic.

(C) ideological.

The probability of fraud is not a function of (A) motive. (B) a person's lack of integrity. (C) predication. (D) opportunity.

(C) predication.

Your client is in the process of acquiring another company. You have been requested to verify that cash for the company being acquired is properly stated. The audit technique that will yield the most persuasive evidence is: (A) examination of the company's escrow account. (B) interview with the company's treasurer and cash manager. (C) preparation and review of standard bank confirmation inquiries. (D) analytical computations comparing current cash in the bank with previous accounting periods.

(C) preparation and review of standard bank confirmation inquiries.

In what way can audit procedures be modified to address assessed fraud risks? (A) Obtain more reliable information. (B) Perform procedures close to year-end. (C) Apply computer-assisted techniques to all items. (D) All of the choices are valid modifications.

(D) All of the choices are valid modifications.

Which of the following control activities would best protect against the preparation of improper or inaccurate cash disbursements? (A) All checks must be sequentially numbered and accounted for by internal auditors. (B) All checks must be perforated or otherwise effectively canceled when they are returned with the bank statement. (C) All checks must be signed by an officer designated by the board of directors. (D) All signed checks must be reviewed and compared with supporting documentation by the treasurer before mailing.

(D) All signed checks must be reviewed and compared with supporting documentation by the treasurer before mailing.

Embezzlement is a type of fraud that involves (A) A manager's falsification of financial statements for the purpose of misleading investors and creditors. (B) An employee's misappropriating an employer's money or property not entrusted to him or her. (C) An employee's mistaken representation of opinion that causes incorrect accounting entries. (D) An employee misappropriating an employer's money or property entrusted to the employee's control in the employee's normal job.

(D) An employee misappropriating an employer's money or property entrusted to the employee's control in the employee's normal job.

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? (A) Intentional deception. (B) Taking unfair or dishonest advantage of other people. (C) Perpetration for the benefit or detriment of the organization. (D) Negligence on the part of executive management.

(D) Negligence on the part of executive management.

Incorporating elements of unpredictability in the selection of audit procedures to be performed by auditors include all of the following except (A) Varying the timing of the audit procedures. (B) Selecting items for testing that have lower amounts or are otherwise outside customary selection parameters. (C) Performing audit procedures on an unannounced basis. (D) Sending attorney letters to every attorney listed under the legal expense account. (E) None of the choices is correct

(D) Sending attorney letters to every attorney listed under the legal expense account.

Which of the following would the auditor consider to be an incompatible operation if the cashier receives remittances? (A) The cashier makes the daily deposit at a local bank. (B) The cashier prepares the daily deposit. (C) The cashier endorses the checks. (D) The cashier posts the receipts to the accounts receivable subsidiary ledger cards.

(D) The cashier posts the receipts to the accounts receivable subsidiary ledger cards.

When auditing with "fraud awareness," auditors should especially notice and follow up on employee activities under which of these conditions? (A) The board of directors reviews and approves all investment transactions. (B) The petty cash box is always locked in the desk of the custodian. (C) Management has published a company code of ethics and sends frequent communication newsletters about it. (D) The company always estimates the inventory but never takes a complete physical count.

(D) The company always estimates the inventory but never takes a complete physical count.

Which of the following control activities could prevent a paid disbursement voucher from being presented for payment a second time? (A) Vouchers should be prepared by individuals who are responsible for signing disbursement checks. (B) Disbursement vouchers should be approved by at least two responsible management officials. (C) The date on a disbursement voucher should be within a few days of the date the voucher is presented for payment. (D) The official signing the check should compare it with the voucher and should stamp "paid" on the voucher documents.

(D) The official signing the check should compare it with the voucher and should stamp "paid" on the voucher documents.

An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using: (A) employee fidelity bonds. (B) independently prepared mailroom prelists. (C) daily check summaries. (D) a bank lockbox system.

(D) a bank lockbox system.

The characteristics of people who commit the largest frauds would not include (A) long tenure with organization. (B) access to largest amounts of money. (C) power to override controls. (D) employees that hold positions with little or no authority.

(D) employees that hold positions with little or no authority.

Auditors ordinarily send a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balances. A purpose of this procedure is to: (A) provide the data necessary to prepare a proof of cash. (B) request that a cutoff bank statement and related checks be sent to the audit. (C) detect questionable bank activities that may otherwise not be discovered. (D) seek information about contingent liabilities and security agreements.

(D) seek information about contingent liabilities and security agreements.

In the audit of cash the auditor obtains a bank cutoff statement primarily to: (A) identify old outstanding checks that the client may exclude from the year-end bank reconciliation in order to misappropriate cash. (B) obtain sufficient information to reconcile the client's bank account as of year-end. (C) obtain direct confirmation of the client's bank balances as of year-end. (D) test the propriety of items appearing on the client's year-end bank reconciliation.

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

Which of the following statements is correct with respect to the elements of the "fraud triangle"? (A) Motive is a cause that pressures people into action. (B) Opportunity refers to a situation that allows someone with motive to carry out fraud. (C) A lack of integrity describes a person who does not stick to the social or organizational ethical code. (D) Fraud is most common when these three factors exist together. (E) All of these statements are correct.

(E) All of these statements are correct.

Independent auditors of financial statements and fraud examiners approach their work differently. (T/F)

(T) True

The client should request the bank to send a cutoff bank statement directly to the auditor. (T/F)

(T) True

cutoff bank statements include activity for the period _____ the period being audited A. after B. before C. disclosing D. inclusive of E. overlapping

A. after

cash confirmation need to be mailed under the control of the _____ A. AICPA B. auditor C. bank D. client E. president

B. auditor

it is important to verify _____ of both cash receipts and cash disbursements A. consideration B. cutoff C. deviation D. disclosure E. existence F. payments

B. cutoff

auditors are often concerned with the _____ of cash, as this is where most misstatements occur A. disclosure B. existence C. inventory D. overstatement E. understatement

D. overstatement

cash reconciliations can be tested via ______ A. counting B. disclosure C. observation D. physical inventory E. reperformance

E. reperformance