Chapter 6
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