ACCT 461 Ch6

Fraud rationalizations include ______.

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

Fidelity bonds ______.

- Are often recommended by auditors - May include employee background checks - Are a type of insurance policy

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

- Are trusted - Have long tenure - Hold high executive positions -- are over the age of 50

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

- Disbursements - Receipts

Substantive procedures over cash will ______.

always be performed

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

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

an outside third-party agency

Detection risk is set based on the level of ______ ______ and risk of material misstatement.

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

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

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

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

existence

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 ______ times.

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

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

fraud triangle

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

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

separation duties

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

- Checks should be endorsed immediately - Two people should open the mail - Cash should be deposited daily and intact - Remittance advices should be sent to the controller's office for recording

Fraudsters behaviors often include ______.

- Drinking too much - Working late - Irritability - Defensiveness - Inability to relax - Working standing up

Which of the following statements are correct?

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

A typical white collar criminal is ______.

- Generally acting alone - Socially conforming

A code of conduct for employees ______.

- Helps send the right message from the top Is more likely to be supported if the Board chairman follows it - Must be supported by the control environment

Common procedures used in tests of controls are ______, ______, inspection, and reperformance.

- Inquiry - Observation

Employee fraud ______.

- Is also called misappropriation of assets - Generally includes a cover-up - Usually involves some type of falsification -- is hard to catch in the conversion stage

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

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

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

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

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.

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

- Often hidden from view - Not easily noticed by auditors -- Reason: Personality red flags are difficult because honest people also show them.

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

- Paper checks are usually destroyed - The benefit of float is virtually eliminated

The cutoff bank statement ______.

- Qualifies as external evidence - Helps search for unrecorded liabilities - Verifies the existence of year-end deposits in transit

A proof of cash ______.

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

A typical white collar criminal has ______.

- Some type of religious affiliation - Attended college - No arrest record

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.

Which of the following statements are correct?

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

If a control is missing or ineffective ______.

- The risk of material misstatement increases - Fraud may or may not exist

Typical relevant assertions for cash are ______.

- Valuation - Existence - Presentation and disclosure

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 -- Reason: A walkthrough is too limited in scope to provide such evidence.

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 -- Reason: Paper checks are generally destroyed and the audit team will only be able to obtain electronic copies of checks.

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 -- Reason: Perfection is not an option. The issue is if the control is operating effectively.

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

False -- Reason: They are not guaranteed to prevent fraud, but the treatment of people is a method of fraud prevention.

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

True -- Reason: This is one reason why timely bank reconciliation is an important element of internal control activities over cash.

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.

canceled checks

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

chain custody

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) ______ ______ scheme.

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

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

cutoff

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

dependent on proper password controls

The company's checkbook is the cash ______ ______.

disbursement journal

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

disbursements

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

The most common motivation in business frauds is ______.

economic benefits

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

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 ______ ______ that have been designed to mitigate the risk of material misstatement.

internal control

Payments are remitted by customers to an external location when a(n) ______ arrangement exists.

lockbox

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

lockbox

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

managers

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 -- Reason: This is true if the internal control activities are not operating effectively.

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

motive

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

never handle the cash

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

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

proof cash

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

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

receipt journal

Copies of canceled checks received electronically are sufficient for ______.

reconciling an account

When testing cash, auditors typically ______.

rely exclusively on tests of detail

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

required

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

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

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

the same as

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

upper management

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

voucher

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