Chapter 6 Review

When auditing financial statements and finding indications of a possible misappropriation of assets, independent auditors should A. investigate fully to determine the total amount of the misappropriation. B. determine which accounts are affected and the amount by which they are overstated or understated. C. determine the methods by which the misappropriation was carried out. D. identify a person(s) who are likely responsible for the misappropriation and obtain evidence about some other fraud indications in their work. E. all of these.

All of These

Which of the following sets of information does an auditor usually confirm on one form?

Cash in bank and collateral for loans

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

An auditor has identified the controller's review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate?

Inquiry and inspection of records

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

Which of the following would be consistent with an employee taking cash receipts from customers on account?

The total of the accounts receivable subsidiary ledger balances is less than the accounts receivable control account.

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 bank lockbox system.

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.

all of these statements are correct

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.

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.

An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control activities leave no audit trail of documentary evidence, the auditor most likely will test the activities by

observation and inquiry.

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

preparation and review of standard bank confirmation inquiries.

An audit plan of substantive procedures for cash would not include

request a cutoff bank statement be mailed to the client

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

seek information about contingent liabilities and security agreements.

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.

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.

An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if

the client does not take the remedial action that the auditor considers necessary.