Audit - Ch 6

Which of the following situations most likely represents the highest risk of a misstatement arising from misappropriation of assets?

A large number of bearer bonds on hand

Which of the following statements is correct with respect to the elements of the "fraud triangle"?

All of these statements are correct.

Information about criminal rackets, convicts and their operations, and reputations of local businesses can be found at the

Better Business Bureau

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

Cash in bank and collateral for loans

A company employs three accounts payable clerks and one treasurer. Their responsibilities are as follows: Picture Which of the following would indicate a weakness in the company's internal controls?

Clerk 3 mails the checks and remittances after they have been signed.

An internal control questionnaire for evaluating the completeness objective of cash receipts would not include which of the following questions?

Does a responsible person approve discounts taken by customers with payments on account?

Narbona, CPA, is reviewing controls over cash received through a bank night depository. Which controls would she find most important?

Dual control (joint custody) is established over the contents of the night depository box from the time of removal until initial recording is completed.

Which question would be inappropriate when asking questions of personnel during a regular audit?

In your department, exactly who has the potential for committing fraud?

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 is not considered one of the three factors increasing the probability of fraud?

Lack of training

Which of the following is ordinarily considered an "extended procedure" during the independent audit of financial statements?

Measure the time lag between the date of recording cash receipts in the books to the date of deposit credit in the bank.

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

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?

Negligence on the part of executive management

At the end of each business day, Safe Company sends its bank a listing of all checks written during the day including the check number, payee, and amount. When a check is sent to the bank for payment the bank compares the payee and the amount with the listing provided by Safe Company. This system is called

Positive Pay.

The phases of employee fraud does not include the

Prosecution

Which of the following should be performed by the persons opening the mail and recording payments?

Restrictive endorsement on all checks

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.

A proof of cash

can be used to test the transactions process.

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?

capability

If the amount of a check is altered by an employee after it has cleared the bank, the change can be detected by

comparing the magnetic imprint of the amount paid to the amount written on the check face.

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.

The auditors' information source for vouching the bank reconciliation items is the

cutoff bank statement.

Each of the following is a type of known misstatement, except

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

When auditing financial statements and finding indications of a possible misappropriation of assets, independent auditors should

do all of these.

A practice that would not encourage fraud would include

due consideration of pressure put on employees in the work place.

The characteristics of people who commit the largest frauds would not include

employees that hold positions with little or no authority.

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.

The standard format for an audit approach for fraud cases would not include

paper trail.

The probability of fraud is not a function of

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

preparation and review of standard bank confirmation inquiries.

The assertions by management regarding the cash accounts in the financial statements include all of the following except

proper internal control activities exist for all cash accounts.

When counting cash on hand the auditor must exercise simultaneous control over all cash and other negotiable assets to prevent

replacement or substitution of stolen assets.

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.

An auditor would least likely initiate a discussion with a client's audit committee concerning

the maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated.

An auditor is considering whether the omission of the confirmation of investments impairs the auditor's ability to support a previously expressed unmodified opinion. The auditor need not perform this omitted procedure if

the results of alternative procedures that were performed compensate for the omission.