Chapter 6: Employee Fraud & the Audit of Cash

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

- determine the methods by which the misappropriation was carried out. -identify persons who are likely responsible for the misappropriation and obtain evidence about some other fraud indications in their work. -investigate fully to determine the total amount of the misappropriation. -determine which accounts are affected and the amount by which they are overstated or understated. -do all of these.

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

-Opportunity refers to a situation that allows someone with motive to carry out fraud. -A lack of integrity describes a person who does not stick to the social or organizational ethical code. -Fraud is most common when these three factors exist together. -Motive is a cause that pressures people into action. -All of these statements are correct.

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.

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

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

a large number of bearer bonds on hand

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

better business bureau

A proof of cash

can be used to test the transactions process

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

cash in bank and collateral for loans

The "relevance" of evidence

chain of custody

A company employs three accounts payable clerks and one treasurer. Their responsibilities are as follows:

clerk 3 mails the check and remittances after they have been signed

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

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?

compatibility

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

cutoff bank statement

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

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

differences between management and the auditor's judgment regarding estimates

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?

A practice that would not encourage fraud would include

due consideration of pressure put on employees in the work place

the need for money

economic motive

Drives people to steal to achieve more personal prestige

egocentric motive

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

employees that hold positions with little or no authority

net worth analysis

extended procedure

application of accounting and auditing sills to the law and criminal cases

forensic accounting

a proactive approach to detect financial fraud

fraud auditing

To gather evidence regarding the bank's balance in a bank reconciliation, an auditor would examine all of the following except the

general ledger

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

The mail which includes payments should be opened by two people. This control is called

joint custody

Which of the following is NOT considered one of the three factors increasing the probability of fraud?

lack of training

Helping attorneys document cases

litigation support

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

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

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 probability of fraud is not a function of

predication

a reason to believe fraud occurred

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

The phases of employee fraud does not include the

prosecution

a habitual criminal

psychotic motive

a change in habits

red flag

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

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

restrictive endorsement on all checks

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.