Audit Chapter 6

Which of the following is least indicative of fraudulent activity? A.) Bank reconciliation has no outstanding checks or deposits older than 15 days. B.) Numerous cash refunds have been made to different people at the same post office box address. C.) Internal auditors cannot locate several credit memos to support reductions of customers' balances. D.) Three people were absent the day the auditors handed out the paychecks and have not picked them up four weeks later.

A Bank reconciliations that do not have outstanding checks or deposits older than 15 days are generally positive signs and are not indicative of fraudulent activity.

Auditors are auditing the cash receipts for Great Wall Corporation. For each audit procedure performed (numbered 1 - 5 below) select the control objective being tested by placing the correct letter in the blank. The auditors vouched a sample of recorded cash receipts to the deposits in the bank statement. A.) Existence B.) Completeness C.) Authorization D.) Accuracy E.) Classification F.) Accounting and posting G.) Proper period

A.) Existence

Cash reconciliations can be tested via __________. A.) Reperformance B.) Cutoff C.) Auditor D.) Overstatement E.) After

A.) Reperformance

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: A.) the results of alternative procedures that were performed compensate for the omission. B.) the auditor's assessed level of detection risk is low. C.) the omission is documented in a communication with the audit committee. D.) no individual investment is material to the financial statements taken as a whole.

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

Which of the following control activities would best protect against the preparation of improper or inaccurate cash disbursements? A.) All checks must be signed by an officer designated by the board of directors. B.) All signed checks must be reviewed and compared with supporting documentation by the treasurer before mailing. C.) All checks must be sequentially numbered and accounted for by internal auditors. D.) All checks must be perforated or otherwise effectively canceled when they are returned with the bank statement.

B A final review by the treasurer can catch mistakes made in the processing of the payment. This also involves a review of the supporting documentation, an important consideration as well.

A code of ethics is an important element of a fraud prevention program. Which of the following would diminish the effectiveness of a company's code of conduct? A.) The establishment of a hotline for reporting unethical behavior. B.) The violation of the code of ethics by senior management. C.) The establishment of a chief ethics officer. D.) The posting of the code of ethics in the company workplace.

B The violation of the code of ethics by senior management would reduce the effectiveness of the code of ethics because the tone at the top would send the wrong message to employees that the code of ethics was not important.

Embezzlement is a type of fraud that involves A.) An employee's misappropriating an employer's money or property not entrusted to him or her. B.) An employee misappropriating an employer's money or property entrusted to the employee's control in the employee's normal job. C.) An employee's mistaken representation of opinion that causes incorrect accounting entries. D.) A manager's falsification of financial statements for the purpose of misleading investors and creditors.

B This statement is the textbook and criminological definition of embezzlement.

Auditors are auditing the cash receipts for Great Wall Corporation. For each audit procedure performed (numbered 1 - 5 below) select the control objective being tested by placing the correct letter in the blank. The auditors traced a sample of daily cash reports to the cash receipts journal. A.) Existence B.) Completeness C.) Authorization D.) Accuracy E.) Classification F.) Accounting and posting G.) Proper period

B.) Completeness

It is important to verify ______ of both cash receipts and cash disbursements. A.) Reperformance B.) Cutoff C.) Auditor D.) Overstatement E.) After

B.) Cutoff

Narbona, CPA, is reviewing controls over cash received through a bank night depository. Which controls would she find most important? A.) Responsibilities are rotated for processing night depository receipts among employees of the various departments. B.) Dual control (joint custody) is established over the contents of the night depository box from the time of removal until initial recording is completed. C.) Vacations are required for all employees engaged in night depository activities. D.) All deposit tickets related to night deposits are numbered.

B.) 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 of the following management policies would increase the probability of fraud in a company? A.) Diversifying authority throughout divisions and subsidiaries in the organization. B.) Measuring performance and awarding bonuses based on short-term operating results. C.) Giving employees performance feedback that considers positive and constructive praise along with critical and negative observations on their work. D.) Establishing work teams that share responsibilities, performance, and bonuses based on collective efforts.

B.) Measuring performance and awarding bonuses based on short-term operating results.

Each morning the controller gets the prior day's list of remittances, a copy of the payment report, and a copy of the deposit slip returned from the bank. When comparing these items, the controller would be able to determine that A.) The assistant controller does not also reconcile the subsidiary accounts payable. B.) The accounts receivable system has controls over unauthorized access. C.) The cash received and remittance advice received were maintained in a single batch. D.) No checks were returned for insufficient funds.

C If the cash received was not deposited intact or remittances were not posted, the deposit slip amount would not match the remittances or the payments recorded.

If the auditor believes that a misstatement is or might be intentional and the effect on the financial statements could be material or cannot be readily determined, the auditor should do which of the following? A.) Inquire of management as to the possibility of fraud. B.) Discuss with the audit committee what should be done to prevent possible future misstatements. C.) Perform procedures to obtain additional audit evidence to determine whether fraud has occurred or is likely to have occurred. D.) Inquire of management as to the possibility of fraud and discuss with the audit committee what should be done to prevent possible future misstatements.

C Since the auditor believes that a discovered misstatement is or might be intentional, he/she should first perform additional procedures to obtain additional evidence to determine whether fraud has actually occurred.

Fraud risk factors are events or conditions that indicate which of the following? A.) An opportunity to carry out a fraud. B.) An incentive or pressure to perpetrate fraud. C.) All of the choices are correct. D.) An attitude or rationalization that justifies a fraudulent action.

C The three factors that are likely to be present when fraud occurs are opportunity, motive, and the rationalization, which are reflected in other three responses

Cash confirmations need to be mailed under the control of the __________. A.) Reperformance B.) Cutoff C.) Auditor D.) Overstatement E.) After

C.) Auditor

A company employs three accounts payable clerks and one treasurer. Their responsibilities are as follows: Employee/Reviews Clerk 1: Review vendor invoices for proper signature approval. Clerk 2: Enters vendor invoice into the accounting system and verifies payment terms. Clerk 3: Posts entered vendor invoices to accounts payable ledger for payment and mails checks. Treasurer: Review the vendor invoices and signs each check. Which of the following would indicate a weakness in the company's internal controls? A.) Clerk 1 opens all of the incoming mail. B.) Clerk 2 reconciles the accounts payable ledger with the general ledger monthly. C.) Clerk 3 mails the checks and remittances after they have been signed. D.) The treasurer uses a stamp for signing checks.

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

The best way to enact a broad fraud prevention program is to A.) Place dedicated hotline telephones on walls around the workplace with direct communication to the company ethics officer. B.) Name an "ethics officer" who is responsible for receiving and acting on fraud tips. C.) Install airtight control systems of checks and supervision. D.) Practice management "of the people and for the people" to help them share personal and professional problems.

D Since "people" are essential to a fraud prevention program, Practice management "of the people and for the people" to help them share personal and professional problems is the best long-run way to stop fraud.

Which of the following would the auditor consider to be an incompatible operation if the cashier receives remittances? A.) The cashier makes the daily deposit at a local bank. B.) The cashier endorses the checks. C.) The cashier prepares the daily deposit. D.) The cashier posts the receipts to the accounts receivable subsidiary ledger cards.

D The auditor would consider it incompatible because the cashier would have both custody of cash and record-keeping responsibility and, hence, could steal money and fix the records without interference by anyone else. The cashier could steal and then conceal!

Auditors are often concerned with the _______of cash, as this is where most misstatements occur. A.) Reperformance B.) Cutoff C.) Auditor D.) Overstatement E.) After

D.) Overstatement

Cutoff bank statements include activity for the period _______the period being audited. A.) Reperformance B.) Cutoff C.) Auditor D.) Overstatement E.) After

E.) After

Auditors are auditing the cash receipts for Great Wall Corporation. For each audit procedure performed (numbered 1 - 5 below) select the control objective being tested by placing the correct letter in the blank. For a sample of recorded cash receipts, the auditors compared the date of receipt to the recording date. A.) Existence B.) Completeness C.) Authorization D.) Accuracy E.) Classification F.) Accounting and posting G.) Proper period

G.) Proper period

Place the general sequence of steps of the audit process (shown below) in the correct order for an audit of cash. A.) Obtain an understanding of internal control over cash B.) Use the understanding of the client and its environment to consider inherent risks related to cash C.) Assess the risks of material misstatement and design further audit procedures D.) Perform further audit procedures - substantive procedures for cash transactions and balances E.) Perform further audit procedures - test of controls

Order is: 1.) Use the understanding of the client and its environment to consider inherent risks related to cash 2.) Obtain an understanding of internal control over cash 3.) Assess the risks of material misstatement and design further audit procedures 4.) Perform further audit procedures - test of controls 5.) Perform further audit procedures - substantive procedures for cash transactions and balances

Which of the following control activities could prevent a paid disbursement voucher from being presented for payment a second time? A.) The official signing the check should compare it with the voucher and should stamp "paid" on the voucher documents. B.) Vouchers should be prepared by individuals who are responsible for signing disbursement checks. C.) Disbursement vouchers should be approved by at least two responsible management officials. D.) The date on a disbursement voucher should be within a few days of the date the voucher is presented for payment.

A Cancellation of vouchers by stamping them PAID prevents the voucher from mistakenly being paid a second time.

Immediately upon receipt of cash, a responsible employee should A.) Prepare a remittance listing. B.) Record the amount in the cash receipts journal. C.) Update the subsidiary accounts receivable records. D.) Prepare a deposit slip in triplicate.

A Effective control of cash requires that receipts be recorded promptly. For mail receipts, a listing of remittance advices by an employee not performing incompatible functions is a standard control activity. If the customer does not return the remittance advice, one should be prepared at the time the mail is opened. If remittance advices are not used, a list of receipts should still be made when the mail is opened.

Which of the following combinations is a good way to conceal employee fraud but an ineffective means of perpetrating management (financial reporting) fraud? A.) Overstating sales revenue and overstating bad debt expense. B.) Omitting the disclosure information about related-party sales to the president's relatives at below-market prices. C.) Overstating sales revenue and overstating customer accounts receivable balances. D.) Understating interest expense and understating accrued interest payable.

A Overstating sales revenue and overstating bad debt expense by the same amount does not overstate net income or total assets (which is often a goal of financial reporting fraud). However, this action would help to hide a manager's theft of assets (i.e., embezzlement).

A good fraud prevention program should address employees' motivation to steal from the company. The best method for doing this is to A.) Establish employee assistance programs. B.) Require a fidelity bond on all employees. C.) Require reconciliations of all accounts to be reviewed by a supervisor. D.) Ensure that all accounts with high inherent risk of fraud are audited.

A Problems due to debt, addictions, or family problems motivate employees to commit frauds. Establishing an employee assistance program addresses these issues and ultimately may reduce the motivation to commit fraud for some employees.

When auditing with "fraud awareness," auditors should especially notice and follow up employee activities under which of these conditions? A.) The company always estimates the inventory but never takes a complete physical count. B.) Management has published a company code of ethics and sends frequent communication newsletters about it. C.) The petty cash box is always locked in the desk of the custodian. D.) The board of directors reviews and approves all investment transactions.

A Risk is high when the company always estimates the inventory but never takes a complete physical count.

The mail which includes payments should be opened by two people. This control is called: A.) separation of duties. B.) joint custody. C.) anti-collusion. D.) lapping.

B.) 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: A.) confirmation and observation. B.) observation and inquiry. C.) analytical procedures and confirmation. D.) inquiry and analytical procedures.

B.) observation and inquiry.

An auditor would least likely initiate a discussion with a client's audit committee concerning: A.) the methods used to account for significant unusual transactions. B.) the maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated. C.) indications of fraud and illegal acts committed by a corporate officer that were discovered by the auditor. D.) disagreements with management as to accounting principles that were resolved during the current year's audit.

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

Upon receipt of customers' checks in the mail room, a responsible employee should prepare a remittance list that is forwarded to the cashier. A copy of the list should be sent to the A.) Entity's bank to compare the list with the cashier's deposit slip. B.) Treasurer to compare the list with the monthly bank statement. C.) Accounts receivable bookkeeper to update the subsidiary accounts receivable records. D.) Internal auditor to investigate the list for unusual transactions.

C The individuals with record-keeping responsibility should not have custody of cash. Hence, those individuals should use either the remittance advices or a list of the remittances to make entries to the cash and accounts receivable control account and to the subsidiary accounts receivable records. Indeed, having different people make entries in the control account and in the subsidiary records is an effective control.

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? A.) Observation and inspection of records. B.) Confirmation and reperformance. C.) Inquiry and inspection of records. D.) Analytical procedures and reperformance.

C.) Inquiry and inspection of records.

Fraud risk factors are events or conditions that indicate I. An incentive or pressure to perpetrate fraud. II. An opportunity to carry out the fraud. III. An attitude or rationalization that justifies the fraudulent action. Which of the following statements is true? A.) None of the choices is a fraud risk factor. B.) II and III are fraud risk factors. C.) I is a fraud risk factor. D.) I, II, and III are fraud risk factors.

D An incentive or pressure to perpetrate fraud is a correct response. In addition, an opportunity to carry out the fraud is a correct response. Finally, an attitude or rationalization that justifies the fraudulent action is a correct response. As a result, this answer is correct.

In preparing for the audit of cash, the auditors perform analytical procedures concerning cash balances. Which of the following would be the best source of information for use in the estimate of cash? A.) Aged accounts receivable reports. B.) Prior-years' balances. C.) Management inquiry. D.) Cash budgets.

D Budgets provided by management provide the best management estimates for the sources and uses of cash. Where cash receipts or cash expenditures vary from the budget by a material amount, a higher level of risk may be assessed.

Allison Everhart, an employee in accounts payable, believes she can run a fictitious invoice through the accounts payable system and collect the money. She knows payments are subject to an audit. Which account would be the best place to hide the fraud? A.) Property tax expense. B.) Inventory. C.) Wage expense. D.) Consulting service expense.

D Expense accounts are often good places to hide fraud because accounts are closed at the end of the year. Consulting expense is a particularly good place to hide a fraud because it provides no actual product that may be counted or compared to the expense.

Which of the following is an effective audit procedure that an auditor might use to detect kiting between intercompany banks? A.) Review subsequent bank statements. B.) Review the composition of authenticated deposit slips. C.) Prepare a year-end bank reconciliation. D.) Prepare a schedule of the bank transfers.

D Kiting involves a mismatching of dates of recording cash transactions around year-end, and the schedule of bank transfers is designed to show all the relevant dates so the auditor can see that the entries were made in the proper periods.

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor? A.) Overstating the accounts receivable control account. B.) Overstating the accounts receivable subsidiary ledger. C.) Overstating the sales journal. D.) Understating the sales journal.

D Not recording sales on account in the books of original entry is the most effective way to conceal a subsequent theft of cash receipts. The accounts will be incomplete but balanced, and procedures applied to the accounting records will not detect the defalcation.

In what way can audit procedures be modified to address assessed fraud risks? A.) Obtain more reliable information. B.) Perform procedures close to year-end. C.) Apply computer-assisted techniques to all items. D.) All of the choices are valid modifications.

D Obtain more reliable information, perform procedures close to year-end & apply computer-assisted techniques to all items, would be appropriate modifications to address assessed fraud risks. As a result, choice "All of the choices are valid modifications" is the correct response.

Incorporating elements of unpredictability in the selection of audit procedures to be performed by auditors include all of the following except A.) Varying the timing of the audit procedures. B.) Selecting items for testing that have lower amounts or are otherwise outside customary selection parameters. C.) Performing audit procedures on an unannounced basis. D.) Sending attorney letters to every attorney listed under the legal expense account. E.) None of the choices is correct.

D Sending attorney letters to every attorney listed under the legal expense account is common as it is important for auditors to inquire about any possible loss contingency. Since it is a customary procedure, this would not be an example of incorporating unpredictability into the selection of auditing procedures and would be the correct answer.

During an audit of cash, the auditor is most concerned with the management assertion of A.) Rights and obligations. B.) Occurrence. C.) Valuation or allocation. D.) Existence.

D The existence of cash is always a relevant assertion for cash because an overstatement of cash might indicate that fraudulent revenue was recorded.

Which of these arrangements of duties could most likely lead to an embezzlement or theft? A.) The accounts receivable clerk received a list of payments received by the cashier so he could make entries in the customers' accounts receivable subsidiary accounts. B.) The financial vice president received checks made out to suppliers and the supporting invoices, signed the checks, and mailed the checks. C.) The cashier prepared the bank deposit, endorsed the checks with a company stamp, and delivered the cash and checks to the bank for deposit (no other bookkeeping duties). D.) The inventory warehouse manager has responsibility for making the physical inventory observation and reconciling discrepancies to the perpetual inventory records.

D The inventory warehouse manager could steal inventory and then manipulate the records to cover up the theft. This arrangement would violate proper segregation of duties because the manager has custody of assets and access to the records. The manager can steal and then conceal!

Auditors are auditing the cash receipts for Great Wall Corporation. For each audit procedure performed (numbered 1 - 5 below) select the control objective being tested by placing the correct letter in the blank. The auditors recalculate the cash listed on the daily deposit for a sample of recorded cash receipts. A.) Existence B.) Completeness C.) Authorization D.) Accuracy E.) Classification F.) Accounting and posting G.) Proper period

D.) Accuracy

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? A.) Adequate internal control. B.) Inadequate internal control because mailroom employees should not have access to cash. C.) Inadequate internal control because treasury employees should prepare the deposit slip. D.) Inadequate internal control because of a lack of separation of duties.

D.) Inadequate internal control because of a lack of separation of duties.

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.) employee fidelity bonds. B.) independently prepared mailroom prelists. C.) daily check summaries. D.) a bank lockbox system.

D.) a bank lockbox system.

In the audit of cash the auditor obtains a bank cutoff statement primarily to: A.) identify old outstanding checks that the client may exclude from the year-end bank reconciliation in order to misappropriate cash. B.) obtain sufficient information to reconcile the client's bank account as of year-end. C.) obtain direct confirmation of the client's bank balances as of year-end. D.) test the propriety of items appearing on the client's year-end bank reconciliation.

D.) test the propriety of items appearing on the client's year-end bank reconciliation.

Auditors are auditing the cash receipts for Great Wall Corporation. For each audit procedure performed (numbered 1 - 5 below) select the control objective being tested by placing the correct letter in the blank. The auditors traced a sample of recorded cash receipts to postings in the correct customers' accounts. A.) Existence B.) Completeness C.) Authorization D.) Accuracy E.) Classification F.) Accounting and posting G.) Proper period

F.) Accounting and posting