Internal 6
After completing an investigation, internal auditing has concluded that an employee has stolen a material amount of cash receipts. A draft of the proposed report on this finding should be reviewed by: a. Legal counsel. b. The audit committee of the board of directors. c. The president of the organization. d. The external auditor.
a
An internal auditor is preparing a report that discusses the possibility of employee fraud by a specific named employee. The auditor should be careful that distribution of the report be limited on a "need-to-know" basis. Failure to follow this caveat may result in the liability of the auditor and/or the employer for: a. Libel. b. Slander. c. Compounding a felony. d. Malicious prosecution.
a
An internal auditor would be concerned about the possibility of fraud if: a. Cash receipts, net of the amounts used to pay petty cash-type expenditures, are deposited in the bank daily. b. The monthly bank statement reconciliation is performed by the same employee who maintains the perpetual inventory records. c. The accounts receivable subsidiary ledger and accounts payable subsidiary ledger are maintained by the same person. d. One person, acting alone, has sole access to the petty cash fund (except for a provision for occasional surprise counts by a supervisor or auditor).
a
Bank management suspects that a bank loan officer frequently made loans to fictitious companies, disbursed loan proceeds to personally established accounts, and then let the loans go into default. Some pertinent facts about the loan officer include: a high standard of living, explained as the result of sound investments and not taking vacations, an expensive personal car obtained through business contacts, gasoline and repair bills submitted for an assigned company car that are higher than company average (mileage logs were submitted on a quarterly basis), and marked annoyance with questions from auditors. The most appropriate trend analysis to indicate this potential fraud is: a. Loan default rates by loan officer. b. Accumulation of unpaid vacation days. c. Automobile operating expenses by loan officer. d. Total dollar volume of loans by loan officer.
a
In the course of their work, internal auditors must be alert for fraud and other forms of white-collar crime. The important characteristic that distinguishes fraud from other varieties of white-collar crime is that: a. Fraud encompasses an array of irregularities and illegal acts that involve intentional deception. b. Unlike other white-collar crimes, fraud is always perpetrated against an outside party. c. White-collar crime is usually perpetrated for the benefit of an organization, whereas fraud benefits an individual. d. White-collar crime is usually perpetrated by outsiders to the detriment of an organization, whereas fraud is perpetrated by insiders to benefit the organization.
a
Internal auditing is responsible for reporting fraud to senior management or the board when: a. The incidence of fraud of a material amount has been established to a reasonable certainty. b. Suspicious activities have been reported to internal auditing. c. Irregular transactions have been identified and are under investigation. d. The review of all suspected fraud-related transactions is complete.
a
Internal auditors would be more likely to detect fraud if they developed/strengthened their ability to: a. Recognize and question changes that occur in organizations. b. Interrogate fraud perpetrators to discover why the fraud was committed. c. Develop internal controls to prevent the occurrence of fraud. d. Document computerized operating system programs.
a
The primary responsibility for preventing fraud in an entity lies with: a. Management. b. The internal auditor. c. Security personnel. d. The audit committee of the board of directors.
a
Which of the following is an indicator of possible financial reporting fraud being perpetrated by management of a manufacturer? a. A trend analysis discloses: (1) sales increases of 50 percent and (2) cost of goods sold increases of 25 percent. b. A ratio analysis discloses: (1) sales of $50 million and (2) cost of goods sold of $25 million. c. A cross-sectional analysis of common size statements discloses: (1) the firm's ratio of cost of goods sold to sales is .4 and (2) the industry average ratio of cost of goods sold to sales is .5. d. A cross-sectional analysis of common size statements discloses: (1) the firm's ratio of cost of goods sold to sales is .5 and (2) the industry average ratio of cost of goods sold to sales is .4.
a
3. Which of the following is true regarding employee antifraud training? a. Employees at all levels of the organization should receive identical antifraud training. b. The training should be catered to the specifics of the organization. c. Training all employees at the time of hire is sufficient. d. All of the above.
b
A purchasing agent acquired items for personal use with company funds. The company allowed designated employees to purchase as much as $250 per day in merchandise under open-ended contracts. Approval of the purchases was required, but that information was not communicated to the vendor. Instead of reviewing and authorizing each purchase order, supervisors routinely signed the authorization sheet at the end of the month without reviewing the supporting documentation. Since purchases of this nature were not subject to normal company receiving policies, the dishonest employee picked up the supplies at the vendor's warehouse. All purchases were for items routinely ordered by the company. During the past year, the employee amassed enough merchandise to start a printing and photography business. Which of the following audit procedures, performed by the internal auditor, would be most effective in leading to the discovery of this fraud? a. Tracing selected canceled checks to the cash payments journal and to the related vendors' invoices. b. Performing a trend analysis of printing supplies expenses for a two- year period. c. Tracing prices and quantities on selected vendor's invoices to the related purchase orders. d. Recomputing the clerical accuracy of selected vendors' invoices, including discounts and sales taxes
b
According to the Standards, internal auditors should be involved in fraud investigations as: a. Sole investigator. b. Part of an investigation team. c. Independent observer. d. A nonparticipant.
b
According to the Standards, which of the following best describes the two general categories or types of fraud that concern most internal auditors? a. Improper payments (such as bribes and kickbacks) and tax fraud. b. Fraud designed to benefit the organization and fraud perpetrated to the detriment of the organization. c. Acceptance of bribes or kickbacks and improper related-party transactions. d. Acceptance of kickbacks or embezzlement and misappropriation of assets.
b
An adequate system of internal controls is most likely to detect an irregularity perpetrated by a: a Group of employees in collusion. b. Single employee. c. Group of managers in collusion. d. Single manager.
b
An internal auditor has detected probable employee fraud and is preparing a preliminary report for management. This report should include: a. A statement that an internal audit conducted with due professional care cannot provide absolute assurance that irregularities have not occurred. b. The auditor's conclusion as to whether sufficient information exists to conduct an investigation. c. The results of a polygraph test administered to the suspected perpetrator(s) of the fraud. d. A list of proposed audit tests to help disclose the existence of similar frauds in the future.
b
An internal auditor reported a suspected fraud to the Director of Internal Auditing. The director turned the entire case over to the Security Department. Security failed to investigate or report the case to management. The perpetrator continued to defraud the organization until being accidentally discovered by a line manager two years later. Select the most appropriate action for the audit director: a. The director's actions were correct. b. The director should have periodically checked the status of the case with Security. c. The director should have conducted the investigation. d. The director should have discharged the perpetrator.
b
Certain information may not be appropriate for disclosure to all report recipients because it is privileged, proprietary, or related to improper or illegal acts. If conditions being reported involved improper acts of a senior manager, the report should be distributed to: a. The External Auditor. b. The Board of Directors. c. The Stockholders. d. Senior Management.
b
During a meeting with senior management, an internal auditor made oral statements that were defamatory to the company controller. The controller may have a cause of action against the auditor for: a. Libel. b. Slander. c. Conversion. d. Conspiracy.
b
One of the elements of fraud is a representation made with the knowledge of its falsity or without sufficient knowledge on the subject to warrant a representation. This is commonly referred to as: a. Undue influence. b. Scienter. c. Estoppel. d. Unconscionable advantage.
b
The internal auditor for a construction contractor finds material costs increasing as a percentage of billings, and suspects that materials billed to the company are being delivered to another contractor. What type of evidence would best enable the auditor to determine whether erroneous billings occurred? a. Documentary. b. Physical examination. c. Confirmation. d. Analytical review.
b
The internal auditor's responsibility for the prevention of fraud would include all of the following except: a. Determining if the organizational environment fosters control consciousness. b. Ensuring against the occurrence of fraud. c. Being aware of activities in which fraud is likely to occur. d. Evaluating the effectiveness of actions taken by management to deter fraud.
b
When comparing perpetrators who have embezzled company funds to perpetrators of financial statement fraud (falsified financial statements), those who have falsified financial statements would be less likely to: a. Have experienced an autocratic management style. b. Be living beyond their obvious means of support. c. Rationalize the fraudulent behavior. d. Use company expectations as justification for the act.
b
Which of the following policies is most likely to result in an environment conducive to the occurrence of fraud? a. Budget preparation input by the employees who are responsible for meeting the budget. b. Unreasonable sales and production goals. c. The division's hiring process frequently results in the rejection of adequately trained applicants. d. The application of some accounting controls on a sample basis.
b
Which of the following statements is not appropriate to include in a manufacturer's conflict of interest policy? An employee shall not: a. Accept money, gifts or services from a customer. b. Participate (directly or indirectly) in the management of a public agency. c. Borrow from or loan money to vendors. d. Use company information for private purposes.
b
Which of the following wrongful acts committed by an employee would constitute fraud? a. Libel. b. Embezzlement. c. Assault. d. Harassment.
b
1. In terms of preventing fraud, which of the following components of the Committee of Sponsoring Organizations of the Treadway Commission's (COSO's) Internal Control—Integrated Framework most adequately embodies an organization's tone at the top: a. Control activities. b. Monitoring. c. Control environment. d. Information and communication.
c
A Certified Internal Auditor is performing an audit of her company's cash function. Which of the following would be considered an action in which due professional care is lacking? a. She deletes the audit of a $50 petty cash fund. This fund was located in a foreign country. b. She uses attribute sampling in the audit of cash disbursements. c. She suspects the cashier is misappropriating money. She immediately confronts the cashier with her suspicions. d. She feels that the cashier is performing too many incompatible functions. She sends a report on this situation along with suggestions for improvements to the chief financial officer of the company.
c
A purchasing agent acquired items for personal use with company funds. The company allowed designated employees to purchase as much as $250 per day in merchandise under open-ended contracts. Approval of the purchases was required, but that information was not communicated to the vendor. Instead of reviewing and authorizing each purchase order, supervisors routinely signed the authorization sheet at the end of the month without reviewing the supporting documentation. Since purchases of this nature were not subject to normal company receiving policies, the dishonest employee picked up the supplies at the vendor's warehouse. All purchases were for items routinely ordered by the company. During the past year, the employee amassed enough merchandise to start a printing and photography business. Once the internal auditor becomes reasonably certain that this defalcation is taking place, what should the auditor do next? a. Immediately report the matter to the appropriate law enforcement official, since a potential felony is involved. b. Say nothing now, but include a description of the suspected defalcation in the audit. c. Immediately report the matter to the appropriate level of management. d. Immediately discuss the matter with the employee suspected of the defalcation in order to confirm the audit findings.
c
A significant employee fraud took place shortly after an internal audit. The internal auditor may not have properly fulfilled the responsibility for the deterrence of fraud by failing to note and report that: a. Policies, practices, and procedures to monitor activities and safeguard assets were less extensive in low-risk areas than in high- risk areas. b. A system of control that depended upon separation of duties could be circumvented by collusion among three employees. c. There were no written policies describing prohibited activities and the action required whenever violations are discovered. d. Divisional employees had not been properly trained to distinguish between real signatures and cleverly forged ones on forms.
c
The Standards require internal auditors to have knowledge about factors (red flags) that have proven to be associated with management fraud. Which of the following factors have generally not been associated with management fraud? a. Generous performance-based reward systems. b. A domineering management. c. Regular comparison of actual results to budgets. d. A management preoccupation with increase financial performance.
c
The Standards require that when an internal auditor identifies multiple factors that have been linked with possible fraudulent conditions, and suspects that fraud has taken place, the auditor should: a. Immediately notify senior management and the board. b. Immediately inform the audit committee. c. Notify the appropriate authorities within the company and recommend an investigation. d. Extend audit tests to determine the extent of the fraud.
c
The internal auditor has concluded a fraud investigation that revealed a previously undiscovered materially adverse impact on the financial position and results of operations for two years on which financial statements have already been issued. The director of internal auditing should immediately inform: a. The external audit firm responsible for the financial statements affected by the discovery. b. The appropriate governmental or regulatory agency. c. Appropriate management and the audit committee of the board of directors. d. The internal accounting function ultimately responsible for making corrective journal entries.
c
The primary purpose of operating a fraud hot line within a company is to: a. Reduce total costs of operating the company. b. Measure how well organizational units are achieving goals. c. Establish channels of communication for people to report suspected improprieties. d. Concentrate on areas that deserve attention and to place less attention on areas operating as expected
c
Which of the following might be considered a "red flag" indicating possible fraud in a large manufacturing company with several subsidiaries? a. The existence of a financial subsidiary. b. A consistent record of above average return on investment for all subsidiaries. c. Complex sales transactions and transfers of funds between affiliated companies. d. Use of separate bank accounts for payrolls by each subsidiary.
c
Which of the following would be the most appropriate activity for the internal auditor when involved in a fraud investigation? a. Supervising the activities of security personnel and other investigators. b. Serving as liaison with law enforcement personnel and the press. c. Designing procedures to follow in attempting to identify the perpetrators and causes of the fraud. d. Conducting public interrogations of suspected perpetrators.
c
2. Which of the following internal controls would likely be most effective in helping to prevent fraud? a. Hidden surveillance cameras. b. Secret cash counts. c. Covert email monitoring. d. Fake surveillance cameras.
d
A purchasing agent acquired items for personal use with company funds. The company allowed designated employees to purchase as much as $250 per day in merchandise under open-ended contracts. Approval of the purchases was required, but that information was not communicated to the vendor. Instead of reviewing and authorizing each purchase order, supervisors routinely signed the authorization sheet at the end of the month without reviewing the supporting documentation. Since purchases of this nature were not subject to normal company receiving policies, the dishonest employee picked up the supplies at the vendor's warehouse. All purchases were for items routinely ordered by the company. During the past year, the employee amassed enough merchandise to start a printing and photography business. Which of the following internal controls would have been most effective in preventing this fraud? a. Allowing purchases only from a list of preapproved vendors. b. Requiring the use of prenumbered purchase orders for all purchases of merchandise. c. Canceling supporting documents such as purchase orders and receiving reports at the time invoices are paid. d. Establishing separation of duties between the ordering and receiving of merchandise.
d
According to the Standards, internal auditing has a responsibility for helping to deter fraud. Which of the following best describes how this responsibility is usually met? a. By coordinating with security personnel and law enforcement agencies in the investigation of possible frauds. b. By testing for fraud in every audit and following up as appropriate. c. By assisting in the design of control systems to prevent fraud. d. By evaluating the adequacy and effectiveness of controls in light of the potential exposure or risk.
d
According to the Standards, the role of internal auditing in the investigation of fraud includes all of the following, except: a. Assessing the probable level and extent of complicity in the fraud within the organization. b. Designing the procedures to follow in attempting to identify the perpetrators, extent of fraud, techniques used, and cause of fraud. c. Coordinating activities with management personnel, legal counsel, and other appropriate specialists throughout the investigation. d. Interrogating suspected perpetrators of the fraud.
d
According to the Standards, which of the following is the correct listing of information that must be included in a fraud report? a. Purpose, scope, results, and when appropriate, an expression of the auditor's opinion. b. Criteria, condition, cause, and effect. c. Background, findings, and recommendations. d. Findings, conclusions, recommendations, and corrective action
d
An internal auditor would not allow an employee to leave the company premises while conducting an interrogation about a theft. If the auditor's actions are judged to be unreasonable in court, the employee may prevail in a suit alleging: a. Malicious prosecution. b. Compounding a felony. c. Libel. d. False imprisonment.
d
Bank management suspects that a bank loan officer frequently made loans to fictitious companies, disbursed loan proceeds to personally established accounts, and then let the loans go into default. Some pertinent facts about the loan officer include: a high standard of living, explained as the result of sound investments and not taking vacations, an expensive personal car obtained through business contacts, gasoline and repair bills submitted for an assigned company car that are higher than company average (mileage logs were submitted on a quarterly basis), and marked annoyance with questions from auditors. 27. In this situation, typical indicators of the suspected fraud would include all of the following except: a. Not taking an annual vacation. b. Becoming annoyed with auditor inquiries about questionable loans. c. Explaining a high standard of living as the result of investments. d. Submitting gas and repair bills higher than company average.
d
Bank management suspects that a bank loan officer frequently made loans to fictitious companies, disbursed loan proceeds to personally established accounts, and then let the loans go into default. Some pertinent facts about the loan officer include: a high standard of living, explained as the result of sound investments and not taking vacations, an expensive personal car obtained through business contacts, gasoline and repair bills submitted for an assigned company car that are higher than company average (mileage logs were submitted on a quarterly basis), and marked annoyance with questions from auditors. The above fraud would least likely be discovered by: a. Analyses of the number of loans made by each loan officer. b. Analysis of total dollar volume of loans by loan officer. c. External or internal audits of loan files. d. Reconciliation of total loans outstanding to the general ledger balance.
d
Bank management suspects that a bank loan officer frequently made loans to fictitious companies, disbursed loan proceeds to personally established accounts, and then let the loans go into default. Some pertinent facts about the loan officer include: a high standard of living, explained as the result of sound investments and not taking vacations, an expensive personal car obtained through business contacts, gasoline and repair bills submitted for an assigned company car that are higher than company average (mileage logs were submitted on a quarterly basis), and marked annoyance with questions from auditors. The extent of loans made to fictitious borrowers by the loan officer could best be determined by: a. Reviewing a representative sample of the loan officer's transactions for compliance with bank policies and procedures. b. Reviewing a representative sample of loan files for properly completed documents, such as loan agreements, credit approvals, and approval of secured collateral. c. Comparing current loan approval balances with those of prior years. d. Requesting positive confirmations for all outstanding loans made by the loan officer.
d
Even when there is overwhelming evidence of fraud by a particular employee, internal auditing will usually not initiate a criminal complaint, but rather will leave this action for the law enforcement authorities. By so doing, internal auditing avoids the possibility of being accused of: a. False imprisonment. b. Libel. c. Slander. d. Malicious prosecution.
d
Experience has shown that certain conditions in an organization are symptoms of possible management fraud. Which of the following conditions would not be considered an indicator of possible fraud? a. Managers regularly assuming subordinates' duties. b. Managers dealing in matters outside their profit center's scope. c. Managers not complying with corporate directives and procedures. d. Managers subject to formal performance reviews on a regular basis.
d
When conducting fraud investigations, internal auditing should a. Clearly indicate the extent of internal auditing's knowledge of the fraud when questioning suspects. b. Assign personnel to the investigation in accordance with the audit schedule established at the beginning of the fiscal year. c. Perform its investigation independent of lawyers, security personnel, and specialists from outside the organization who are involved in the investigation. d. Assess the probable level of and the extent of complicity in the fraud within the organization.
d
