Deck 6: Employee Fraud and the Audit of Cash

Question 1

Employee fraud generally involves people at the top executive level.

Answer 1

False

Question 2

The most effective long-run prevention of fraud lies in the practice of tight management controls over people.

Answer 2

False

Question 3

Psychotic motivation is characterized by the habitual criminal who steals for the sake of stealing.

Answer 3

True

Question 4

An organization can prevent all fraud if its auditors are acquainted with some detection techniques.

Question 5

Employee fraud is an intentional act that injures investors or creditors by leading to materially misleading financial statements.

Question 6

The use of confirmations for cash balances is still considered a generally accepted audit procedure.

Question 7

Control systems enhance trust and reduce the bureaucracy of business.

Question 8

The company's bank reconciliation (audited by independent auditors)is the primary means of valuing cash in the financial statements.

Question 9

Fraud examiners are more interested in evaluating internal control weaknesses rather than strengths.

Question 10

Fraud consists of unintentional misstatements or omissions in financial statements.

Question 11

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 the above.

Question 12

Independent auditors of financial statements and fraud examiners approach their work differently.

Question 13

One of the main requirements under GAAS relating to fraud in a financial statement audit is that auditors obtain evidence about the intent of the persons responsible for the fraud.

Question 14

Fidelity bonds are used to prevent embezzlement.

Question 15

It is not necessary to send confirmations on accounts that a company represents as closed during the year to get the bank to confirm zero balances.

Question 16

Fraud awareness auditing includes "thinking like a crook" to imagine ways and means of stealing.

Question 17

The client should request the bank to send a cutoff bank statement directly to the auditor.

Question 18

It is always good control to have the bookkeeper prepare a list of cash receipts and then have the bookkeeper record it immediately in the accounts.

Question 19

The key to integrity in business is "accountability."

Question 20

The chain of custody is the crucial link of evidence to the fraud suspect.

Question 21

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 audit.

Question 22

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

A) Sending positive confirmations on recorded customer accounts receivable balances.
B) Performing physical observation and test count during the client's inventory taking.
C) Measuring the time lag between the date of recording cash receipts in the books to the date of the deposit credit in the bank.
D) Conducting interviews with the client's sales billing personnel to learn about sales recording control activities.

Question 23

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

A) Provide the data necessary to prepare a proof of cash.
B) Request that a cutoff bank statement and related checks be sent to the audit.
C) Detect questionable bank activities that may otherwise not be discovered.
D) Seek information about contingent liabilities and security agreements.

Question 24

An audit plan of substantive procedures for cash would not include

A) Requesting a cutoff bank statement be mailed to the client.
B) Requesting the client to prepare bank reconciliations.
C) Preparing a schedule of interbank transfers for a period of 10 business days before and after year-end date.
D) Obtaining a written client representation concerning compensating balance agreements.

Question 25

When an employee embezzles company funds from an electric utility company for the purpose of paying expenses of an antinuclear protest organization,the fraudster's motive is said to be

A) Psychotic.
B) Egocentric.
C) Ideological.
D) Economic.

Question 26

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.

Question 27

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

A) Accounts payable and purchase commitments.
B) Cash in bank and collateral for loans.
C) Inventory on consignment and contingent liabilities.
D) Accounts receivable and accrued interest receivable.

Question 28

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 using

A) Confirmation and observation.
B) Observation and inquiry.
C) Analytical procedures and confirmation.
D) Inquiry and analytical procedures.

Question 29

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.

Question 30

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

A) Motive.
B) Lack of training.
C) Opportunity.
D) Rationalization.

Question 31

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?

A) Intentional deception.
B) Taking unfair or dishonest advantage of other people.
C) Perpetration for the benefit or detriment of the organization.
D) Negligence on the part of executive management.

Question 32

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

A) The total of the accounts receivable subsidiary ledger balances is less than the accounts receivable control account.
B) The total of the accounts receivable subsidiary ledger balances is more than the accounts receivable control account.
C) Total cash receipts from customers for the month are less than credit sales for the month.
D) Total cash receipts from customers for the month are more than credit sales for the month.

Question 33

An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when the

A) Check register for the last month is reviewed.
B) Cutoff bank statement is reconciled.
C) Bank confirmation is reviewed.
D) Search for unrecorded liabilities is performed.

Question 34

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

A) Comparing the amount written on the check face to the amount written in the cash disbursements journal.
B) Comparing the magnetic imprint of the amount paid to the amount written on the check face.
C) Examining the endorsement on the back of the check.
D) Comparing the check number on the face of the check to the check number in the cash disbursements journal.

Question 35

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

A) The illegal act is a violation of generally accepted accounting principles.
B) The client does not take the remedial action that the auditor considers necessary.
C) The illegal act was committed during a prior year that was not audited.
D) The auditor has already assessed control risk at the maximum level.

Question 36

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

A) Supported by a vendor's invoice.
B) Stamped PAID by the check signer.
C) Prenumbered and accounted for.
D) Approved for authorized purchases.

Question 37

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.

Question 38

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 the above statements are correct.

Question 39

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.

Question 40

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

A) Cutoff bank statement.
B) General ledger.
C) Bank confirmation.
D) Year-end bank statement.

Question 41

Which of the following is least indicative of fraudulent activity?

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

Question 42

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

A) Theft.
B) Irregular endorsement.
C) Replacement or substitution of stolen assets.
D) Deposits in transit.

Question 43

Which of the following combinations is a good means to conceal employee fraud but an ineffective means of perpetrating management (financial reporting)fraud?

A) Overstating sales revenue and overstating customer accounts receivable balances.
B) Overstating sales revenue and overstating bad debt expense.
C) Understating interest expense and understating accrued interest payable.
D) Omitting the disclosure information about related-party sales to the president's relatives at below-market prices.

Question 44

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) Inventory.
B) Wage expense.
C) Consulting service expense.
D) Property tax expense.

Question 45

Each morning the controller gets the prior day's listing 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) No checks were returned for insufficient funds.
B) The cash received and remittance advice received were maintained in a single batch.
C) The accounts receivable system has controls over unauthorized access.
D) The assistant controller does not also reconcile the subsidiary accounts payable.

Question 46

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 chief ethics officer.
B) The establishment of a hot line for reporting unethical behavior.
C) The violation of the code of ethics by senior management.
D) The posting of the code of ethics in the company workplace.

Question 47

At the end of each business day,Safe Company sends its bank a list 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 list provided by Safe Company.This system is called

A) Paychex.
B) Pay-as-you-go.
C) Positive pay.
D) Pay master.

Question 48

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

A) Examination of the company's escrow account.
B) Interview with the company's treasurer and cash manager.
C) Preparation and review of standard bank confirmation inquiries.
D) Analytical computations comparing current cash in the bank with previous accounting periods.

Question 49

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) The petty cash box is always locked in the desk of the custodian.
C) Management has published a company code of ethics and sends frequent communication newsletters about it.
D) The board of directors reviews and approves all investment transactions.

Question 50

Which of the following is an effective audit procedure that an auditor might use to detect kiting between intercompany banks?

A) Review the composition of authenticated deposit slips.
B) Review subsequent bank statements.
C) Prepare a schedule of the bank transfers.
D) Prepare a year-end bank reconciliation.

Question 51

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 that is not an element of the fraud triangle?

A) Motive.
B) Opportunity.
C) Capability.
D) Liquidity.

Question 52

A proof of cash

A) Is required by GAAS.
B) Can be used to test the transactions process.
C) Is most helpful when control risk for cash is low.
D) Always detects lapping.

Question 53

The best way to enact a broad fraud-prevention program is to

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

Question 54

Immediately upon receipt of cash,a responsible employee should

A) Record the amount in the cash receipts journal.
B) Prepare a remittance listing.
C) Update the subsidiary accounts receivable records.
D) Prepare a deposit slip in triplicate.

Question 55

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

A) Adding a restrictive endorsement on all checks.
B) Entering payment information into customer accounts.
C) Preparing the deposit slip and the delivery of the checks to the bank.
D) Segregating all payments made on accounts listed as past due.

Question 56

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 refoot 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.

Question 57

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.

Question 58

Which of these arrangements of duties could most likely lead to an embezzlement or theft?

A) The inventory warehouse manager has responsibility for making the physical inventory observation and reconciling discrepancies to the perpetual inventory records.
B) 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).
C) 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.
D) The financial vice president received checks made out to suppliers and the supporting invoices, signed the checks, and mailed the checks.

Question 59

Two people should open mail that includes payments.This control is called

A) Separation of duties.
B) Joint custody.
C) Anti-collusion.
D) Lapping.

Question 60

Which of the following would the auditor consider to be an incompatible operation if the cashier receives remittances?

A) The cashier prepares the daily deposit.
B) The cashier makes the daily deposit at a local bank.
C) The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
D) The cashier endorses the checks.

Question 61

The phases of employee fraud do not include the

A) Conversion of money to fraudster's use.
B) Prosecution.
C) Fraudulent act.
D) Cover-up.

Question 62

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) Prior-years' balances.
B) Management inquiry.
C) Cash budgets.
D) Aged accounts receivable reports.

Question 63

During an audit of cash,the auditor is most concerned with the management assertion of

A) Existence.
B) Rights and obligations.
C) Valuation or allocation.
D) Occurrence.

Question 64

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

A) Police and Drug Enforcement Agency.
B) Standard & Poor Registers.
C) Securities and Exchange Commission.
D) Better Business Bureau.

Question 65

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) A manager's falsification of financial statements for the purpose of misleading investors and creditors.
C) An employee's mistaken representation of opinion that causes incorrect accounting entries.
D) An employee misappropriating an employer's money or property entrusted to the employee's control in the employee's normal job.

Question 66

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.

Question 67

Another name for employee fraud and embezzlement is _________________________.

Question 68

Which question would not be appropriate when asking questions of personnel during a regular audit?

A) Do you think fraud is a problem for business in general?
B) Do you think this company has any particular problem with fraud?
C) In your department, who has the potential for committing fraud?
D) Is there any information you would like to furnish regarding possible fraud within this organization?

Question 69

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

A) Cash in all accounts exists in the name of the company.
B) Proper internal control activities exist for all cash accounts.
C) Cash balance properly reflects all cash on hand, in transit, or on deposit with third parties.
D) All restrictions on the use of cash are disclosed.

Question 70

The probability of fraud is not a function of

A) Motive.
B) Opportunity.
C) Lack of integrity.
D) Predication.

Question 71

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 listing should be sent to the

A) Internal auditor to investigate the list for unusual transactions.
B) Treasurer to compare the list with the monthly bank statement.
C) Accounts receivable bookkeeper to update the subsidiary accounts receivable records.
D) Entity's bank to compare the list with the cashier's deposit slip.

Question 72

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

A) Standard bank confirmation.
B) Bank statement at audit date.
C) Cutoff bank statement.
D) Accounting journal at year end.

Question 73

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) Understating the sales journal.
B) Overstating the accounts receivable control account.
C) Overstating the accounts receivable subsidiary ledger.
D) Overstating the sales journal.

Question 74

The three components of the fraud triangle are ____________________________,____________________________,and ____________________________.

Question 75

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

A) Does the person who opens the mail make a list of cash received?
B) Are prenumbered sales invoices or receipt books used?
C) Are current receipts controlled by mechanical devices?
D) Does a responsible person approve discounts taken by customers with payments on account?

Question 76

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

A) Hold middle management positions.
B) Have power to override controls.
C) Have long tenure with organization.
D) Have access to large amounts of money.

Question 77

Which of the following control activities could prevent a paid disbursement voucher from being presented for payment a second time?

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

Question 78

___________________________ is the use of fraudulent means to take money or other property from an employer.

Question 79

A practice that would not encourage fraud would include

A) Centralizing authority in top management.
B) Considering people pressure in the work place.
C) Making profits the only criterion for success.
D) Insisting that everything be documented with a rule for everything.

Question 80

The standard format for the audit approach to fraud cases would not include

A) Audit of balance.
B) Test of controls.
C) Paper trail.
D) Discovery summary.