Deck 6: Employee Fraud and the Audit of Cash

Question 1

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.

Answer 1

D

Question 2

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

A)an inaccuracy in processing data.
B)the misapplication of accounting principles.
C)differences between management and the auditor's judgment regarding estimates.
D)a difference between the classification of a reported financial statement element and the classification according to generally accepted accounting principles.

Answer 2

C

Question 3

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 persons who are likely responsible for the misappropriation and obtain evidence about some other fraud indications in their work.
E)all of these.

Answer 3

E

Question 4

An audit plan of substantive procedures for cash would not include

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

Question 5

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

A)A large number of bearer bonds on hand
B)A large number of inventory items with low sales prices
C)A large number of transactions processed in a short period of time
D)A large number of fixed assets with easily identifiable serial numbers

Question 6

To gather evidence regarding the bank's 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 7

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 8

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 greater 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 greater than credit sales for the month.

Question 9

If the amount of a check is altered by an employee 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 10

A company employs three accounts payable clerks and one treasurer.Their responsibilities are as follows: Which of the following would indicate a weakness in the company's internal controls? $$\begin{array} { l l } \underline { \text { Employee } } & { \underline { \text { Responsibility } } } \\\text { Clerk 1 } & \text { Reviews vendor invoices for proper signature approval. } \\\text { Clerk } 2 & \text { Enters vendor invoices into the accounting system and verifies } \\&\text { payment terms. } \\\text { Clerk } 3 & \text { Posts entered vendor invoices to the accounts payable ledger for } \\& \text { Payment and mails checks. } \\\text { Treasurer } &\text { Reviews the vendor invoices and signs each check. }\end{array}$$

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.

Question 11

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

A)psychotic.
B)egocentric.
C)ideological.
D)economic.

Question 12

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 13

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

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

Question 14

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 15

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.

Question 16

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.

Question 17

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 18

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

Question 19

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 20

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 21

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 22

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 23

Ed's wife Diane owns a printing business in town.Ed works in the accounts payable department of Jiffy Abs Vitamin Company.Diane prints invoices for work supposedly done for Jiffy Abs (no actual work was performed)and Ed places in the invoice in the approved for payment invoice pile.Jiffy Abs pays these invoices and sends Diane a check.
1.Name two internal controls that might prevent or detect these fraudulent payments.
2.Name two audit procedures that might detect this fraud.

Question 24

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 25

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

A)Restrictive endorsement on all checks
B)Entering of payment information into customer accounts
C)The preparation of the deposit slip and the delivery of the checks to the bank
D)The segregation of all payments made on accounts listed as past due

Question 26

After checks are signed for vendor invoices,why should vouchers be marked "paid" or otherwise mutilated?

Question 27

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.

Question 28

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?

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

Question 29

When you examine canceled checks returned in the bank statement by a client's bank,how could you tell whether the amount on the check had been skillfully raised (increased,say,from $75.00 to $7,500 in the amount box,and altered in the written line from "Seventy-five dollars" to "Seventy-five hundred dollars")after the check was cleared by the bank? (An employee might do this to "support" a $7,500 cash disbursement journal entry.)

Question 30

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

A)PayChex.
B)Pay-As-You-Go.
C)Positive Pay.
D)Pay Master.

Question 31

List,and briefly describe,the three factors that increase the probability of fraud.

Question 32

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 33

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

Question 34

What kind of error or fraud could happen if the inventory warehouse manager also had responsibility for making the physical inventory count and reconciling discrepancies to the perpetual inventory records?

Question 35

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.

Question 36

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 these statements are correct.

Question 37

Describe how a lockbox works and indicate the advantages of such a system.

Question 38

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 39

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 40

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 41

Micro Chip Corporation (MCC)has a special PO Box for customer payments.Jane is responsible for:
• going to the post office every day,
• emptying the post office box,
• opening the mail,
• making a prelist,
• sending the remittance advices to accounts receivable,and
• sending the checks to the cashier's office.
Jane has opening a business account at her bank for Master Cleaning Company (MCC).Several of Micro Chips checks are made out with only the initials MCC.Jane selects certain checks made out only with the initials MCC and deposits them in her business account.She would destroy the remittance advice.
1.Name two controls that would prevent or detect this fraud.
2.Name two audit procedures that might detect this fraud.