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Audit > Ch 6 > Flashcards

Ch 6 Flashcards

0
Q

Employee fraud AKA misappropriation of assets

A

Use of fraudulent means to take money or other property from
An employer

Usually involves falsification of some kind

Ex. False documents, lying, exceeding authority or violating
Employers policies

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1
Q

Fraud

A

Knowingly making material misrepresentations of fact with
Intent of inducing someone to believe falsehood

Act upon it and suffer a loss

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2
Q

3 steps employee frauds generally consist of

A

1 fraudulent act itself
2 conversion of assets to fraudster’s use
3 cover up

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3
Q

Management fraud

A

Intentional deception orchestrated by management

And designed to injure investors and creditors by providing
Materially misleading information

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4
Q

Errors

A

Unintentional misstatements or omissions of amounts or

disclosures in financial statements

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5
Q

Direct effect illegal acts

A

Violations of laws or government regulations by the company
Or its management/employees

Produce direct and material effects on dollar amounts in
Financial statements

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6
Q

Embezzlement

A

Fraud that involves an employee stealing assets entrusted to
His care, custody or control

Often accompanied by false accounting entries and lies to cover
Up

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7
Q

10 personality red flags fraudsters often exhibit

A 
1 sleeplessness
2 excessive drinking
3 take drugs
4 easily irritable
5 can't relax
6 antisocial
7 sweat excessively
8 work standing up
9 work late
10 make excuses
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8
Q

3 reasons personality red flags are hard to detect

A

1 honest people show them as well
2 often hidden from view
3 auditors not in good position to notice these characteristics

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9
Q

Who is in the best position to notice employee personality red flags?

A

Managers

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10
Q

8 Traits of typical white collar criminal

A 
1 education beyond high school
2 likely married
3 member of church, mosque or temple
4 ranges in age from teens to over 60
5 socially conforming
6 employment tenure 1-20 years (longer tenure = more trusted and more fraud at larger amounts)
7 no arrest record
8 usually acts alone (70% of time)
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11
Q

When managers minimize the significance of a weak or missing control by rationalizing that the employee involved is a “long time trusted employee,” most experienced auditors will…

A

Escalate their level of fraud risk awareness

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12
Q

Fraud triangle, 3 conditions likely to be present when fraud occurs

A

1 motivations
2 opportunity
3 rationalization

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13
Q

Fraud triangle: motivation

A

Recognizes that an employee/manager has incentives (bonus

Compensation) or pressure to meet specific estimates

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14
Q

Fraud triangle: opportunity

A

Recognizes in order for fraud to be perpetrated, must be

Weakness in system of internal control

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15
Q

Fraud triangle: rationalization

A

For employee or manager to commit fraud, individual must
Posses attitude that allows him to rationalize why he is knowingly
Committing crime

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16
Q

Motive (in fraud context)

A

Some type of pressure experienced by person that is believed
To be unshareable with friends and confidants

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17
Q

Psychotic motivation

A

Characterized by habitual criminal who steals simply for sake of
Stealing

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18
Q

Egocentric motivations

A

Drive people to steal to achieve more personal prestige

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19
Q

Ideological motivations

A

Held by people who think their cause is morally superior

And they are justified in making someone else a victim

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20
Q

What is the most common motivation in business fraud?

A

Economic benefits

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21
Q

Fraud may be used to pay for 7 typical needs

A 
1 college tuition 
2 uninsured medical bills
3 gambling debts
4 drugs/alcohol
5 alimony/child support
6 high lifestyle
7 finance business or stock speculation losses
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22
Q

The higher the position in the organization…

A

The higher degree of trust

Therefore it’s more likely controls can be overridden and larger
Frauds can be committed

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23
Q

Opportunity for fraud with inventory

A

Inventory not counted regularly

So inventory shortages and losses aren’t known

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24
Q

Opportunity: separation of duties example

A

Proper separation of duties related to cash receipts or payments
Is compromised because termination or retirement

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25
Q

Opportunity: review

A

Vice President of finance has investment authority without

Any review

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26
Q

Opportunity: frequent emergency jobs ex.

A

Frequent emergency jobs leave lots of excess material lying

around manufacturing plant

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27
Q

Unimpeachable integrity

A

Ability to act in accordance with highest moral and ethical

Values all the time

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28
Q

7 common rationalizations that fraudsters use to make their stealing acceptable

A

1 I need it more than other people
2 I’m borrowing the money and will pay it back
3 nobody will get hurt
4 company is big enough to afford it
5 successful image is the name of the game
6 everybody us doing it
7 I’m underpaid so this is due compensation

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29
Q

A CEO who always acts with ethics and integrity sends a strong message to all employees that management is serious about…

A

Internal controls and fraud prevention

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30
Q

Control systems limit…

A

Trust

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31
Q

Management must be sensitive to the needs of the business by…

A

Instituting controls that will prevent/detect fraud without

Impeding business activity

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32
Q

Best anonymous employee hotline arrangement

A

Best responding party be 3rd party agency outside organization

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33
Q

2 Methods for Longterm fraud prevention

A

1 anonymous hotlines (required by SOX)

2 employee assistance programs (EAP)

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34
Q

Employee assistance program (EAP)

A

Mental health and financial planning referral services for people
Who work in the company

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35
Q

An entity who’s only control is “trustworthy employees” has…

A

No control

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36
Q

Important feature of effect internal control system

A

Separation of duties and responsibilities

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37
Q

What 4 duties and responsibilities should be separated?

A

1 transaction authorization
2 record keeping
3 custody/access of assets
4 reconciliation of assets/records

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38
Q

Auditing with fraud awareness often involves the combination of…

A

Observing client control activities and thinking about how a

Criminal would commit theft

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39
Q

3 symptoms of financial statement fraud

A

1 discrepancies in accounting records
2 conflicting evidence
3 missing documentation

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40
Q

Managements response when investigating fraud

A

Key source of evidence: especially when vague, implausible

Or inconsistent responses are given

41
Q

Chain of custody (called the relevance of evidence by attorney’s and judges)

A

Crucial link of evidence to suspect

42
Q

What should auditors do as soon as signal of fraud appears?

A

Mark evidence, writing location, condition, date, time,

circumstances

43
Q

Marking fraud evidence 3 things

A

Should be done on separate tag/page

Original document should be put in protective plastic envelope
And locked away

Then copies should be made

44
Q

When can a code of conduct only be effective?

A

If control environment and tone at top support it

45
Q

Why should fraudsters be prosecuted?

A

Fraudsters have low probability of repeat offenses if they are
Prosecuted

But high probability if they aren’t

46
Q

3 reasons cash is the favorite target of company employees?

A

1 highly liquid
2 not easily identifiable as company property
3 highly portable

47
Q

After cash, what is the 2nd favorite target for employee thieves to steal?

A

Inventory

48
Q

Controls over cash must be…

A

Unusually strong

49
Q

What 2 controls must be implemented for cash?

A

Controls for cash receipts and cash disbursements must be

Fraud proof

50
Q

Lockbox

A

Arrangement where fiduciary (bank) receives the payments,
Lists the receipts deposits and sends remittance advices
To company

51
Q

Remittance advices

A

Stubs showing amount received from each customer

52
Q

4 controls for individual employees who receive checks an cash

A

1 have 2 people open mail containing customer receipts
(Resulting in joint account)
2 restrictively endorse checks immediately after removing
From envelope
3 separate list of cash receipts as early as possible
4 separate actual cash from record keeping documents

53
Q

Lapping

A

The theft of a payment and application of subsequent payments
To cover the theft

54
Q

Employees in normal cash operations

A

Recording and custody

55
Q

Fidelity bond

A

Insurance policy that covers most kinds of cash embezzlement
Losses

Require persons who handle cash to be insured

56
Q

Why should an entity establish input, processing and output control activities for cash receipts?

A

To prevent, detect and correct accounting errors

57
Q

For cash disbursements, where does effective internal control begin?

A

With appropriate separation of duties

58
Q

Proper separation of duties for cash disbursements involves different people/departments handling what 4 things?

A

1 custody of blank documents (checks)
2 cash disbursement authorization
3 record keeping for payments
4 bank reconciliation

59
Q

What is the management Assertion Supported?
Internal control: cash receipts are deposited intact and daily
Test of Comtrol- observe the opening of mail and ensure that:

2 employees are opening mail, remittance advice is received, check is restrictively endorsed

A

Occurrence

60
Q

What is the management Assertion Supported?
Internal control: cash receipts are deposited intact and daily
Test of Comtrol- observe the opening of mail and ensure that:

Listing of all checks is being prepared and compared to total of deposit ticket for total of checks

A

Accuracy

61
Q

What is the management Assertion Supported?
Internal control: cash receipts are deposited intact and daily
Test of Comtrol- observe the opening of mail and ensure that:

Trace deposit ticket to bank statement to ensure that deposit was recorded in proper period

A

Cutoff

62
Q

What management assertion is supported?
Internal control: deposits are reconciled with totals posted to A/R subsidiary ledger
Test control: for sample of daily posting to A/R subsidiary ledger, trace the amount to amount of cash deposited in bank on that day as per the bank statement

A

Completeness

63
Q

Cash disbursements are typically authorized by…

A

Accounts payable department’s assembly of purchase orders,
Vendor invoices and internal receiving reports

To demonstrate valid obligation to pay

64
Q

What is the assembly of supporting documents for cash disbursement authorization called?

2) How should they be marked when processed?

A

Voucher

Voucher’s could be marked “PAID”

65
Q

Cash disbursements: recording

A

When checks are prepared, entries are made to debit accounts
Payable and credit cash

Someone without access to check writing function should perform
Recording function

66
Q

Cash disbursements: reconciliation

A

Monitoring if internal control over cash can be provided by
Timely bank reconciliations

Made by individuals outside normal cash operations

67
Q

How are separation of duties usually performed while using a computerized information processing system?

A

By assigning proper functional “permissions” to appropriate employees through password access credentials

68
Q

In an audit plan, Cash is always…

A

A relevant assertion

69
Q

What management assertion is tested?
Internal control: checks aren’t printed until voucher packets are prepared
Test of Control: for a sample of cash disbursements from the cash disbursements journal, vouch to supporting documentation for evidence of mathematical accuracy, correct classification, proper approval and proper date of entry.

A

Occurrence

70
Q

What management assertion is tested?
Internal control: an employee compares amounts on printed checks with voucher packets prior to submission for signature
Test of Control: for a sample of cash disbursements from the cash disbursements journal, vouch to supporting documentation for evidence of mathematical accuracy, correct classification, proper approval and proper date of entry.

A

Accuracy

71
Q

What management assertion is tested?
Internal control: only authorized signers are permitted to sign checks
Test of Control: for a sample of cash disbursements from the cash disbursements journal, vouch to supporting documentation for evidence of mathematical accuracy, correct classification, proper approval and proper date of entry.

A

Occurrence

72
Q

What management assertion is tested?
Internal control: checks are prenumbered and accounted for
Test of Control: scan checks for sequence. Look for gaps in sequence and duplicate numbers

A

Completeness

73
Q

What management assertion is tested?
Internal control: bank reconciliations are prepared on a timely basis
Test of Control: review bank reconciliations to ensure that they were prepared on a timely basis

A

Cutoff

74
Q

Once relevant assertions have been identified for cash (existence) and the tests of control activities are complete the auditor must…

A

Evaluate the evidence obtained from risk assessment activities
And control tests

To determine risk of material misstatement for each relevant
assertion

75
Q

All payments from cash disbursements journal should be made from either…

A

Check or electronic transfer

76
Q

Missing cancelled checks

A

Red flag for fraudulent checking

As fraudsters try to hide documentation of cancelled checks

77
Q

First procedure in audit of cash

A

Obtain entity prepared bank reconciliations and audit them

78
Q

When auditing the bank reconciliation the auditor should begin by…

A

Confirming the account balance listed as “balance per bank”

79
Q

To improve control of both delivery and receipt of confirmation request to authenticate the identity of person completing request, many public accounting firms now use…

A

Electronic audit confirmations when confirming cash

80
Q

Once the balance in the bank has been confirmed and cross referenced to the balance in the bank reconciliation, what following 3 procedures are used in auditing the bank reconciliation?

A

1 verify mathematical accuracy of reconciliation
2 examine reconciling items to ensure appropriately classified
3 agree book balance to trial balance

81
Q

Auditing the bank reconciliation: verify the mathematical accuracy of the reconciliation
What does this include?

A

Listing of outstanding checks and deposits in transit

82
Q

Auditing the bank reconciliation: examine reconciling items to ensure they are appropriately classified, example

A

Ex: that they were legitimate outstanding checks that were written,
But not paid by bank at statement date

83
Q

Auditing the bank reconciliation: agree the book balance to trial balance

Where has it been traced?

A

Has been traced to general ledger

84
Q

Auditor’s information source for validating the bank reconciliation items is typically…

A

A cutoff bank statement

85
Q

Cutoff bank statement

A

Client bank statement (usually sent directly to auditor)

Includes all paid checks and deposits slips through certain
date (usually the middle of the month

86
Q

Why is the cutoff bank statement important? 2

A

1 sent directly to auditors which qualifies as external evidence

2 documents important bank transactions occurring early in subsequent period, so audit team doesn’t need to wait for
Normal bank statement to be sent to client

87
Q

When a normal bank statement is sent to the client, what kind of evidence is it classified as?

A

External-internal evidence

88
Q

Deposits in transit, testing existence

A

Should be vouched from bank reconciliation to bank cutoff

statement

89
Q

Deposits In Transit should be recorded by bank in…

A

First business days in cutoff period

90
Q

Negative reconciling items listed on bank reconciliation

A

Outstanding checks

91
Q

Existence of cash

A

Overstatement

92
Q

Completeness of cash

A

Understatement

93
Q

Canceled checks should be traced to…

A

Cash disbursements listing journal

94
Q

Schedule of interbank transfers

A

Prepared by auditors to determine whether transfers of cash from
1 bank to another were recorded properly

(Correct amount, correct date)

95
Q

Check kiting

A

Deliberate floating of funds between 2 or more bank accounts

In order to make it appear that more cash is present than is
Really the case

96
Q

Check Clearing for the 21st Century Act AKA Check 21

A

System where Checks converted into digital images,

allowing for dramatic increase in speed in check clearing

97
Q

How does Check 21 help prevent check kiting?

A

“Float” on the check is virtually eliminated, so kiting becomes
Difficult to perform and conceal

98
Q

Proof of cash

A

Used to discover unrecorded cash transaction

Reconciliation where bank balance, bank report of cash paid
Are reconciled with entity’s general ledger, cash receipts journal
And cash disbursements journal

99
Q

When is proof of cash usually used?

A

When controls over cash are weak

100
Q

Extended procedures

A

Specific responses to fraud risk factors

101
Q

Extended procedures to detect fraud examples

A 
1 count and recount petty cash on same day
2 examine endorsements on canceled checks
3 retrieve customers' checks
4 used marked currency
5 analyze mix of cash and checks in deposits
6 measure deposit lag
7 document examination
8 inquiry (never question fraud suspect)
9 covert surveillance 
10 horizontal and vertical analysis
11 net worth analysis
12 expenditure analysis
13 reasonableness tests

Audit (36 decks)

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