Chapter 6: Additional Practice Questions Flashcards
When auditing with “fraud awareness,” auditors should especially notice and follow up employee activities under which of these conditions?
The company always estimates the inventory but never takes a complete physical count. Risk is high when the company always estimates the inventory but never takes a complete physical count.
The best way to enact a broad fraud prevention program is to:
practice management “of the people and for the people” to help them share personal and professional problems.
A good fraud prevention program should address employees’ motivation to steal from the company. The best method for doing this is to:
establish employee assistance programs.
- 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.
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?
The violation of the code of ethics by senior management
Which of the following is least indicative of fraudulent activity?
Bank reconciliation has no outstanding checks or deposits older than 15 days.
- This is generally a positive sign and are not indicative of fraudulent activity.
When performing confirmation of cash balances with a bank, the auditor is primarily gathering evidence related to which financial statement assertion?
Existence
Confirmation of cash balances provides the best evidence of the existence of cash held by a bank.
Which of the following is true about electronic cash confirmations obtained through Confirmation (Confirmation.com)?
Auditors must obtain evidence supporting the reliability of controls surrounding the Confirmation (Confirmation.com) process.
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?
Consulting service expense
- 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 these arrangements of duties could most likely lead to an embezzlement or theft?
The inventory warehouse manager has responsibility for making the physical inventory observation and reconciling discrepancies to the perpetual inventory records.
Which of the following would the auditor consider to be an incompatible operation if the cashier receives remittances?
The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
- 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!
Which of the following is an effective audit procedure that an auditor might use to detect kiting between intercompany banks?
Prepare a schedule of the bank transfers
- 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.
Immediately upon receipt of cash, a responsible employee should:
prepare a remittance listing.
- Effective control of cash requires that receipts be recorded promptly.
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:
the cash received and remittance advice received were maintained in a single batch.
- 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.
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:
accounts receivable bookkeeper to update the subsidiary accounts receivable records.
- 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.
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?
Understating the sales journal
- 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.
Embezzlement is a type of fraud that involves:
an employee misappropriating an employer’s money or property entrusted to the employee’s control in the employee’s normal job.
Which of the following control activities would best protect against the preparation of improper or inaccurate cash disbursements?
All signed checks must be reviewed and compared with supporting documentation by the treasurer before mailing.
- 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.
During an audit of cash, the auditor is most concerned with the management assertion of:
existence.
- The existence of cash is always a relevant assertion for cash because an overstatement of cash might indicate that fraudulent revenue was recorded.
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?
Cash budgets
- 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.
Which of the following control activities could prevent a paid disbursement voucher from being presented for payment a second time?
The official signing the check should compare it with the voucher and should stamp “paid” on the voucher documents.
- Cancellation of vouchers by stamping them PAID prevents the voucher from mistakenly being paid a second time.
Fraud risk factors are events or conditions that indicate which of the following?
An opportunity to carry out a fraud, An attitude or rationalization that justifies a fraudulent action, and An incentive or pressure to perpetrate fraud
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?
Perform procedures to obtain additional audit evidence to determine whether fraud has occurred or is likely to have occurred
- 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.
In what way can audit procedures be modified to address assessed fraud risks?
Obtain more reliable information, Perform procedures close to year-end, and Apply computer-assisted techniques to all items
Incorporating elements of unpredictability in the selection of audit procedures to be performed by auditors include all of the following except:
sending attorney letters to every attorney listed under the legal expense account.
- 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
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?
I, II, and III are fraud risk factors.
