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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.
Correct - A. Risk is high when the company always estimates the inventory but never take a complete physical count
b. incorrect - Risk is low when the petty cash box is always locked in the desk of the custodian
c. incorrect - Risk is lower when management has published a company code of ethics and sends frequent communication newsletters about it
d. incorrect - Risk is lower when the board of directors reviews and approves all investment transactions
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 upon fraud tips
c. Place dedicated hotline telephones on walls around the workplace with direct communiation to the company ethics officer
d. Practice management "of the people and for the people" to help them share personal and professional problems
Correct D. Practice managment "of the people and for the people" to help them share personal and professional problems is the best long-run way to stop fraud
a. Incorrect - An airtight control systems of checks and supervision is not possible because of collusion and managment overide
b. Incorrect - a positive steop, but not the best long-run way to stop fraud
c. Incorrect - Dedicated "hotline" telephones are a great idea, but you wouldn't want to put them on walls around the workplace where anonymity is impaired
A good fraud prevention program should address employees' motivation to steal from the company. The best method of doing this is to
a. Establish employe assistance programs
b. Require a fidelity bond on all employees
c. Require reconciliation of all accounts with high inherent risk of fraud
d. Ensure audits of all accounts with high inherent risk of fraud
A. Correct . Many frauds are motivated by employees who have problems due to debt, addictions, or family problems. Establishing an employee assistance program addresses these issues and may reduce the motivation to commit fraud for some employees
b. incorrect - a fidelity bond reduces the risk to the employer for theft since this is a form of insurance. it also provides a background check on employees . Neither of these issues address employee motivation
c. Incorrect - Reconciliations are methods of detecting problems that have occured. While these are good controls and may reduce the opportunities for employees to steal, reconcilations do not address employee motivation to commit fraud
d. Incorrect - Auditors may detect fraud and even provide deterrence for fraud. Audits do not address the employees' motivation to commit fraud
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 hotline for reporting unethical behavior
c. The violation of a code of ethics by senior managment
d. The posting of the code of ethics in the company workplace
C. Correct - The violation of the code of ethics since the tone at the top would provide a message to employees that the code of ethics was not important
a. Incorrect - an appointment of a chief ethics office would increase the effectiveness of the code of ethics
b. Incorrect - A hot line that allowed employees to report ethical violations would increase the effectiveness of teh code of ethics
d. Incorrect - The posting of the code of ethics and any other means of presenting the code of ethics to employees in a prominent manner would increase the effectiveness of the code of ethics
Which of the following is least indicative of fraudulent activity?
a. Number 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 not oustanding 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
C Correct - Bank reconciliations that do not have outstanding checks or deposits older than 15 days is generally a positive sign
a. Incorrect - Numerous cash refunds have been made to different people at the same post office box address is an indicator of cash refund fraud
b. Incorrect - Internal auditor cannot locate several credit memos to support reductions of customers' balances is an indicator of accounts receivable fraud, especially if there is not an appropriate separation of duties
d. Incorrect - Three people were absent the day the auditors handed out the paychecks and have not picked them up four weeks later is an indicator of "ghost employees" (payroll faud)
Which of the following combinations is a good means of concealing employee fraud but an ineffective means of perpetrating managment (financial reporting) fraud?
a. Overstating sales revenue and overstating customer accounts receivable balances.
b. Overstating sales revene 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
B. Correct - Overstating sales revenues and overstaing bad debt expense does not misstate income or assets but will hide an employee embezzlement
a. Incorrect - Overstating sales revenues and overstating customer accounts receivable balances is a way to misstate financial statements for management fraud
c. Incorrect - Understating interest expense and understating accrued interest payable is a way to misstate financial statements for management fraud
d. Incorrect - Omit the disclosure information about related party sales to the president's relatives at below-market prices is a way to misstate financial statements for management fraud
Allison, 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?
b. Wage expense
c. Consulting service expense
d. Property tax expense
C Correct - Expense accounts are often good places to hide fraud since accounts are closed at the end of the year. Consulting expense is a particularly good place to hid a fraud since no actual product is provided which may be counted or compared to the expense
a. Incorrect - Inventory should be counted on a regular basis, therefore, the fraud would be detected
b. Incorrect - Expense accounts are often good places to high fraud since accounts are closed at the end of the year. Wage expense accounts may be compared to budget and may be reviewed by department managers that migh detect the fraud.
d. Incorrect - property tax expense would likely be compared to the property tax bill and any discrepancies investigated
Which of these arrangements of duties could most likely lead to an embezzlement or theft?
a. Inventory warehouse manager has responsibility for making the physical inventory observation and recording discrepancies to the perpetual inventory records
b. 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. Accounts receivable clerk received a list of payments received by the cashier so she could make entries in the customers' accounts receivable subsidiary accounts
d. Financial vice president received checks made out to suppliers and the supporting invoices, signed the checks, and mailed the checks
A. correct - The inventory warehouse manager can steal inventory and manipulate the records
b. Incorrect - Cashier prepared the bank deposit, endorsed the check with a company stamp, and took the cash and checks to the bank for deposit (no other bookkeeping duties). The cashier migh steal currency, but needs access to the records to cover up the theft of customer payments
c. incorrect - accounts receivable clerk received a list of payments received by the cashier so he could make entries to the customers' accounts receivable subsidiary accounts. Good arrangement because the bookkeeper does not have access to cash
d. Incorrect - Financial VP received checks made out to suppliers and the supporting invoices, signed the checks, and put them in to mail to the payees. Fraud would be harder becaue financial VP would also need to be able to create fictitious vendors and invoices
Which of the following would the auditor consider to be an incompatible operationg 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
C Correct - The cashier would have both custody of cash and recored keeping responsibility, hence could steal money and fix the records without interference by anyone else
Which of the following is an effective audit procedure that might be used by an auditor to detect kiting between intercompany banks?
a. Review composition of authenticated deposit slips?
b. Review subsequent bank statements
c. Prepare a schedule of the bank transfers
d. Prepar a year-end bank reconciliation
C Correct - Kiting involves a mismatching of dates of recording around year-end and the schedule of bank transfers is designed to show all the relevant dates so the auditor can see tha the entries are in the proper periods
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 a subsidiary accounts receivable records
d. Prepare a deposit slip in triplicate
B. Correct - Effective control of cash requires that receipts be recorded promptly. For mail receipts, a listing of remittance advices by an employee not performing incompatible functions is a standard control activiity. If the customer does not return the remittance advice, one should be prepared at the time the maiil is opened. If remittance advices are not used, a listing of receipts should still be made when the mail is opened.
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 assitant controller does not also reconcile the subsidiary accounts payable
B Correct - 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
a. incorrect - a check returned for insufficient funds would make the balance per bank different than the balance per books and would need to be a reconciling item. It would not change any of the information that was provided to the asssistant controller
c. incorrect - Controls over unauthorized access into accounts receivable strengthens the control indicated in the question since information on the payment report would be more reliable
d. Incorrect - The controller would not be able to determine whether the payments were posted to the correct customer account with this information
Upon receipt of customers' checks in the mail room, a responsible employee should prepare a remittance listing that is forwarded to the cashier. A copy of the listing should be sent to the
a. Internal auditor to investigate the listing for unusual transactions
b. Treasure to compare the listing with the monthly bank statement
c. Accounts receivable bookkeeper to update the subsidiary accounts receivable records
d. Entity's bank to compare the listing with the cashier's deposit slip
C. Correct - The individuals with record-keeping responsibility should not have custody of cash. Hence, they should use either the remittance advices or a listing of the remittances to make entries to the cash and accounts receivable control account and to the subsidiary accounts receivable records. Indeed, having different people make entries in the control account and in the subsidiary records is an effecting control
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
A. Correct - 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
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 misstaken representation of opinion that causes incorrect acccounting entries
d. An employee's misappropriating an employer's money or property entrusted to the employee's control in the employee's normal job
D. Correct - This statement is the textbook and criminological definition of embezzlement
a. Incorrect - the definition of embezzlement involves property that is entrusted to the employee's control. This statement refers to larceny
b. Incorrect - This statement is similar to the definition of managment fraud
c. Incorrect - this statement is similar to a mere error in accounting
Which of the following control activities would best protect against the prepartion of improper or inaccurate cash disbursements?
a. All checks mus 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 treasure 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
B. Correct - A final reveiw by the treasurer can catch mistakes made in prior processing
During an audit of cash, the auditor is most concerned with the management assertion of
b. Rights and obligations
c. Valuation or allocation
A. correct - the ovestatement of cash would be of most concern. Cash is overstated by claiming that the organization has more cash then it does
b. incorrect - it is possible that firm could borrow money to include in a cash count and, therefore, not have the rights to the cash. However, such a scheme is of lesser concern than if the company claimed cash that did not exist
c. Incorrect - Since the value of cash is easily countable this assertion is usually not an issue
d. Incorrect - improper cash presentation is of lower risk than the existence of cash
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
C. Correct - Budgets provided by management provide the best estimates by managament for the sources and use of cash. Where cash receipts or cash expenditures vary form the budget by a material amount, a higher level of risk may be assessed
a. Incorrect - since the sources and use of cash can vary greatly from year to year, balances in prior year are of little use
b. Incorrect - Management inquiry would provide poor information for use in performing analytical procedures
d. Incorrect - Failure to collect accounts receivable may indicate a problem with cash sources but would only be part of an estimate of cash.
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 managment official s
c. The date on a disbursement voucher should be withing 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
D. Correct - Cancellation "paid" of vouchers prevent their use a second time.
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