Chapter 06 - Employee Fraud and the Audit of Cash

Chapter 06 Employee Fraud and the Audit of Cash

Multiple Choice Questions

1. 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.

2. 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

3. 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.

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4. 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.

5. 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.

6. 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.

7. 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.

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8. 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.

9. 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.

10. 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.

11. 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.

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12. 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.

13. 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.

14. 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.

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.

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16. 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.

17. 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.

18. 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.

19. 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.

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20. 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.

21. 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.

22. 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.

23. A proof of cash A. Is required by GAAS. B. Tests the transactions process. C. Is most helpful when control risk for cash is low. D. Detects lapping.

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24. 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.

25. 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.

26. 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.

27. 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

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28. 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

29. 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 also found in textbook

30. 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.

31. 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 "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.

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32. 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 audits of all accounts with high inherent risk of fraud.

33. 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.

34. 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.

35. Which of the following combinations is a good means of concealing 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.

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36. 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? A. Inventory. B. Wage expense. C. Consulting service expense. D. Property tax expense.

37. 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 reconciling 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.

38. 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.

39. 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. Prepare a year-end bank reconciliation.

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40. 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.

41. 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.

42. 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. Treasurer 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.

43. 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.

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44. 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.

45. 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.

46. 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.

47. 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.

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48. 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 also found in Study Guide

49. The phases of employee fraud does not include the A. Conversion of money to fraudster's use. B. Prosecution. C. Fraudulent act. D. Cover-up.

50. 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?

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51. The characteristics of people who commit the largest frauds would not include A. Hold middle management positions. B. Power to override controls. C. Long tenure with organization. D. Access to largest amounts of money.

52. 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.

53. The probability of fraud is not a function of A. Motive. B. Opportunity. C. Lack of integrity. D. Predication.

54. 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.

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55. A practice that would not encourage fraud would include A. Centralize authority in top management. B. Consider people pressure in the work place. C. Make profits the only criterion for success. D. Insist everything be documented with a rule for everything.

56. Which question would be inappropriate 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?

57. 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.

58. Information about criminal rackets, cons and their operations, and 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.

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Matching Questions

59. Auditors are auditing the cash receipts for Great Wall Corporation. For each audit procedure performed (numbered 1-5 below) select the control objective being tested by placing the correct letter in theblank. For a sample of recorded cash receipts, the auditors compared the date of receipt to the recording date. The auditors traced a sample of daily cash reports to the cash receipts journal. The auditors vouched a sample of recorded cash receipts to the deposits in the bank statement. The auditors recalculate the cash listed on the daily deposit for a sample of recorded cash receipts. The auditors traced a sample of recorded cash receipts to postings in the correct customers' accounts.

1. Existence 2. Completeness 3. Proper period 4. Accounting and posting 5. Accuracy

____ ____ ____ ____ ____

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Essay Questions

Question also found in Study Guide

60. For each of the descriptions in Column A, match the correct word or words from Column B.

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True / False Questions

Question Also Found in Study Guide

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

62. 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. True False

63. Fidelity bonds are used to prevent embezzlement. True False

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

65. 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. True False

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

67. Fraud consists of unintentional misstatements or omissions in financial statements. True False

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

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

70. Control systems enhance trust and reduce the bureaucracy of business. True False

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

72. The key to integrity in business is "accountability." True False

73. Employee fraud almost always involves people at the top executive level. True False

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

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

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

77. Employee fraud is an intentional act that injures investors or creditors through materially misleading financial statements. True False

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

79. 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. True False

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Fill in the Blank Questions

Question also Found in Study Guide

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

81. Another name for employee fraud and embezzlement is _____________________________. ________________________________________

82. The three components of the fraud triangle are _____________________________, _____________________________, and _____________________________. ________________________________________

83. A common feature of cash management is to require that persons who handle cash be bonded under a(n) _____________________________ _____________________________. ________________________________________

84. Fraud examinations should always begin only after sufficient _____________________________ is in hand leading to belief that a fraud has occurred. ________________________________________

85. The three necessary elements to commit fraud are the _____________________________, _____________________________, and _____________________________. ________________________________________

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86. A(n) _____________________________ _____________________________ _____________________________ is a reconciliation in which the bank balance, the bank report of cash deposited, and the bank report of cash paid are all reconciled to the client's general ledger. ________________________________________

87. Dual direction testing involves samples selected to obtain evidence about control over _____________________________ in one direction and control over _____________________________ in the other direction. ________________________________________

88. Someone who steals from an organization in order to support a political agenda is said to have a(n) ____________________ motivation. ________________________________________

89. A set of telltale signs of erroneous accounting, missing or altered documents, or a "dangling debt" is referred to as a ____________________ ____________________. ________________________________________

90. Simple theft of money or goods not entrusted to an individual is referred to as _____________________________. ________________________________________

91. A _____________________________ is some pressure experienced by a person and believed to be unshareable with friends and confidants. ________________________________________

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92. An organization whose only control is "_____________________________ _____________________________" really has no control. ________________________________________

93. Observation of persons' _____________________________ in _____________________________ and _____________________________ may reveal some red flags of employee fraud. ________________________________________

94. The nature of extended procedures is limited only by a(n) _____________________________ _____________________________. ________________________________________

95. Auditors _____________________________ perform the company's control function of _____________________________ the bank reconciliation. ________________________________________

96. Auditors use a(n) _____________________________ _____________________________ _____________________________ to obtain independent evidence of the proper listing of outstanding checks and deposits in transit on a bank reconciliation. ________________________________________

97. The term _____________________________ _____________________________ means the application of accounting and auditing skills to civil and criminal problems. ________________________________________

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Essay Questions

98. 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.)

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

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

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101. 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?

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

103. 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.

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104. 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.

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Chapter 06 Employee Fraud and the Audit of Cash Answer Key

Multiple Choice Questions

1. 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. Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Comprehension Difficulty: Medium

2. 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 Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Easy

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3. 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. Original

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

4. 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. Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Knowledge Difficulty: Easy

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5. 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. Original

AACSB: Analytic AICPA BB: Resource Management AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

6. 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. Original

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Bloom's: Comprehension Difficulty: Medium

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7. 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. Original

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

8. 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. Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Easy

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9. 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. Original

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

10. 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. Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

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Chapter 06 - Employee Fraud and the Audit of Cash

11. 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. Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

12. 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. AICPA

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

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Chapter 06 - Employee Fraud and the Audit of Cash

13. 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. AICPA

AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Application Difficulty: Medium

14. 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. Original

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

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Chapter 06 - Employee Fraud and the Audit of Cash

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. AICPA

AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Application Difficulty: Medium

16. 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. AICPA

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Bloom's: Application Difficulty: Hard

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Chapter 06 - Employee Fraud and the Audit of Cash

17. 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. Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Knowledge Difficulty: Medium

18. 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. AICPA

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

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Chapter 06 - Employee Fraud and the Audit of Cash

19. 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. AICPA

AACSB: Communication AICPA BB: Legal AICPA FN: Reporting Bloom's: Knowledge Difficulty: Medium

20. 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. Original

AACSB: Ethics AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Knowledge Difficulty: Medium

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Chapter 06 - Employee Fraud and the Audit of Cash

21. 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. Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Application Difficulty: Hard

22. 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. Original

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making Bloom's: Comprehension Difficulty: Medium

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Chapter 06 - Employee Fraud and the Audit of Cash

23. A proof of cash A. Is required by GAAS. B. Tests the transactions process. C. Is most helpful when control risk for cash is low. D. Detects lapping. AICPA

AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Hard

24. 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. Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Application Difficulty: Hard

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Chapter 06 - Employee Fraud and the Audit of Cash

25. 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. AICPA

AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Comprehension Difficulty: Hard

26. 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. Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Comprehension Difficulty: Medium

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Chapter 06 - Employee Fraud and the Audit of Cash

27. 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 Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Medium

28. 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 Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Knowledge Difficulty: Easy

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Chapter 06 - Employee Fraud and the Audit of Cash

29. 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 Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Knowledge Difficulty: Medium

Question also found in textbook

30. 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. Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

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31. 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 "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. Original

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

32. 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 audits of all accounts with high inherent risk of fraud. Original

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

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Chapter 06 - Employee Fraud and the Audit of Cash

33. 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. Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

34. 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. Original

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

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Chapter 06 - Employee Fraud and the Audit of Cash

35. Which of the following combinations is a good means of concealing 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. Original

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Bloom's: Application Difficulty: Hard

36. 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? A. Inventory. B. Wage expense. C. Consulting service expense. D. Property tax expense. Original

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

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Chapter 06 - Employee Fraud and the Audit of Cash

37. 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 reconciling 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. Original

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

38. 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. Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Knowledge Difficulty: Medium

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Chapter 06 - Employee Fraud and the Audit of Cash

39. 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. Prepare a year-end bank reconciliation. Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Knowledge Difficulty: Easy

40. 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. AICPA

AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Knowledge Difficulty: Easy

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Chapter 06 - Employee Fraud and the Audit of Cash

41. 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. Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Medium

42. 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. Treasurer 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. AICPA

AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Knowledge Difficulty: Medium

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Chapter 06 - Employee Fraud and the Audit of Cash

43. 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. Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

44. 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. Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Easy

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Chapter 06 - Employee Fraud and the Audit of Cash

45. 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. Original

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

46. 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. Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Easy

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Chapter 06 - Employee Fraud and the Audit of Cash

47. 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. Original

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

48. 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. Original

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Bloom's: Comprehension Difficulty: Medium

Question also found in Study Guide

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Chapter 06 - Employee Fraud and the Audit of Cash

49. The phases of employee fraud does not include the A. Conversion of money to fraudster's use. B. Prosecution. C. Fraudulent act. D. Cover-up. Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Knowledge Difficulty: Medium

50. 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? Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

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Chapter 06 - Employee Fraud and the Audit of Cash

51. The characteristics of people who commit the largest frauds would not include A. Hold middle management positions. B. Power to override controls. C. Long tenure with organization. D. Access to largest amounts of money. Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

52. 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. Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

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Chapter 06 - Employee Fraud and the Audit of Cash

53. The probability of fraud is not a function of A. Motive. B. Opportunity. C. Lack of integrity. D. Predication. Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Knowledge Difficulty: Medium

54. 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. Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Application Difficulty: Medium

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Chapter 06 - Employee Fraud and the Audit of Cash

55. A practice that would not encourage fraud would include A. Centralize authority in top management. B. Consider people pressure in the work place. C. Make profits the only criterion for success. D. Insist everything be documented with a rule for everything. Original

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

56. Which question would be inappropriate 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? Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

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Chapter 06 - Employee Fraud and the Audit of Cash

57. 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. Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Application Difficulty: Medium

58. Information about criminal rackets, cons and their operations, and 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. Original

AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Easy

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Chapter 06 - Employee Fraud and the Audit of Cash

Matching Questions

59. Auditors are auditing the cash receipts for Great Wall Corporation. For each audit procedure performed (numbered 1-5 below) select the control objective being tested by placing the correct letter in theblank. For a sample of recorded cash receipts, the auditors compared the date of receipt to the recording date. The auditors traced a sample of daily cash reports to the cash receipts journal. The auditors vouched a sample of recorded cash receipts to the deposits in the bank statement. The auditors recalculate the cash listed on the daily deposit for a sample of recorded cash receipts. The auditors traced a sample of recorded cash receipts to postings in the correct customers' accounts.

1. Existence 2. Completeness 3. Proper period 4. Accounting and posting 5. Accuracy

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

3 2 1 5 4

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Chapter 06 - Employee Fraud and the Audit of Cash

Essay Questions

Question also found in Study Guide

60. For each of the descriptions in Column A, match the correct word or words from Column B.

1.E, 2.L, 3.O, 4.G, 5.I, 6.N, 7.H, 8.J, 9.K, 10.D

AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Knowledge Difficulty: Hard

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Chapter 06 - Employee Fraud and the Audit of Cash

True / False Questions

Question Also Found in Study Guide

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

62. 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. FALSE

63. Fidelity bonds are used to prevent embezzlement. FALSE

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

65. 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. FALSE

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

67. Fraud consists of unintentional misstatements or omissions in financial statements. FALSE

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Chapter 06 - Employee Fraud and the Audit of Cash

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

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

70. Control systems enhance trust and reduce the bureaucracy of business. FALSE

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

72. The key to integrity in business is "accountability." TRUE

73. Employee fraud almost always involves people at the top executive level. FALSE

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

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Chapter 06 - Employee Fraud and the Audit of Cash

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

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

77. Employee fraud is an intentional act that injures investors or creditors through materially misleading financial statements. FALSE

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

79. 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. FALSE

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Fill in the Blank Questions

Question also Found in Study Guide

80. _____________________________ _____________________________ is the use of fraudulent means to take money or other property from an employer. Employee fraud

81. Another name for employee fraud and embezzlement is _____________________________. defalcation

82. The three components of the fraud triangle are _____________________________, _____________________________, and _____________________________. motive, opportunity, rationalization

83. A common feature of cash management is to require that persons who handle cash be bonded under a(n) _____________________________ _____________________________. fidelity bond

84. Fraud examinations should always begin only after sufficient _____________________________ is in hand leading to belief that a fraud has occurred. predication

85. The three necessary elements to commit fraud are the _____________________________, _____________________________, and _____________________________. fraud, conversion, cover-up

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86. A(n) _____________________________ _____________________________ _____________________________ is a reconciliation in which the bank balance, the bank report of cash deposited, and the bank report of cash paid are all reconciled to the client's general ledger. proof of cash

87. Dual direction testing involves samples selected to obtain evidence about control over _____________________________ in one direction and control over _____________________________ in the other direction. completeness, validity

88. Someone who steals from an organization in order to support a political agenda is said to have a(n) ____________________ motivation. ideological

89. A set of telltale signs of erroneous accounting, missing or altered documents, or a "dangling debt" is referred to as a ____________________ ____________________. paper trail

90. Simple theft of money or goods not entrusted to an individual is referred to as _____________________________. larceny

91. A _____________________________ is some pressure experienced by a person and believed to be unshareable with friends and confidants. motive

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Chapter 06 - Employee Fraud and the Audit of Cash

92. An organization whose only control is "_____________________________ _____________________________" really has no control. trustworthy employees

93. Observation of persons' _____________________________ in _____________________________ and _____________________________ may reveal some red flags of employee fraud. changes, habits, lifestyles

94. The nature of extended procedures is limited only by a(n) _____________________________ _____________________________. auditor's imagination

95. Auditors _____________________________ perform the company's control function of _____________________________ the bank reconciliation. should not, preparing

96. Auditors use a(n) _____________________________ _____________________________ _____________________________ to obtain independent evidence of the proper listing of outstanding checks and deposits in transit on a bank reconciliation. cutoff bank statement

97. The term _____________________________ _____________________________ means the application of accounting and auditing skills to civil and criminal problems. forensic accounting

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Chapter 06 - Employee Fraud and the Audit of Cash

Essay Questions

98. 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.) The bank imprints the check with the amount paid by the bank (magnetic print in the lower right corner). It will be 00007500, meaning $75.00.

AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Application Difficulty: Hard

99. After checks are signed for vendor invoices, why should vouchers be marked "paid" or otherwise mutilated? To show they have been processed so they cannot be paid again.

AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

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Chapter 06 - Employee Fraud and the Audit of Cash

100. List, and briefly describe, the three factors that increase the probability of fraud. Motive, opportunity, and lack of integrity are the three factors that increase the probability of fraud. Motive is a cause that pressures people into action. Economic motives are common in business fraud. Opportunity refers to a situation that allows someone with motive to carry out fraud. An example would be a lack or lapse of a specific control or controls in an organization. A lack of integrity describes a person who does not stick to the social or organizational ethical code. They may rationalize their actions to defend such a lack of integrity. Fraud is most common when these three factors exist together.

AACSB: Analytic AICPA BB: Legal AICPA FN: Risk Analysis Bloom's: Knowledge Difficulty: Medium

101. 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? The inventory manager could 1. Commit an inadvertent error of miscounting and adjust the error into the accounts and inventory records. 2. Steal inventory and adjust the inventory records permanently to cover up the theft.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

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102. Describe how a lockbox works and indicate the advantages of such a system. A lockbox is a post office box under the control of the bank. The bank will send employees to retrieve checks from the box and deposit them in the company's account. The bank will provide a listing of deposits and the remittance advises to the company. The bank may also provide images of the checks (if the company is willing to pay for these additional services). There are two main advantages to this system: 1. Checks are retrieved by the bank and never enter the company. Therefore the risk that checks will be misplaced or end up in the hands of the wrong individuals is eliminated. Separation of duties also becomes easier since the custody of the asset is no longer a possible for record keepers or authorizers. 2. The money is placed immediately into the bank allowing for immediate access to the use of the funds or interest on the funds.

AACSB: Analytic AICPA BB: Legal AICPA FN: Research Bloom's: Application Difficulty: Medium

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103. 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. 1. Controls include: Voucher package that includes a receiving report. An approved vendor list and the requirement that the vendor be on the approved vendor list. The inclusion of an expense account for the charging of all material. Each department gets a report of all expenses each month for review. 2. Procedures include: Review of voucher packages to ensure goods were received. Review of voucher packages to ensure vendors are on the approved vendor list. Analytical procedures to identify increases in expenditures for specific types of products (printing services). Analytical procedures to identify increases in expenditures to specific vendors.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Bloom's: Application Difficulty: Medium

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104. 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. Controls include: 1. A separate person could empty the PO Box, record how many envelops were in the box and deliver the unopened mail to Jane. Jane would be required to account for each envelop. The mail could be picked up under joint custody. The mail could be opened under joint custody. Surveillance equipment could be used to monitor the opening and recording of payments. Since customer complaints would be made because payments would not be credited to their account, and independent and vigorous complaint resolution process would be a good control. Mailing of statements each month to customers with balances or activity in their account. Follow up communication on customer accounts that are past due by someone independent of accounts receivable. 2. Procedures would include: Observe the opening of the mail and the recording of cash. Review of customer complaints for patterns and appropriate follow up by company personnel. From a sample of customer complaints, ask customers to send a copy of their payment (front and back) and review check for endorsement and bank account. Review of the aging of accounts receivable schedule (accounts where payments were diverted would begin to have past due balances). Confirm account balances with customers. Review responses to follow up communications on customer past due accounts.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Bloom's: Application Difficulty: Hard

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