he correct answer for each question is indicated by a

1 INCORRECT

The cash account is involved in which cycle? A) B) C) Revenue and collection. Acquisition and expenditure. Production and conversion.

All of the above. D) Feedback: Incorrect. While this statement is correct, D (all of the above) is a better answer.

2 CORRECT

Which of the following is an appropriate audit program step for the review of canceled checks to ensure that only authorized check signers are actually signing checks? A) Compare the check date with the first cancellation date.

Determine that all checks are to be signed by an individual B) authorized by the board. Examine a representative sample of signed checks and determine C) that the signatures are authorized in the corporate signature book. Confirm the signatures from a sample of checks directly with the D) bank. Feedback: Correct. This procedure would be the most appropriate to ensure that only authorized check signers are signing checks.

3 INCORRECT

A proof of cash is normally used A) B) C) for all engagements. to test the transactions process when controls over cash are weak. when control risk for cash is low.

when the client uses a lockbox system. D) Feedback: Incorrect. A proof of cash is only used when control risk is high.

4 CORRECT

When counting cash on hand the auditor must exercise control over all cash and other negotiable assets to prevent A) B) C) D) Theft. Collusion. Substitution of stolen funds. Kiting.

Feedback: Correct. Simultaneous custody of all liquid assets would prevent employees from replacing stolen money with money that had been counted by the auditor previously.

5 INCORRECT

When a fraud perpetrator embezzles company funds for the purpose of buying gifts for co-workers, the fraudster's motive is said to be: A) B) C) Psychotic Egocentric Ideological

Economic D) Feedback: Incorrect. The fraudster's motive in this case is economic.

6 INCORRECT

An enlightened management team can decrease the probability of fraud in the company best by: Restricting authority for profit objective determination to top A) management. Measuring performance and awarding bonuses on the basis of shortB) term operating results. Providing employees performance feedback that stresses negative C) observations on their work to increase performance. Establishing work teams that share responsibilities, performance, D) and bonuses based on collective efforts. Feedback: Incorrect. Stressing criticism would likely increase the probability of fraud in the organization.

7 INCORRECT

In order for internal auditors to be able to recognize potential fraud, they must be aware of the basic characteristics of fraud. Which of the following is a characteristic of fraud? A) B) C) Unintentional deception. Taking unfair or dishonest advantage of uninformed individuals. Lack of training.

Negligence on the part of executive management. D) Feedback: Incorrect. Lack of training is not a basic characteristic of fraud.

8 CORRECT

Which of the following statements is correct with respect to the elements of the "fraud triangle"? A) Opportunity is a cause that pressures people into action.

Motive refers to a situation that allows someone with opportunity to B) carry out fraud. Fraud it most common when motive, opportunity and rationalization C) all occur together.

Fraud is most common when motive and lack of integrity exist D) together. Feedback: Correct. The answer contains all three conditions that make up the fraud triangle. By definition, this is the most common situation when fraud will occur.

9 CORRECT

When auditing with "fraud awareness," auditors should especially notice and follow up employee activities under which of these conditions? The company counts inventory on a cycle basis throughout the year without performing a complete inventory observation at year-end to A) improve efficiency. The petty cash box is always locked in the desk of the custodian to B) improve security. Cash disbursement and bank statement reconciliation responsibilities are restricted to the cashier to improve C) accountability. The board of directors reviews and approves all investment D) transactions to prevent unauthorized transactions. Feedback: Correct. Restricting these functions to one person increases that person's ability to commit fraud. Lack of segregation of duties in the cash disbursements area would be a red flag. Which of the following gives an indication of potential fraudulent activity? A) Credit memos have been issued to the company's biggest customer.

10 INCORRECT

Internal auditor cannot locate several credit memos to support B) reductions of customers' balances. The year-end bank reconciliation has no outstanding checks or C) deposits older than 15 days. No one was absent the day the auditors handed out the paychecks. D) Feedback: Incorrect. The fact that there are no outstanding items, although unusual, would not necessarily be a red flag.

11 INCORRECT

Which of these arrangements of duties would least likely lead to an embezzlement or theft? Inventory warehouse manager has responsibility for making the physical inventory observation and reconciling discrepancies to the A) perpetual inventory records. Cashier prepared the bank deposit, endorsed the checks with a company stamp, took the cash and checks to the bank for deposit, B) and reconciled the bank statement. Accounts receivable clerk opens customer payments so she could make entries in the customers' accounts receivable subsidiary C) accounts. Financial vice president received checks made out to suppliers and the supporting invoices, signed the checks, and put them in the mail D) to the payees. Feedback: Incorrect. These circumstances would allow the accounts receivable clerk to steal funds and then conceal the theft