Chapter 6 MC

Embezzlement is a type of fraud that involves

An employees misappropriating an employers money or property not entrusted to him

or her.
A managers falsification of financial statements for the purpose of misleading investors
and creditors.
An employee misappropriating an employers money or property entrusted to
the employees control in the employees normal
job.
An employees mistaken representation of opinion that causes incorrect accounting
entries
Incorporating elements of unpredictability in the selection of audit procedures to be
performed by auditors include all of the following except
Selecting items for testing that have lower amounts or are otherwise outside customary
selection parameters.
Varying the timing of the audit procedures.
None of these are correct.
Performing audit procedures on an unannounced basis.
Sending attorney letters to every attorney listed under the legal expense
account
If the auditor believes that a misstatement is or might be intentional and the effect on
the financial statements could be
material or cannot be readily determined, the auditor should do which of the following?
Discuss with the audit committee what should be done to prevent possible future
misstatements.
Inquire of management as to the possibility of fraud.
Discuss with the audit committee what should be done to prevent possible future
misstatements and perform procedures to
obtain additional audit evidence to determine whether fraud has occurred or is likely to
have occurred.
Perform procedures to obtain additional audit evidence to determine whether
fraud has occurred or is likely to have occurred.
None of these is correct.

Which of these arrangements of duties could most likely lead to an embezzlement

or theft?
The financial vice president received checks made out to suppliers and the
supporting invoices, signed the checks, and mailed the checks
The 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).
The accounts receivable clerk received a list of payments received by the cashier so
he could make entries in the customers accounts receivable subsidiary accounts.

The inventory warehouse manager has responsibility for making the

physical inventory observation and reconciling discrepancies to the
perpetual inventory records.

The best way to enact a broad fraud prevention program is to

Name an "ethics officer" who is responsible for receiving and acting on fraud tips.
Place dedicated hotline telephones on walls around the workplace with direct
communication to the company ethics officer.
Practice management "of the people and for the people" to help them share
personal and professional problems.
Install airtight control systems of checks and supervision.
Fraud risk factors are events or conditions that indicate which of the following:
An incentive or pressure to perpetrate fraud.
All of these are correct.
An attitude or rationalization that justifies a fraudulent action.
An opportunity to carry out a fraud.
Which of the following would the auditor consider to be an incompatible operation if the
cashier receives remittances?

The cashier posts the receipts to the accounts receivable subsidiary ledger
cards.
The cashier prepares the daily deposit.
The cashier makes the daily deposit at a local bank.
The cashier endorses the checks.
When auditing with "fraud awareness," auditors should especially notice and follow up
employee activities under which of these conditions?

The company always estimates the inventory but never takes a complete
physical count.
The petty cash box is always locked in the desk of the custodian.
Management has published a company code of ethics and sends frequent
communication newsletters about it.
The board of directors reviews and approves all investment transactions
Which of the following control activities could prevent a paid disbursement voucher from
being presented for payment a second time?

Disbursement vouchers should be approved by at least two responsible management

officials.
The official signing the check should compare it with the voucher and should
stamp "paid" on the voucher documents.
The date on a disbursement voucher should be within a few days of the date the
voucher is presented for payment.
Vouchers should be prepared by individuals who are responsible for signing
disbursement checks.
A good fraud prevention program should address employees' motivation to steal from the

company. The best method for doing this is to

Require reconciliations of all accounts to be reviewed by a supervisor.

Require a fidelity bond on all employees.
Establish employee assistance programs.
Ensure that all accounts with high inherent risk of fraud are audited.

Each morning the controller gets the prior day's list of remittances, a copy of the payment
report, and a copy of the deposit slip returned from the bank. When comparing these items,
the controller would be able to determine that

No checks were returned for insufficient funds.

The cash received and remittance advice received were maintained in a single
batch.
The accounts receivable system has controls over unauthorized access.
The assistant controller does not also reconcile the subsidiary accounts payable.
Which of the following control activities would best protect against the preparation of
improper or inaccurate cash disbursements?

All checks must be signed by an officer designated by the board of directors.

All checks must be perforated or otherwise effectively canceled when they are returned
with the bank statement.
All signed checks must be reviewed and compared with supporting
documentation by the treasurer before mailing.
All checks must be sequentially numbered and accounted for by internal auditors.
Which of the following is least indicative of fraudulent activity?

Numerous cash refunds have been made to different people at the same post office box
address.
Bank reconciliation has no outstanding checks or deposits older than 15 days.
Internal auditors cannot locate several credit memos to support reductions of
customers balances.
Three people were absent the day the auditors handed out the paychecks and have not
picked them up four weeks later
Upon receipt of customers checks in the mail room, a responsible employee should prepare
a remittance list that is forwarded to the cashier. A copy of the list should be sent to the

Accounts receivable bookkeeper to update the subsidiary accounts receivable

records.
Internal auditor to investigate the list for unusual transactions.
Entitys bank to compare the list with the cashiers deposit slip.
Treasurer to compare the list with the monthly bank statement.
A code of ethics is an important element of a fraud prevention program. Which of the
following would diminish the effectiveness of a companys code of conduct?

The establishment of a chief ethics officer.

The violation of the code of ethics by senior management.
The establishment of a hotline for reporting unethical behavior.
The posting of the code of ethics in the company workplace

Which of the following is an effective audit procedure that an auditor might use to detect
kiting between intercompany banks?

Review subsequent bank statements.

Prepare a year-end bank reconciliation.
Prepare a schedule of the bank transfers.
Review the composition of authenticated deposit slips.
Allison Everhart, an employee in accounts payable, believes she can run a fictitious invoice
through the accounts payable system and collect the money. She knows payments are
subject to an audit. Which account would be the best place to hide the fraud?

Wage expense.
Consulting service expense.
Property tax expense.
Inventory.
Fraud risk factors are events or conditions that indicate
I. An incentive or pressure to perpetrate fraud.
II. An opportunity to carry out the fraud.
III. An attitude or rationalization that justifies the fraudulent action.
Which of the following statements is true?
None of these is a fraud risk factor.
I and II are fraud risk factors.
II and III are fraud risk factors.
I is a fraud risk factor.
I, II, and III are fraud risk factors
Which of the following combinations is a good way to conceal employee fraud but an
ineffective means of perpetrating management (financial reporting) fraud?

Omitting the disclosure information about related-party sales to the presidents relatives
at below-market prices.
Overstating sales revenue and overstating bad debt expense.
Understating interest expense and understating accrued interest payable.
Overstating sales revenue and overstating customer accounts receivable balances
Cash receipts from sales on account have been misappropriated. Which of the following acts
would conceal this defalcation and be least likely to be detected by an auditor?

Understating the sales journal.

Overstating the sales journal.
Overstating the accounts receivable subsidiary ledger.
Overstating the accounts receivable control account
Immediately upon receipt of cash, a responsible employee should

Update the subsidiary accounts receivable records.

Prepare a deposit slip in triplicate.
Record the amount in the cash receipts journal.
Prepare a remittance listing

In what way can audit procedures be modified to address assessed fraud risks?
All of these are valid modifications.
Perform procedures close to year-end.
Apply computer-assisted techniques to all items.
Obtain more reliable information.
During an audit of cash, the auditor is most concerned with the management assertion of

Valuation or allocation.
Rights and obligations.
Existence.
Occurrence.
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?

Aged accounts receivable reports.

Prior-years' balances.
Management inquiry.
Cash budgets.

To gather evidence regarding the balance in a bank reconciliation, an auditor would

examine all of the following except the

Cutoff bank statement.

General ledger.
Bank confirmation.
Year-end bank statement

Which of the following is not considered one of the three factors increasing the probability of
fraud?
Motive.
Lack of training.
Opportunity.
Rationalization.

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
Supported by a vendor's invoice.

Stamped PAID by the check signer.

Prenumbered and accounted for.
Approved for authorized purchases.

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
Provide the data necessary to prepare a proof of cash.
Request that a cutoff bank statement and related checks be sent to the audit.
Detect questionable bank activities that may otherwise not be discovered.
Seek information about contingent liabilities and security agreements.

In the audit of cash, the auditor obtains a bank cutoff statement primarily to
Identify old outstanding checks that the client may exclude from the year-end bank
reconciliation in order to misappropriate cash.
Obtain sufficient information to reconcile the client's bank account as of year-end.
Obtain direct confirmation of the client's bank balances as of year-end.
Test the propriety of items appearing on the client's year-end bank reconciliation.

Which of the following is ordinarily considered an extended procedure during the

independent audit of financial statements?
Sending positive confirmations on recorded customer accounts receivable balances.
Performing physical observation and test count during the client's inventory taking.
Measuring the time lag between the date of recording cash receipts in the books to
the date of the deposit credit in the bank.
Conducting interviews with the client's sales billing personnel to learn about sales recording
control activities.

Which of the following sets of information does an auditor usually confirm on one form?
Accounts payable and purchase commitments.
Cash in bank and collateral for loans.
Inventory on consignment and contingent liabilities.
Accounts receivable and accrued interest receivable.

Which of the following management policies would increase the probability of fraud in a
company?
Diversifying authority throughout divisions and subsidiaries in the organization.

Measuring performance and awarding bonuses based on short-term operating

results.
Giving employees performance feedback that considers positive and constructive praise
along with critical and negative observations on their work.
Establishing work teams that share responsibilities, performance, and bonuses based on
collective efforts

Which of the following would be consistent with an employee taking cash receipts from
customers on account?
The total of the accounts receivable subsidiary ledger balances is less than the
accounts receivable control account.
The total of the accounts receivable subsidiary ledger balances is more than the accounts
receivable control account.
Total cash receipts from customers for the month are less than credit sales for the month.
Total cash receipts from customers for the month are more than credit sales for the month.