Auditing Chapter 6 Connect MC

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.
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When auditing with "fraud awareness," auditors should especially notice and follow up
employee activities under which of these conditions?
a. The company always estimates the inventory but never takes a complete physical count.
b. The petty cash box is always locked in the desk of the custodian.
c. Management has published a company code of ethics and sends frequent communication
newsletters about it.
d. The board of directors reviews and approves all investment transactions.
b. risk is low when the petty cash box is always locked in the desk of the custodian.
c. risk is low when management has published a company code of ethics and sends frequent communication newsletters about it.
d. risk is low when the board of directors reviews and approves all investment transactions.

a. Correct Risk is high when the company always estimates the inventory but never takes a complete physical count.
The best way to enact a broad fraud prevention program is to
a. Install airtight control systems of checks and supervision.
b. Name an "ethics officer" who is responsible for receiving and acting on fraud tips.
c. Place dedicated hotline 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.
a. an airtight control system of checks and supervision is not possible because of collusion and management override.
b. this is a positive step but it is not the best long-term way to stop fraud
c. dedicated hotline telephone are a great idea but you wouldnt want to put them on walls around the work place where anonymity is impaired

d. Correct Since "people" are essential to a fraud prevention program, Practice management "of the people and for the people" to help them share personal and professional problems is the best long run way to stop fraud.
A 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 that all accounts with high inherent risk of fraud are audited.
b. a fidelity bond reduces the risk to the employer for theft because this is a form of insurance . It also provides a background check on employees. Neither of these issues address the fundamental issue of employee motivation.
c. reconciliations are methods of detecting problems that have occurred. While these are good controls and may reduce the opportunity for employees to steal, reconciliations do not address employee motivation to commit fraud.
d. audits may detect fraud and even provide deterrence for fraud, but they do not address the employee's motivation to commit fraud.

a. Correct Problems due to debt, addictions, or family problems motivate employees to commit frauds. Establishing an employee assistance program addresses these issues and ultimately may reduce the motivation to commit fraud for some employees.
A code of ethics is an important element of a fraud prevention program. Which of the following
would diminish the effectiveness of a company's code of conduct?
a. The establishment of a chief ethics officer.
b. The establishment of a hotline 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.
a. an appointment of chief ethics officer would increase the effectiveness of the code of ethics.
b. a hot line that allowed employees to report ethical violations would increase the effectiveness of the code of ethics.
d. the posting of the code of ethics and any other means of presenting the code of ethics to employees in the workplace would increase the effectiveness of the code of ethics.

c. Correct The violation of the code of ethics by senior management would reduce the effectiveness of the code of ethics because the tone at the top would send the wrong message to employees that the code of ethics was not important.
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.
a. numerous cash refunds made to different people at the same post office box is an indicator of cash refund fraud.
b. internal auditor can't locate several credit memos to support reductions of customers' balances is an indicator of AR fraud especially if there isn't an appropriate separation of duties.
d. three people were absent the day the auditors handed out the paychecks and have not picked them up four weeks later is an indicator of "Ghost employees" aka payroll fraud

c. Correct Bank reconciliations that do not have outstanding checks or deposits older than 15 days are generally positive signs and are not indicative of fraudulent activity.
When performing confirmation of cash balances with a bank, the auditor is primarily gathering evidence related to which financial statement assertion?

a. Existence
b. Completeness
c. Valuation
d. Presentation and Disclosure
b. although a confirmation can provide evidence related to completeness this is not the primary assertion auditors are concerned about in audits of cash
c. valuation of cash is generally not a primary assertion for cash held in US banks
d. presentation and disclosure is not an assertion that is supported through the confirmation of acct balances

a. Correct Confirmation of cash balances provides the best evidence of the existence of cash held by a bank.
Which of the following is true about electronic cash confirmations obtained through Confirmation (Confirmation.com)?

a. Responses to electronic confirmations are often delayed compared with manual confirmations.
b. Electronic cash confirmations provide more convincing evidence for the completeness assertion than manual confirmations.
c. Auditors must obtain evidence supporting the reliability of controls surrounding the Confirmation (Confirmation.com) process.
d. It is more difficult to determine the authenticity of an electronic confirmation obtained through Confirmation compared with confirmations mailed to the auditors.
a. electronic confirmations are often responded to in a much more timely manner because there are no mail delays
b. the evidence provided by an electronic confirmation is not greater than a manual confirmation presuming reliability of both methods
d. the authenticity of the confirmation is the primary advantage of using electronic confirmations. Unlike manual confirmations, electronic confirmations require usernames and passwords to access and complete the confirmation

c. Correct Prior to relying on confirmations from any source, auditors must obtain evidence supporting the reliability of the confirmation process
Allison Everhart, an employee in accounts payable, believes she can run a fictitious invoice
through the accounts payable system and collect the money. She knows payments are subject
to an audit. Which account would be the best place to hide the fraud?
a. Inventory.
b. Wage expense.
c. Consulting service expense.
d. Property tax expense.
a. inventory should be counted on a regular basis; therefore the fraud would be detected
b. expense accts are often good places to hide fraud because accts are closed at the end of the year. wage exp accts may be compared to budget and may be reviewed by department managers that might detect the fraud.
d. property tax exp would likely be compared to the property tax bill and any discrepancies investigated.

c. Correct Expense accounts are often good places to hide fraud because accounts are closed at the end of the year. Consulting expense is a particularly good place to hide a fraud because it provides no actual product that may be counted or compared to the expense.
Which of these arrangements of duties could most likely lead to an embezzlement or theft?
a. The inventory warehouse manager has responsibility for making the physical inventory
observation and reconciling discrepancies to the perpetual inventory records.
b. 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).
c. 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.
d. The financial vice president received checks made out to suppliers and the supporting
invoices, signed the checks, and mailed the checks.
b. the cashier prepared the bank deposit, endorsed the checks with a company stamp, and took the cash and checks to the bank for deposit. the cashier might steal currency but needs access to the records to cover up a theft of customer payment
c. to make entries in the customers AR subsidiary accts, the AR clerk received a list of payments received by the cashier. good arrangement because the bookkeeper doesn't have access to cash
d. the financial VP received checks made out to suppliers and the supporting invoices, signed the checks, and put them in the mail to the payees. fraud would be difficult because financial VP would also need to be able to create fictitious vendors and invoices

a. Correct The inventory warehouse manager could steal inventory and then manipulate the records to cover up the theft. This arrangement would violate proper segregation of duties because the manager has custody of assets and access to the records. The manager can steal and then conceal!
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.
a. individual responsible for receiving the remittances is often responsible for preparing the daily deposit. Both activities qualify as "custody" activities. So this is incorrect.
b. the individual responsible for receiving the remittances is often responsible for making the daily deposit. both activities qualify as "custody" activities. so this is incorrect.
d. the individual responsible for receiving the remittance is often responsible for endorsing the checks. both activities would qualify as "custody" activities. so this is incorrect.

c. Correct The auditor would consider it incompatible because the cashier would have both custody of cash and record-keeping responsibility and, hence, could steal money and fix the records without interference by anyone else. The cashier could steal and then conceal!
Which of the following is an effective audit procedure that an auditor might use to detect kiting between intercompany banks? a. Review the 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.a. this procedure would not help auditors detect kiting. b. this procedure would not help auditors detect kiting. d. this procedure would not help auditors detect kiting. c. Correct Kiting involves a mismatching of dates of recording cash transactions around year end, and the schedule of bank transfers is designed to show all the relevant dates so the auditor can see that the entries were made in the proper periods.Immediately upon receipt of cash, a responsible employee should 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.a. the individual responsible for receiving the cash should not have access to the acct records. this would violate proper segregation of duties. c. the individual responsible for receiving the cash should not have access to the acct records. this would violate segregation of duties. d. while this is a step in that would likely be completed by the individual receiving the checks, it is not immediate step to be taken. thus this response is not the best answer and is incorrect. b. Correct Effective control of cash requires that receipts be recorded promptly. For mail receipts, a listing of remittance advices by an employee not performing incompatible functions is a standard control activity. If the customer does not return the remittance advice, one should be prepared at the time the mail is opened. If remittance advices are not used, a list of receipts should still be made when the mail is opened.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 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.a. a check returned for insufficient funds would make the balance per bank different than the balance per books and would need to be reconciled. it would not change any of the information that was provided to the assistant controller c. controls over unauthorized access to AR strengthens the controls indicated in the question because information on the payment report would be more reliable d. the assistant controller would not be able to determine whether the payments were posted to the correct customer acct with this information. b. Correct If the cash received was not deposited intact or remittances were not posted, the deposit slip amount would not match the remittances, or the payments recorded.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 a. Internal auditor to investigate the list for unusual transactions. b. Treasurer to compare the list with the monthly bank statement. c. Accounts receivable bookkeeper to update the subsidiary accounts receivable records. d. Entity's bank to compare the list with the cashier's deposit slip.a. this step does not involve internal auditors. thus is incorrect b. this step does not involve the treasurer's office. thus is incorrect d. this step does not involve the entity's bank thus is incorrect c. Correct The individuals with record-keeping responsibility should not have custody of cash. Hence, those individuals should use either the remittance advices or a list of the remittances to make entries to the cash and accounts receivable control account and to the subsidiary accounts receivable records. Indeed, having different people make entries in the control account and in the subsidiary records is an effective control.Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor? a. Understating the sales journal. b. Overstating the accounts receivable control account. c. Overstating the accounts receivable subsidiary ledger. d. Overstating the sales journal.b. overstating the AR control acct would make it easier for an auditor to detect c. overstating the AR subsidiary ledger would make it easier for an auditor to detect the fraud activity d. overstating the sales journal would make it easier for an auditor to detect the fraud activity a. Correct Not recording sales on account in the books of original entry is the most effective way to conceal a subsequent theft of cash receipts. The accounts will be incomplete but balanced, and procedures applied to the accounting records will not detect the defalcation.Embezzlement is a type of fraud that involves a. An employee's misappropriating an employer's money or property not entrusted to him or her. b. A manager's falsification of financial statements for the purpose of misleading investors and creditors. c. An employee's 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.a. the definition of embezzlement involves property that is entrusted to the employee's control. this statement refers to larceny b. this statement is similar to the definition of management fraud c. this statement is similar to a mere error in accounting d. Correct This statement is the textbook and criminological definition of embezzlement.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.a. it is not likely that an officer of the company would have the time to sign all checks. In addition the final review of supporting documentation by the treasurer is a better answer to this question. thus is incorrect c. is is not likely that a company would ever require the internal auditor to acct for all signed checks. thus this is incorrect d. while this may be a worthwhile activity conducted by the entity's bank, it is not a control that would best protect against improper cash disbursement thus is incorrect b. Correct A final review by the treasurer can catch mistakes made in the processing of the payment. This also involves a review of the supporting documentation, an important consideration as well.During an audit of cash, the auditor is most concerned with the management assertion of a. Existence. b. Rights and obligations. c. Valuation or allocation. d. Occurrence.b. it is possible that a firm could borrow money to include in a cash count and therefore not have the rights to the cash c. because the value of cash is easily countable this assertion is usually not an issue d. improper cash presentation is of lower risk than the existence of cash a. Correct The existence of cash is always a relevant assertion for cash because an overstatement of cash might indicate that fraudulent revenue was recorded.In preparing for the audit of cash, the auditors perform analytical procedures concerning cash balances. Which of the following would be the best source of information for use in the estimate of cash? a. Prior-years' balances. b. Management inquiry. c. Cash budgets. d. Aged accounts receivable reports.a. because the sources and use of cash can vary greatly from year to year, balances in prior year are of little use b. management inquiry would provide poor information for use in performing analytical procedures d. failure to collect AR may indicate a problem with cash sources but would be only one part of an estimate of cash c. Correct Budgets provided by management provide the best management estimates for the sources and uses of cash. Where cash receipts or cash expenditures vary from the budget by a material amount, a higher level of risk may be assessed.Which of the following control activities could prevent a paid disbursement voucher from being presented for payment a second time? 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 it with the voucher and should stamp "paid" on the voucher documents.a. the individual preparing the voucher package should not also be responsible for signing the checks. it is best to separate the authorization function from the custody function. thus is incorrect b. approval by two management officials would not necessarily prevent a voucher from being presented for payment twice thus is incorrect c. the alignment between the date on the voucher and when it is presented for payment would not necessarily prevent a voucher from being presented for payment twice thus is incorrect d. Correct Cancellation of vouchers by stamping them PAID prevents the voucher from mistakenly being paid a second time.Fraud risk factors are events or conditions that indicate which of the following: a. An opportunity to carry out a fraud. b. An attitude or rationalization that justifies a fraudulent action. c. An incentive or pressure to perpetrate fraud. d. All of these are correct.a. this is a correct response b. this is a correct response c. this is a correct response d. Correct The three factors that are likely to be present when fraud occurs are opportunity, motive, and the rationalization, which are reflected in responses (a-c).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? a. Inquire of management as to the possibility of fraud. b. Discuss with the audit committee what should be done to prevent possible future misstatements. c. Perform procedures to obtain additional audit evidence to determine whether fraud has occurred or is likely to have occurred. d. Both a and b are correct. e. None of these is correct.a. this is a step that the auditor would likely complete during the planning stages of the audit. in this situation since the auditor believes that a discovered misstatement is or might be intentional, he/she should first perform additional procedures to obtain additional evidence to determine whether fraud has occurred which is C b. this is a step the auditor would likely complete when completing the required communication with the audit committee that would occur after the auditor determined that a fraud had occurred. this is an important step that would help prevent fraud in the future. d. response C is correct e. response C is correct c. Correct Since the auditor believes that a discovered misstatement is or might be intentional, he/she should first perform additional procedures to obtain additional evidence to determine whether fraud has actually occurred.In what way can audit procedures be modified to address assessed fraud risks? a. Obtain more reliable information. b. Perform procedures close to year-end. c. Apply computer-assisted techniques to all items. d. All of these are valid modifications.a. obtaining more reliable information would be appropriate modification to address assessed fraud risks. since B&C are also correct its all of the above b. performing procedures closer to year end would be an appropriate modification to address fraud risk. sicne A&C are also correct its all of the above c. applying computer assisted auditing techniques to all data would be an appropriate modification to address fraud risk since A&B are also correct it is all of the above d. Correct All three responses reflected in (a-c) would be appropriate modifications to address assessed fraud risks. As a result, this is the correct response.Incorporating elements of unpredictability in the selection of audit procedures to be performed by auditors include all of the following except a. Varying the timing of the audit procedures. b. Selecting items for testing that have lower amounts or are otherwise outside customary selection parameters. c. Performing audit procedures on an unannounced basis. d. Sending attorney letters to every attorney listed under the legal expense account. e. None of these is correct.a. varying the timing of audit procedures would be an example of incorporating unpredictability into the selection of auditing procedures b. selecting items for testing that have lower amounts or are otherwise outside the scope of selection would be an example of incorporating unpredictability into the selection of auditing procedures e. since response d is correct, this is incorrect d. Correct Sending attorney letters to every attorney listed under the legal expense account is common as it is important for auditors to inquire about any possible loss contingency. Since it is a customary procedure, this would not be an example of incorporating unpredictability into the selection of auditing procedures and would be the correct answer.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? a. I is a fraud risk factor. b. I and II are fraud risk factors. c. II and III are fraud risk factors. d. None of these is a fraud risk factor. e. I, II, and III are fraud risk factors.e. Correct An incentive or pressure to perpetrate fraud is a correct response. In addition, an opportunity to carry out the fraud is a correct response. Finally, an attitude or rationalization that justifies the fraudulent action is a correct response. As a result, this answer is correct.1. Occurrence assertation recorded disbursements are valid, authorized, representing payment for goods and services that are receivedObserve who has custody of signed checks for evidence of separation of duties from persons having cash disbursement or AP record-keeping responsibilities and from persons who have cash disbursement authorization responsibilities2. Occurrence assertion recorded disbursements are valid and documented representing payment for goods and services receivedselect a sample of cash disburse recorded during the period and compare to canceled check, examine for authorized signature and proper endorsement matching payee name, compare recorded amount and check amount, compare recorded payee name and name on check3. Occurrence assertion cash disburse are authorized according to company policyscan the recorded cash disburse for large or unusual amount and perform the same work on these items as in sample 2 and examine supporting documents for a proper authorizing signature or initials approving the amount of payment, trace authorizing signature to list of authorized approvers, trace vendor's name to approved vendor list4. Accuracy assertion cash disburse dollar amounts are calculated and recorded accuratelyrecalculate amounts shown on the supporting vendors invoices and compare to check amount, recalculate cash discount if any5. Classification assertion cash disburse are properly classified in the accountsobtain a chart of accts and the accounting manual pertainning to classification policy and for each disburse determine whether the debit entry is classified accruately6. Completeness and Cutoff assertion cash disburse accounting is compleye and properly summarized and posted in the GLfoot selected summaries of cash disburse, trace these totals to the GL debit and credit entries, foot the GL cash accts7. Completeness and Cutoff assertion cash disburse are recorded in the proper periodobserve cash disburse procedures and inquire to find out whether checks are held for a time before mailing, compare dates on check to date of recoded disbursement, compare dates to payee's bank clearance date for any apparent lengthy delay that indicates that checks are held before mailingAudit procedure: source of debit entries in GL cash acct other than from cash receipts journal should be investigated and supporting documents examinedReason: because only the cash receipts journal was examined using standard procedures, the auditors must investigate the occurrence of all other sources of cash receipts that are not recorded in these journalsAudit procedure: a surprise examination of cash receipts should be performed. prior to the AR clerk obtaining the cash receipts, the auditor should make a list of them without the clerk's knowledge. the undeposited mail receipts should then be examined after their preparation for deposit slip should be compared to the remittances for accuracy and totaled. individual items on the deposit slip should be compares to postings to the subsidiary AR ledger. the auditor should then supervuse the mailing of the deposit to the bank. the auditor should ask Gutzler to ask the bank to send the statement containing this deposit directly to the auditorReason: because there are no initial controls over cash receipts established prior to the time the AR clerk obtains the cash, a surprise examination is the only method of determining whether cash receipts are being recorded and deposited correctlyAudit Procedure: posting from the deposit slips should be traced to the subsidiary acct rec ledger also entries in the subsidiary acct ledger should be traced to the deposit slipsReason: there is no separation of duties between cash receipts and AR the AR clerk may have been careless in performing the posting duties. this procedure may also disclose whether the AR clerk may have been lapping the accountsAudit Procedure: reveiw the sub ar ledger and confirm accts that have abnormal transaction activityReason: there is no separation of duties between cash receipts and AR the AR clerk may have been careless in performing the posting duties. this procedure may also disclose whether the AR clerk may have been lapping the accountsAudit Procedure: if gutzler allows customers to take discounts the amount of such discount and the discount period should be checkedReason: there is no separation of duties between cash receipts and AR the AR clerk may have appropriated discounts that could have been but were not taken or may have been careless in checking appropriateness of discount takenAudit Procedure: Dates and amounts of daily deposits per bank statement should be compares with entries in the cash receipts journalReason: no initial control over cash receipts were established prior to the time the AR clerk obtains cash the clerk may have become careless about prompt deposits of the daily receiptsAudit Procedure: a proof of cash working paper that reconciles total cash receipts with credits per bank statement should be preparedReason: initial control over cash receipts is weak, the auditor should perform this overall check to help substantiate that all material items were investigated during the performance of the detail tests.Audit procedure: for those periods for which the preceding audit procedures were not performed and for a period after the balance sheet date scan the cash receipts journal and bank statements for unusual itemsReason: internal control over cash receipts is weak the auditor should perform this review to help substantiate that all material items not covered during other tests were investigated