Auditing and Assurance Services, 5th Edition Test Bank
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Chapter 06
Employee Fraud and the Audit of Cash
True / False Questions
1. Independent auditors of financial statements and fraud examiners approach their work differently.
True False
2. 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
3. Fidelity bonds are used to prevent embezzlement.
True False
4. The use of confirmations for cash balances is still considered a generally accepted audit procedure.
True False
5. 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
6. The client should request the bank to send a cutoff bank statement directly to the auditor.
True False
7. Fraud consists of unintentional misstatements or omissions in financial statements.
True False
8. Fraud examiners are more interested in evaluating internal control weaknesses rather than strengths.
True False
9. Psychotic motivation is characterized by the habitual criminal who steals for the sake of stealing.
True False
10.Control systems enhance trust and reduce the bureaucracy of business.
True False
11.The most effective long-run prevention of fraud lies in the practice of tight management controls over people.
True False
12.The key to integrity in business is "accountability."
True False
13.Employee fraud generally involves people at the top executive level.
True False
14.An organization can prevent all fraud if its auditors are acquainted with some detection techniques.
True False
15.The chain of custody is the crucial link of evidence to the fraud suspect.
True False
16.Fraud awareness auditing includes "thinking like a crook" to imagine ways and means of stealing.
True False
17.Employee fraud is an intentional act that injures investors or creditors by leading to materially misleading financial statements.
True False
18.The company's bank reconciliation (audited by independent auditors) is the primary means of valuing cash in the financial statements.
True False
19.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
Multiple Choice Questions
20.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.
21.When an employee embezzles company funds from an electric utility company for the purpose of paying expenses of an antinuclear protest organization, the fraudster's motive is said to be
A. Psychotic.
B. Egocentric.
C. Ideological.
D. Economic.
22.Which of the following management policies would increasethe 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.
23.Which of the following is notconsidered one of the three factors increasing the probability of fraud?
A. Motive.
B. Lack of training.
C. Opportunity.
D. Rationalization.
24.Which of the following is ordinarily considered an extended procedure during the independent audit of financial statements?
A. Sending positive confirmations on recorded customer accounts receivable balances.
B. Performing physical observation and test count during the client's inventory taking.
C. Measuring the time lag between the date of recording cash receipts in the books to the date of the deposit credit in the bank.
D. Conducting interviews with the client's sales billing personnel to learn about sales recording control activities.
25.If an employee altered the amount of a check 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.
26.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 more 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 more than credit sales for the month.
27.An audit plan of substantive procedures for cash would notinclude
A. Requesting a cutoff bank statement be mailed to the client.
B. Requesting the client to prepare bank reconciliations.
C. Preparing a schedule of interbank transfers for a period of 10 business days before and after year-end date.
D. Obtaining a written client representation concerning compensating balance agreements.
28.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 yearend 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.
29.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.
30.To gather evidence regarding the balance in a bank reconciliation, an auditor would examine all of the following exceptthe
A. Cutoff bank statement.
B. General ledger.
C. Bank confirmation.
D. Year-end bank statement.
31.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.
32.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.
33.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.
34.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 using
A. Confirmation and observation.
B. Observation and inquiry.
C. Analytical procedures and confirmation.
D. Inquiry and analytical procedures.
35.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.
36.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 nota 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.
37.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.
38.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 audit.
39.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. Opportunityrefers 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.