To download the complete and accurate content document, go to: https://testbankbell.com/download/auditing-and-assurance-services-7th-edition-louwe rs-solutions-manual/
CHAPTER 06
Employee Fraud and the Audit of Cash
LEARNING OBJECTIVES
1. Define and explain the differences among several kinds of employee fraud that might occur at an audit client.
2. Identify and explain the three conditions (i.e., the fraud triangle) that often exist when a fraud occurs.
3. Describe techniques that can be used to prevent employee fraud.
4. Identify the relevant assertions and risks of material misstatement that are typically related to the cash balance.
5. Identify important internal control activities present in a properly designed system to mitigate the risk of material misstatements for each relevant assertion related to cash and to help prevent or detect employee fraud.
6. Give examples of substantive procedures used to test cash and relate them to the relevant assertions.
7.
some extended procedures for detecting employee fraud schemes involving cash.
SOLUTIONS FOR REVIEW CHECKPOINTS
6.1 Employee fraud is the use of fraudulent means to take money or other property from an employer. The defining characteristics are (1) the fraudulent act, (2) the conversion of the money or property to the fraudster’s use, and (3) the cover up.
Embezzlement is a type of fraud by employees or nonemployees. Its defining characteristic is wrongfully taking money or property entrusted to their care, custody, and control, often accompanied by false accounting entries and other forms of lying and cover up.
6.2 Fraud perpetrators look like other people, hence the difficulty in spotting them easily. However, for most people, committing a fraudulent act is stressful. Observation of changes in a person’s’ habits and lifestyles may reveal some red flags such as:
• Drinking too much.
• Taking drugs.
• Becoming irritable easily.
• Being unable to relax, to sleep.
• Becoming defensive, argumentative.
• Being unable to look people in the eye.
• Sweating excessively.
• Going to confession (e.g., priest, psychiatrist).
• Finding excuses and scapegoats for mistakes.
• Working standing up.
• Working alone.
• Working late frequently.
Personality red flags are difficult because (1) honest people often show them as well, (2) they often are hidden from view, and (3) auditors are not in a good position to notice these characteristics. However, auditors need to do the best they can to catch a fraudster.
6.3 A number of pressures/motivations might lead an honest person to commit fraud:
Egocentric pressures/motivations
• My father was wealthy, and I need to be wealthy too.
• My friends admire cars, and I need to have an expensive one.
Ideological pressures/motivations
• Because the company sells tobacco and alcohol, it doesn’t deserve to make a profit.
• I can award the government housing grants to best use without the HUD red tape. (Justifying diversion of funds in government housing programs.)
Economic pressures/motivations
I need to:
• Pay college tuition.
• Pay hospital bills for my parent with cancer.
• Pay gambling debts.
• Buy drugs.
• Pay alimony and child support.
• Pay for high life style (homes, cars, boats).
• Finance business or stock speculation losses.
• Report good financial results.
6.4 A number of conditions might provide the opportunity for employee fraud, for example:
• Nobody counts the inventory, so losses are not known for certain.
• The petty cash box is often left unattended.
• Supervisors set a bad example by taking supplies home.
• Upper management considered a written statement of ethics but decided not to publish or circulate one to employees.
• Another employee was caught and fired but was never prosecuted.
• The finance vice president has investment authority without any review.
• Frequent emergency jobs leave a lot of excess material just lying around the plant.
6.5 A number of conditions might provide the rationalization for employee fraud, for example:
• “I need it more than the other person” (Robin Hood theory).
• “I’m borrowing the money and will pay it back.”
• “Nobody will get hurt.”
• “The company is big enough to afford it.”
• “A successful image is the name of the game.”
• “Everybody is doing it.”
6.6 Some auditors look at capability as a fourth item necessary for committing a fraud. They argue that if a control weakness exists, but an individual does not have the skills and knowledge to take advantage of the weakness, an opportunity is not really present. Others would argue that these are separate issues and the opportunity exists whether the potential fraudster has the capability or not. This issue remains open and up for debate.
6.7 The cover-up or concealment of a fraud is a distinguishing attribute of a fraud. Often the audit team’s first indication of a fraud is the identification of a control violation. Cover-up attempts generally appear in the accounting records. The key for an auditor is to be aware of and notice exceptions and oddities such as the following:
• Unusual (either large or small) number or dollar amount of transactions.
• Transactions for “round” dollar amounts (e.g., $50,000).
• Transactions recorded at unusual times of the day, month, or year.
• Transactions associated with unusual branches or
• Cash shortages and overages.
• Excessive voids and credit memos.
• General ledgers that do not balance.
• Increase in past due receivables.
• Inventory shortages.
• Unexplained adjustments to inventory or accounts receivable balances, especially without support.
• Increased scrap or waste in a manufacturing plant.
• Alterations on official documents.
• Duplicate payments made to the same vendor.
• Employees who cannot be found.
• Use of copies instead of originals for supporting documentation.
• Missing documentation to support transactions.
• Unusual endorsements on checks.
• Unusual patterns in deposits in transit.
• Common names or addresses for refunds.
6.8
a. If Eloise Garfunkle is a company employee, somehow she cashed a check payable to a supplier. Maybe she is related to the supplier, or maybe she intercepted the check before it reached the supplier. The auditor may want to investigate further.
b. Somebody is working on holidays! These dates New Year’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas day are normal days off for most businesses. A key question to consider is whether an auditor would have been able to identify holidays like Memorial Day and Labor Day if the other more obvious ones had not been listed
6.9 Whether the auditor examines the actual check or a scanned image obtained from the bank, knowledge of the codes for Federal Reserve districts, offices, states, and bank identification numbers could enable an auditor to spot a crude check forgery. If the amount of a check is altered after it has cleared the bank, the alteration would be noted by comparing the magnetic imprint of the amount paid by the bank to the actual amount that was written on the check face. If the numbers are different, further investigation should be completed.
6.10 On this bank statement, only three clues indicate that the statement may have been altered:
• The low balance is $2,374.93 (the correct balance) and no transactions occurred after this point.
• There is a space for a gap in the check sequence, but no “**”‘s as with the other gaps.
• The “7” in $7,374.93 appears in a different font.
An auditor can also scrutinize other parts of the bank statement for reasonableness. For example, the number and dollar amount of deposits and checks can be compared to the detail data on the bank statement, the mathematical accuracy of the statement can be checked, and the statement itself can be studied for alterations.
6.11 In a cash collection process, someone will have to receive the cash and checks and thus has custody of the physical cash for at least a short period of time. Because this initial custody cannot be avoided, it is always a good control to (1) have two people open the mail containing customer receipts if possible, resulting in joint custody, (2) restrictively endorse the checks immediately after removing them from the envelope, (3) prepare a list of the cash receipts as early in the process as possible, and then (4) separate the actual cash from the record-keeping documents. The cash should be sent to the cashier or treasurer’s office where a bank deposit is prepared and the money is sent to the bank daily and intact (no money should be withheld from the deposit). The list or remittance advices go to the accountants (controller’s office), who then would record the cash receipts.
6.12 The accountant who records cash receipts and makes credits to customer accounts should never actually handle the cash. Rather, the accountant should receive a remittance list or remittance advice to make the entries to the cash and accounts receivable control accounts and to the customers’ accounts receivable subsidiary account records. An accountant who had custody of the cash and made the entries to the different accounts could steal and then conceal their theft. This would be a violation of the segregation of duties. This is why the accountant should not perform both functions. In fact, a good additional internal control activity is to have control account and subsidiary account entries made by different people so that later the accounts receivable entries and balances can be compared (reconciled) to determine whether they agree in total. So, while it might be easier just to send the cash to the accounts receivable accountants, a dishonest accountant could steal cash while still giving the customer credit.
6.13 The word lapping refers to an employee’s stealing the cash receipts of a company from a particular customer (Customer A) and then covering the amount with a following day’s payment received for another customer’s account (Customer B). In essence, the amount of money received from Customer B is applied to Customer A’s account. This type of activity continues because when a check comes from Customer C, the employee would apply those funds to Customer B, etc. A lapping operation is possible when a single employee has access to both cash and accounts receivable records.
The auditor is alerted to the possibility of a lapping operation when duties are not properly separated. Surprise confirmation is the primary means that an auditor can use to uncover such activity. Also, to detect this type of lapping scheme, a detailed audit should include comparison of the checks listed on a sample of deposit slips (from say Customer B) to the detail of customer remittances recorded to customer accounts (Customer A). Doing so is an attempt to find credits given to customers for whom no payments were received on the day in question. It can be hard to detect. However, detailed scrutiny will allow the auditor to catch the fraudster.
6.14 All vendors should be required to be on an approved vendor list. Vendors are placed on this list with approval from multiple departments (e.g. purchasing, engineering, and quality control). In addition, payments should not be made without a complete voucher package including a purchase order and receiving report. Because fictitious vendors do not supply product or service, such a fraud would require collusion between purchasing and receiving. As a result, having an approved vendor list would help to prevent a fraud.
6.15 The cutoff bank statement is a bank statement sent by the bank directly to the auditor, and it is usually for a 15- or 20-day period following the reconciliation date. The auditor basically uses the statement to determine whether outstanding checks were actually mailed by the client before the reconciliation date and that the outstanding deposits in transit were actually received in a timely manner by the bank.
6.16 Check kiting is the practice of building up apparent balances in one or more bank accounts based on uncollected (float) checks drawn against similar accounts in other banks. Kiting involves depositing money
from one bank account to another by using a bogus check. Kiting is the deliberate floating of funds between two or more bank accounts. This method enables a bank customer to utilize the time required for checks to clear to obtain an unauthorized loan without any interest charge.
If these cash transfers are recorded in the books, a company will show the negative balances that result from checks drawn on insufficient funds. However, perpetrators may try to hide the kiting by not recording the deposits and checks. Such maneuvers may be detectable in a bank reconciliation audit. Auditors also can detect signs of kiting by observing in the bank statements:
• Frequent deposits and checks in same amounts.
• Frequent deposits and checks in round amounts.
• Frequent deposits with checks written on the same (but another) bank.
• Short time lag between deposits and withdrawals.
• Frequent ATM account balance inquiries.
• Many large deposits made on Thursday or Friday to take advantage of the weekend.
• Large periodic balances in individual accounts with no apparent business explanation.
• Low average balance compared to high level of deposits.
• Many checks made payable to other banks.
• Bank willingness to pay against uncollected funds.
• “Cash” withdrawals with deposit checks drawn on another bank.
• Checks drawn on foreign banks with lax banking laws and regulations.
In today’s environment, check kiting has become much less an issue for auditors. Today banks have implemented the Check Clearing for the 21st Century Act, referred to as Check 21. In this system, checks are converted to digital images allowing for a dramatic increase in speed in check clearing. The benefit is that the “float” on the check is virtually eliminated and kiting becomes very difficult to perform and conceal.
6.17 Auditors can prepare a schedule of interbank transfers to determine whether transfers of cash from one bank to another were recorded properly (correct amount and date). A schedule of interbank transfers would show improper cash transfer transactions when the auditors find (a) no recording of transfers shown in the bank statement and (b) dates of bank and general ledger recording that are not in alignment. When this is discovered, additional investigation is required.
6.18 A proof of cash can reveal unrecorded cash deposit and cash payment transactions when the deposits and payments reported by the bank are compared to the deposits and payments recorded in the general ledger and will require consideration of unrecorded amounts. Inspection of the bank statement and comparison to the general ledger (books) will uncover the problem provided the documents have not been destroyed.
6.19 Extended procedures are used as “specific responses to identified fraud risk factors.” These audit procedures are performed only when the audit team thinks that an area deserves focused investigation given the facts and circumstances. In some cases, they are more complicated and expensive than normal audit procedures, and they usually involve a suspicion of something fraudulent occurring.
6.20 Two endorsements may indicate that the payee of the check is not the party that received the benefit of the check payment. The payee may be fictitious and further investigation may be warranted.
6.21 An auditor would use net worth analysis when fraud has been discovered or is strongly suspected, and the information to calculate a suspect’s net worth can be obtained (e.g., asset and liability records, bank accounts). The method is to calculate the suspect’s net worth (known assets – known liabilities) at the beginning and end of a period (months or years) and then to try to account for the difference as (1) known income less living expenses and (2) unidentified difference. The unidentified difference may be the best available approximation of the amount of a theft.
Expenditure analysis is similar to net worth analysis except the data involve the suspect’s spending for all purposes compared to known income. If spending exceeds legitimate and explainable income, the difference may be the amount of a theft.
SOLUTIONS FOR MULTIPLE-CHOICE QUESTIONS
6.22
6.23
a. Correct Risk is high when the company always estimates the inventory but never takes a complete physical count.
b. Incorrect Risk is low when the petty cash box is always locked in the desk of the custodian.
c. Incorrect Risk is low when management has published a company code of ethics and sends frequent communication newsletters about it.
d. Incorrect Risk is low when the board of directors reviews and approves all investment transactions.
a. Incorrect An airtight control system of checks and supervision is not possible because of collusion and management override.
b. Incorrect This is a positive step but not the best long-run way to stop fraud.
c. Incorrect Dedicated “hotline” telephones are a great idea, but you wouldn’t want to put them on walls around the workplace 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.
6.24
6.25
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.
b. Incorrect 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 addresses the fundamental issue of employee motivation.
c. Incorrect Reconciliations are methods of detecting problems that have occurred. While these are good controls and may reduce the opportunities for employees to steal, reconciliations do not address employee motivation to commit fraud.
d. Incorrect Audits may detect fraud and even provide deterrence for fraud, but they do not address the employees’ motivation to commit fraud.
a. Incorrect An appointment of a chief ethics officer would increase the effectiveness of the code of ethics.
b. Incorrect A hot line that allowed employees to report ethical violations 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.
d. Incorrect 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.
6.26
6.27
a. Incorrect Numerous cash refunds made to different people at the same post office box address is an indicator of cash refund fraud.
b. Incorrect Internal auditor cannot locate several credit memos to support reductions of customers’ balances is an indicator of accounts receivable fraud especially if there is not an appropriate separation of duties.
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.
d. Incorrect 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” (payroll fraud).
a. Incorrect Overstating sales revenue and overstating customer accounts receivable balances is a way to misstate financial statements for management (financial reporting) fraud.
b. Correct Overstating sales revenue and overstating bad debt expense by the same amount does not overstate net income or total assets (which is often a goal of financial reporting fraud). However, this action would help to hide a manager’s theft of assets (i.e., embezzlement)
c. Incorrect Understating interest expense and understating accrued interest payable is a way to misstate financial statements for management fraud.
d. Incorrect Omitting the disclosure information about related-party sales to the president’s relatives at below-market prices is a way to misstate financial statements for management fraud.
6.28
6.29
a. Incorrect Inventory should be counted on a regular basis; therefore, the fraud would be detected.
b. Incorrect Expense accounts are often good places to hide fraud because accounts are closed at the end of the year. Wage expense accounts may be compared to budget and may be reviewed by department managers that might detect the fraud.
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.
d. Incorrect Property tax expenses would likely be compared to the property tax bill and any discrepancies investigated.
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!
b. Incorrect The cashier prepared the bank deposit, endorsed the checks with a company stamp, and took the cash and checks to the bank for deposit (no other bookkeeping duties). The cashier might steal currency but needs access to the records to cover up a theft of customer payments.
c. Incorrect To make entries in the customers’ accounts receivable subsidiary accounts, the accounts receivable clerk received a list of payments received by the cashier. Good arrangement because the bookkeeper does not have access to cash.
d. Incorrect The financial vice president 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.
6.30
a. Incorrect
The individual responsible for receiving the remittances is often responsible for preparing the daily deposit. Both activities qualify as “custody” activities. So, this response is incorrect.
6.31
b. Incorrect The individual responsible for receiving the remittances is often responsible for making the daily deposit. Both activities qualify as “custody” activities. So, this response 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!
d. Incorrect The individual responsible for receiving the remittances is often responsible for endorsing the checks. Both activities would qualify as “custody” activities. So, this response is incorrect.
a. Incorrect Kiting involves a mismatching of dates of recording cash transactions around year-end. This procedure would not help the auditor detect kiting.
b. Incorrect Kiting involves a mismatching of dates of recording cash transactions around year-end. This procedure would not help the auditor 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.
d. Incorrect Kiting involves a mismatching of dates of recording cash transactions around year-end. This procedure would not help the auditor detect kiting.
6.32
6.33
a. Incorrect The individual responsible for receiving the cash should not have access to the accounting records. This would violate proper segregation of duties. Thus, this 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.
c. Incorrect The individual responsible for receiving the cash should not have access to the accounting records. This would violate proper segregation of duties. Thus, this is incorrect.
d. Incorrect While this is a step that would likely be completed by the individual receiving the checks, it is not the immediate step to be taken. Thus, this response is not the best answer and is incorrect.
a. Incorrect 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.
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.
c. Incorrect Controls over unauthorized access to accounts receivable strengthens the control indicated in the question because information on the payment report would be more reliable.
d. Incorrect The assistant controller would not be able to determine whether the payments were posted to the correct customer account with this information.
6.34
a. Incorrect Proper internal controls dictate that the remittance list is forwarded to the accounts receivable bookkeeper to ensure that each customer’s balance is properly updated. This step does not involve internal auditors. Thus, this response is incorrect.
b. Incorrect Proper internal controls dictate that the remittance list is forwarded to the accounts receivable bookkeeper to ensure that each customer’s balance is properly updated. This step does not involve the treasurer’s office. Thus, this response is incorrect.
6.35
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.
d. Incorrect Proper internal controls dictate that the remittance list is forwarded to the accounts receivable bookkeeper to ensure that each customer’s balance is properly updated. This step does not involve the entity’s bank. Thus, this response is incorrect.
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.
b. Incorrect Overstating the accounts receivable control account would make it easier for an auditor to detect the fraudulent activity. Thus, this response is incorrect.
c. Incorrect Overstating the accounts receivable subsidiary ledger would make it easier for an auditor to detect the fraudulent activity. Thus, this response is incorrect.
d. Incorrect Overstating the sales journal would make it easier for an auditor to detect the fraudulent activity. Thus, this response is incorrect.
6.36
6.37
a. Incorrect The definition of embezzlement involves property that is entrusted to the employee’s control (as in d). This statement refers to larceny.
b. Incorrect This statement is similar to the definition of management fraud.
c. Incorrect This statement is similar to a mere error in accounting.
d. Correct This statement is the textbook and criminological definition of embezzlement.
a. Incorrect 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, this response 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.
c. Incorrect It is not likely that a company would ever require the internal auditors to account for all signed checks. In addition, the final review of supporting documentation by the treasurer is a better answer to this question. Thus, this response is incorrect.
d. Incorrect 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 disbursements. Thus, this response is incorrect.
6.38 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.
b. Incorrect It is possible that a firm could borrow money to include in a cash count and, therefore, not have the rights to the cash. However, such a scheme is of less concern then if the company claimed cash that did not exist.
c. Incorrect Because the value of cash is easily countable, this assertion is usually not an issue
d. Incorrect Improper cash presentation is of lower risk than the existence of cash
6.39 a. Incorrect Because the sources and use of cash can vary greatly from year to year, balances in prior year are of little use.
b. Incorrect Management inquiry would provide poor information for use in performing analytical procedures.
c. Correct Budgets provided by management provide the best management estimates for
6.40
6.41
6.42
6.43
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.
d. Incorrect Failure to collect accounts receivable may indicate a problem with cash sources but would be only one part of an estimate of cash.
a. Incorrect 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, this is not the correct response.
b. Incorrect Approval by two management officials would not necessarily prevent a voucher from being presented for payment twice. Thus, this is not the correct response.
c. Incorrect The alignment between the date on a voucher and when it is presented for payment would not necessarily prevent a voucher from being presented for payment twice. Thus, this is not the correct response.
d. Correct Cancellation of vouchers by stamping them PAID prevents the voucher from mistakenly being paid a second time.
a. Incorrect This is a correct response. However, since response (b) and response (c) are also correct responses, the answer to this question is response (d) which is all of the above.
b. Incorrect This is a correct response. However, since response (a) and response (c) are also correct responses, the answer to this question is response (d) which is all of the above.
c. Incorrect This is a correct response. However, since response (a) and response (b) are also correct responses; the answer to this question is response (d) which is all of the above.
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)
a. Incorrect 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 response (c).
b. Incorrect This is a step that 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 would be an important step that would help the client prevent frauds in the future.
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
d. Incorrect Response (c) is the correct answer.
e. Incorrect Response (c) is the correct answer.
a. Incorrect Obtaining more reliable information would be an appropriate modification to address assessed fraud risks. However, since response (b) and response (c) are also correct responses, the answer to this question is response (d) which is all of the above.
b. Incorrect Performing procedures closer to year end would be an appropriate modification to address assessed fraud risks. However, since response (a) and response (c) are also correct responses, the answer to this question is response (d) which is all of the above.
c. Incorrect Applying computer assisted auditing techniques to all data would be an appropriate modification to address assessed fraud risks. However, since response (a) and response (b) are also correct responses; the answer to this question is response (d) which is all of the above.
6.44
6.45
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.
a. Incorrect Varying the timing of audit procedures would be an example of incorporating unpredictability into the selection of auditing procedures. As a result, this is not the correct response.
b. Incorrect 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. As a result, this is not the correct response.
c. Incorrect Performing auditing procedures on an unannounced basis would be an example of incorporating unpredictability into the selection of auditing procedures. As a result, this is not the correct response.
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.
e. Incorrect Since response (d) is the correct answer, this response is incorrect.
a. Incorrect An incentive or pressure to perpetrate fraud is a correct response. However, since (II) and (III) are also correct responses, the correct answer is letter (e).
b. Incorrect An incentive or pressure to perpetrate fraud is a correct response. In addition, an opportunity to carry out the fraud is a correct response. However, since (III) is also a correct response, the correct answer is letter (e).
c. Incorrect An opportunity to carry out the fraud is a correct response. In addition, an attitude or rationalization that justifies the fraudulent action is a correct response. However, since (I) is also a correct response, the correct answer is letter (e).
d. Incorrect 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 incorrect.
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.
SOLUTIONS TO PROBLEMS, EXERCISES AND SIMULATIONS
6.46 Tests of Controls over Cash Disbursements
NOTES TO INSTRUCTOR: Procedure 2 is designed to indicate that work on one sample of cash disbursements can produce evidence related to several objectives. The tasks numbered 2a through 2l all relate to the number 2 sample items.
TEST OF CONTROLS AUDIT PROCEDURES – A SAMPLE ANSWER
Management Assertion Test of Controls Procedure
Occurrence assertion
Recorded disbursements are valid, authorized, and documented, representing payment for goods and services that were
1. Observe who has custody of signed checks for evidence of separation of duties from persons having cash disbursement or accounts payable record-keeping responsibilities and from persons who have cash disbursement authorization responsibilities.
Occurrence assertion
Recorded disbursements are valid and documented, representing payment for goods and services received.
Cash disbursements are authorized according to company policy.
2. Select a sample of cash disbursements recorded during the period and
2a. Compare to the canceled check.
2b. Examine for authorized signature and proper endorsement matching payee name.
2c. Compare recorded amount and check amount.
2d. Compare recorded payee name and name on check.
3. Scan the recorded cash disbursements for large or unusual amounts and perform the same work on these items as in sample 2.
2e. Examine supporting documents for a proper authorizing signature or initials approving the amount for payment.
2f. Trace authorizing signature to the list of authorized approvers.
2g. Trace vendor’s name to approved vendor list. assertion
Cash disbursement dollar amounts are calculated and recorded accurately.
Completeness assertion
Cash disbursements are properly classified in the accounts.
Cash disbursements accounting is complete: properly summarized and posted in the general ledger.
2h. Recalculate amounts shown on the supporting vendor’s invoices and compare to check amount.
2i. Recalculate cash discount, if any.
4. Obtain a chart of accounts and the accounting manual pertaining to classification policy.
2j. For each disbursement, determine whether the debit entry is classified accurately.
5. Foot selected summaries (daily, monthly) of cash disbursements.
6. Trace these totals to the general ledger debit and credit entries.
7. Foot the general ledger cash account. assertion
Cash disbursements are recorded in the proper period.
8. Observe cash disbursement procedures and inquire to find out whether checks are held for a time before mailing. 2k. Compare date on check to date of recorded disbursement.
2l. Compare dates to payee’s bank clearance date for any apparent lengthy delay that indicates that checks are held before mailing.
6.47 Internal Control Questionnaire for Book Buy-Back Cash Fund
University Books, Incorporated REVOLVING CASH FUND
INTERNAL CONTROL QUESTIONNAIRE SAMPLE ANSWER
Question Yes No
1. Is responsibility for the fund vested in one person?
2. Is physical access to the fund denied to all others?
3. Is the custodian independent of other employees who handle cash?