6 Ch MC - 1 - Chapter 6, Employee Fraud M/C PDF

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Chapter 6, Employee Fraud M/C ...

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Chapter 6 Employee Fraud and the Audit of Cash Multiple Choice Questions 1. 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. Answer: E Source: Original Difficulty: Easy 2. When an employee embezzles company funds from an electric utility company for the purpose of paying expenses of an anti-nuclear protest organization, the fraudster's motive is said to be A) Psychotic B) Egocentric C) Ideological D) Economic Answer: C Source: Original Difficulty: Easy 3. An unenlightened management can increase the probability of fraud in the company by 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. Answer: B Source: Original Difficulty: Easy

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Chapter 6 Employee Fraud and the Audit of Cash 4. Which of the following is not considered one of the three factors increasing the probability of fraud? A) Motive. B) Lack of training. C) Opportunity. D) Rationalization. Answer: B Source: Original Difficulty: Easy 5. Which of the following is ordinarily considered an "extended procedure" in external auditors' independent audits of financial statements? A) Send positive confirmations on recorded customer accounts receivable balances. B) Perform physical observation and testcount during the client's inventorytaking. C) Measure the time lag between the date of recording cash receipts in the books to the date of deposit credit in the bank. D) Conduct interviews with the client's sales billing personnel to learn about sales recording control procedures. Answer: C Source: Original Difficulty: Medium 6. A payroll manager was including fictitious employees on the payroll each month and taking the checks for himself. An audit procedure that would most likely lead to discovering this would be A) recalculating the payroll amounts. B) comparing the total payroll amount to the journal entry. C) a surprise payroll distribution. D) making sure all checks clear the bank. Answer: C Source: Original Difficulty: Easy 7. If the amount of a check is altered by an employee 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. Answer: B Source: Original Difficulty: Medium

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Chapter 6 Employee Fraud and the Audit of Cash 8. 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 greater 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 greater than credit sales for the month. Answer: A Source: Original Difficulty: Medium 9. An audit program of substantive procedures for cash would not include A) request a cutoff bank statement be mailed to the client. B) request client to prepare bank reconciliations. C) prepare a schedule of interbank transfers for a period of ten business days before and after year-end date. D) obtain a written client representation concerning compensating balance agreements. Answer: A Source: Original Difficulty: Easy 10. 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 year-end 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. Answer: D Source: Original Difficulty: Easy 11. 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 kiting activities that may otherwise not be discovered. D) seek information about contingent liabilities and security agreements. Answer: D Source: Original Difficulty: Medium

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Chapter 6 Employee Fraud and the Audit of Cash 12. To gather evidence regarding the bank's balance in a bank reconciliation, an auditor would examine all of the following except the A) cutoff bank statement. B) general ledger. C) bank confirmation. D) year-end bank statement. Answer: B Source: Original Difficulty: Easy 13. 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. Answer: D Source: AICPA adapted Difficulty: Easy 14. 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. Answer: B Source: AICPA adapted Difficulty: Medium 15. 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. Answer: B Source: Original Difficulty: Easy

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Chapter 6 Employee Fraud and the Audit of Cash 16. An auditor should trace bank transfers for the last part of the audit period and the first part of the subsequent period to detect whether A) the cash receipts journal was held open for a few days after the year-end. B) the last checks recorded before the year-end were actually mailed by the year-end. C) cash balances were overstated because of kiting. D) any unusual payments to or receipts from related parties occurred. Answer: C Source: AICPA adapted Difficulty: Medium 17. Upon receipt of customers' checks in the mailroom, a responsible employee should prepare a remittance listing that is forwarded to the cashier. A copy of the listing should be sent to the A) internal auditor to investigate the listing for unusual transactions. B) treasurer to compare the listing with the monthly bank statement. C) accounts receivable bookkeeper to update the subsidiary accounts receivable records. D) entity's bank to compare the listing with the cashier's deposit slip. Answer: C Source: AICPA adapted Difficulty: Easy 18. An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control procedures leave no audit trail of documentary evidence, the auditor most likely will test the procedures by A) confirmation and observation. B) observation and inquiry. C) analytical procedures and confirmation. D) inquiry and analytical procedures. Answer: B Source: AICPA adapted Difficulty: Medium 19. 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. Answer: B Source: AICPA adapted Difficulty: Hard

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Chapter 6 Employee Fraud and the Audit of Cash 20. Building up balances in bank accounts based upon floating checks drawn against similar accounts in other banks is best called: A) Hypothecation B) Kiting. C) Money laundering. D) Lapping. Answer: B Source: Original Difficulty: Easy 21. The auditor should trace bank transfers for the latter part of an audit period and the early part of the subsequent period to determine whether: A) The cash balances were overstated because of kiting. B) The cash receipts journal was held open for a few days after the end of the year. C) Any unusual payments to or receipts from related parties occurred. D) The last checks recorded before the year-end were really mailed by year-end. Answer: A Source: Original Difficulty: Medium 22. 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 not a 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. Answer: D Source: Original Difficulty: Easy 23. Which of the following gives the least indication of fraudulent activity? A) Numerous cash refunds have been made to different people at the same post office box address. B) Internal auditor 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. Answer: C Source: Original Difficulty: Medium

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Chapter 6 Employee Fraud and the Audit of Cash 24. Which of the following procedures might an auditor use to detect kiting? A) Review the composition of authenticated deposit slips. B) Review subsequent bank statements. C) Prepare a schedule of bank transfers. D) Prepare a year-end bank reconciliation. Answer: C Source: Original Difficulty: Hard 25. 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. Answer: B Source: AICPA adapted Difficulty: Medium 26. 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 upon fraud tips. C) Place dedicated “hotline” telephones on walls around the workplace with direct communication to the company ethics officer. D) Initiate programs to help employees share personal and professional problems. Answer: D Source: Original Difficulty: Easy 27. 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. Answer: C Source: Original Difficulty: Medium

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Chapter 6 Employee Fraud and the Audit of Cash 28. 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's audit. Answer: B Source: AICPA adapted Difficulty: Medium 29. 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) Opportunity refers 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. Answer: E Source: Original Difficulty: Medium 30. 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. Answer: A Source: Original Difficulty: Medium

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Chapter 6 Employee Fraud and the Audit of Cash 31. Which of these arrangements of duties could most likely lead to an embezzlement or theft? A) Inventory warehouse manager has responsibility for making the physical inventory observation and reconciling discrepancies to the perpetual inventory records. B) 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). C) Accounts receivable clerk received a list of payments received by the cashier so she could make entries in the customers' accounts receivable subsidiary accounts. D) 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. Answer: A Source: Original Difficulty: Hard 32. Narbona, CPA is reviewing controls over cash received through a bank night depository. Which controls would she find most important? A) Responsibilities are rotated for processing night depository receipts among employees of the various departments. B) Dual control (joint custody) is established over the contents of the night depository box from the time of removal until initial recording is completed. C) Vacations are required for all employees engaged in night depository activities. D) All deposit tickets related to night deposits are numbered. Answer: B Source: Original Difficulty: Medium 33. Your client is in the process of acquiring another company. You have been requested to verify that cash for the company being acquired is properly stated. The audit technique that will yield the most persuasive evidence is A) Examination of the company's escrow account. B) Interview with the company's treasurer and cash manager. C) Preparation and review of standard bank confirmation inquiries. D) Analytical computations comparing current cash in the bank with previous accounting periods. Answer: C Source: Original Difficulty: Medium

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Chapter 6 Employee Fraud and the Audit of Cash 34. A proof of cash A) Is required by GAAS. B) Tests the transactions process. C) Is most helpful when control risk for cash is low. D) Detects lapping. Answer: B Source: AICPA adapted Difficulty: Hard 35. When counting cash on hand the auditor must exercise simultaneous control over all cash and other negotiable assets to prevent A) Theft. B) Irregular endorsement. C) Replacement or substitution of stolen assets. D) Deposits in transit. Answer: C Source: Original Difficulty: Medium 36. As payments are received, one mailroom employee is assigned the responsibility of prelisting receipts and preparing the deposit slip prior to forwarding the receipts, deposit slip, and remittance advices to accounts receivable for posting. Accounts receivable personnel refoot the deposit slip, stamp a restrictive endorsement on the back of each check, and then forward the receipts and deposit slip to the treasury department. Evaluate the internal control of the described process. Which of the following is a reasonable assessment of internal control in this process? A) Adequate internal control. B) Inadequate internal control because mailroom employees should not have access to cash. C) Inadequate internal control because treasury employees should prepare the deposit slip. D) Inadequate internal control because of a lack of segregation of duties. Answer: D Source: AICPA adapted Difficulty: Medium 37. Which of the following should be performed by the persons opening the mail and recording payments? A) Restrictive endorsement on all checks B) Entering of payment information into customer accounts C) The preparation of the deposit slip and the delivery of the checks to the bank D) The segregation of all payments made on accounts listed as past due. Answer: A Source: Original Difficulty: Easy

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Chapter 6 Employee Fraud and the Audit of Cash 38. At the end of each business day, Safe Company sends its bank a listing of all checks written during the day including the check number, payee, and amount. When a check is sent to the bank for payment the bank compares the payee and the amount with the listing provided by Safe Company. This system is called A) PayChex B) Pay-As-You-Go C) Positive Pay D) Pay Master Answer: C Source: Original Difficulty: Easy 39. The mail which includes payments should be opened by two people. This control is called A) Separation of duties B) Joint custody C) Anti-collusion D) Lapping Answer: B Source: Original Difficulty: Easy 40. Most fraud investigators utilize the fraud triangle theory. A new theory called the fraud diamond has been proposed. Which of the following is an element of the fraud diamond and is not an element of the fraud triangle? A) Motive B) Opportunity C) Capability D) Liquidity Answer: C Source: Original Difficulty: Medium

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Chapter 6 Employee Fraud and the Audit of Cash Essay Questions 41. For each of the test of control audit procedures for cash receipts, indicate the control objective by placing the correct letter in the blank. A. Existence B. Completeness C. Authorization D. Accuracy E. Classification F. Accounting and posting G. Proper period ___ 1. For a sample of recorded cash receipts, compare the date of receipt to the recording date. ___ 2. Trace a sample of daily cash reports to the cash receipts journal. ___ 3. Vouch a sample of recorded cash receipts to the deposits in the bank statement. ___ 4. Recalculate the cash summarized for a daily deposit for a sample of recorded cash receipts. ___ 5. Trace a sample of recorded cash receipts to postings in the correct customers' accounts. Source: Original Difficulty: Easy Answer: 1. G, 2. B, 3. A, 4. D, 5. F 42. When you examine canceled checks returned in the bank statement by a client's bank, how could you tell whether the amount on the check had been skillfully raised (increased, say, from $75.00 to $7,500 in the amount box, and altered in the written line from "Seventy-five dollars" to "Seventy-five hundred dollars") after the check was cleared by the bank? (An employee might do this to "support" a $7,500 cash disbursement journal entry.) Source: Original Difficulty: Easy Answer: The bank imprints the check with the amount paid by the bank (magnetic print in the lower right corner). It will be 00007500, meaning $75.00. 43. After checks are signed for vendor invoices, why should vouchers be marked "paid" or otherwise muti...