Professional Documents
Culture Documents
Chap 006
Chap 006
Chapter 06
Employee Fraud and the Audit of Cash
Multiple Choice Questions
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
3. Which of the following management policies would increase the 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.
6-1
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.
6. 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.
7. 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.
6-2
9. 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.
10. 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.
11. 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.
6-3
12. 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.
13. 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.
14. 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.
15. 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
A. Confirmation and observation.
B. Observation and inquiry.
C. Analytical procedures and confirmation.
D. Inquiry and analytical procedures.
6-4
16. 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.
17. 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.
18. 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.
19. 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.
6-5
20. 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.
21. 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.
22. 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.
6-6
24. 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.
25. 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 separation of duties.
26. 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.
27. 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
6-7
28. 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
29. 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
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.
6-8
32. 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 audits of all accounts with high inherent risk of fraud.
33. 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 "hot line" 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.
35. Which of the following combinations is a good means of concealing employee fraud but
an ineffective means of perpetrating management (financial reporting) fraud?
A. Overstating sales revenue and overstating customer accounts receivable balances.
B. Overstating sales revenue and overstating bad debt expense.
C. Understating interest expense and understating accrued interest payable.
D. Omitting the disclosure information about related-party sales to the president's relatives at
below-market prices.
6-9
36. Allison, 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.
37. 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
delivered 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 mailed the checks.
38. 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.
39. Which of the following is an effective audit procedure that might be used by an auditor to
detect kiting between intercompany banks?
A. Review 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.
6-10
41. Each morning the controller gets the prior day's listing 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.
42. Upon receipt of customers' checks in the mail room, 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.
43. 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.
6-11
45. 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.
46. 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.
47. 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.
6-12
48. 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 the check with the voucher and should
stamp "paid" on the voucher documents.
50. An internal control questionnaire for evaluating the completeness objective of cash
receipts would not include which of the following questions?
A. Does the person who opens the mail make a list of cash received?
B. Are prenumbered sales invoices or receipt books used?
C. Are current receipts controlled by mechanical devices?
D. Does a responsible person approve discounts taken by customers with payments on
account?
6-13
51. The characteristics of people who commit the largest frauds would not include
A. Hold middle management positions.
B. Power to override controls.
C. Long tenure with organization.
D. Access to largest amounts of money.
52. The auditors' information source for vouching the bank reconciliation items is the
A. Standard bank confirmation.
B. Bank statement at audit date.
C. Cutoff bank statement.
D. Accounting journal at year end.
54. The assertions by management regarding the cash accounts in the financial statements
include all of the following except
A. Cash in all accounts exists in the name of the company.
B. Proper internal control activities exist for all cash accounts.
C. Cash balance properly reflects all cash on hand, in transit or, on deposit with third parties.
D. All restrictions on the use of cash are disclosed.
6-14
56. Which question would be inappropriate when asking questions of personnel during a
regular audit?
A. Do you think fraud is a problem for business in general?
B. Do you think this company has any particular problem with fraud?
C. In your department, who has the potential for committing fraud?
D. Is there any information you would like to furnish regarding possible fraud within this
organization?
57. The standard format for the audit approach to fraud cases would not include
A. Audit of balance.
B. Test of controls.
C. Paper trail.
D. Discovery summary.
58. Information about criminal rackets, cons and their operations, and reputations of local
businesses can be found at the
A. Police and Drug Enforcement Agency.
B. Standard & Poor Registers.
C. Securities and Exchange Commission.
D. Better Business Bureau.
6-15
Matching Questions
59. Auditors are auditing the cash receipts for Great Wall Corporation. For each audit
procedure performed (numbered 1-5 below) select the control objective being tested by
placing the correct letter in theblank.
1. Existence
2. Completeness
3. Proper period
4. Accounting and
posting
5. Accuracy
6-16
____
____
____
____
____
60. For each of the descriptions in Column A, match the correct word or words from Column
B.
6-17
61. Independent auditors of financial statements and fraud examiners approach their work
differently.
True False
62. 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
64. The use of confirmations for cash balances is still considered a generally accepted audit
procedure.
True False
65. 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
66. The client should request the bank to send a cutoff bank statement directly to the auditor.
True False
6-18
68. Fraud examiners are more interested in evaluating internal control weaknesses rather than
strengths.
True False
69. Psychotic motivation is characterized by the habitual criminal who steals for the sake of
stealing.
True False
70. Control systems enhance trust and reduce the bureaucracy of business.
True False
71. The most effective long run prevention of fraud lies in the practice of tight management
controls over people.
True False
73. Employee fraud almost always involves people at the top executive level.
True False
74. An organization can prevent all fraud if its auditors are acquainted with some detection
techniques.
True False
75. The chain of custody is the crucial link of evidence to the fraud suspect.
True False
6-19
76. Fraud awareness auditing includes "thinking like a crook" to imagine ways and means of
stealing.
True False
77. Employee fraud is an intentional act that injures investors or creditors through materially
misleading financial statements.
True False
78. The company's bank reconciliation (audited by independent auditors) is the primary
means of valuing cash in the financial statements.
True False
79. 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
6-20
83. A common feature of cash management is to require that persons who handle cash be
bonded under a(n) _____________________________ _____________________________.
________________________________________
6-21
87. Dual direction testing involves samples selected to obtain evidence about control over
_____________________________ in one direction and control over
_____________________________ in the other direction.
________________________________________
88. Someone who steals from an organization in order to support a political agenda is said to
have a(n) ____________________ motivation.
________________________________________
6-22
6-23
98. 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.)
99. After checks are signed for vendor invoices, why should vouchers be marked "paid" or
otherwise mutilated?
100. List, and briefly describe, the three factors that increase the probability of fraud.
6-24
101. What kind of error or fraud could happen if the inventory warehouse manager also had
responsibility for making the physical inventory count and reconciling discrepancies to the
perpetual inventory records?
102. Describe how a lockbox works and indicate the advantages of such a system.
103. Ed's wife Diane owns a printing business in town. Ed works in the accounts payable
department of Jiffy Abs Vitamin Company. Diane prints invoices for work supposedly done
for Jiffy Abs (no actual work was performed) and Ed places in the invoice in the approved for
payment invoice pile. Jiffy Abs pays these invoices and sends Diane a check.
1. Name two internal controls that might prevent or detect these fraudulent payments.
2. Name two audit procedures that might detect this fraud.
6-25
104. Micro Chip Corporation (MCC) has a special PO Box for customer payments. Jane is
responsible for:
going to the post office every day,
emptying the post office box,
opening the mail,
making a prelist,
sending the remittance advices to accounts receivable, and
sending the checks to the cashier's office.
Jane has opening a business account at her bank for Master Cleaning Company (MCC).
Several of Micro Chips checks are made out with only the initials MCC. Jane selects certain
checks made out only with the initials MCC and deposits them in her business account. She
would destroy the remittance advice.
1. Name two controls that would prevent or detect this fraud.
2. Name two audit procedures that might detect this fraud.
6-26
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Medium
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
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
6-27
3. Which of the following management policies would increase the 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.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
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.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Knowledge
Difficulty: Easy
6-28
AACSB: Analytic
AICPA BB: Resource Management
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
6. 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.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Comprehension
Difficulty: Medium
6-29
7. 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.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
6-30
9. 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.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
10. 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.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
6-31
11. 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.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
12. 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.
AICPA
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
6-32
13. 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.
AICPA
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Application
Difficulty: Medium
14. 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.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
6-33
15. 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
A. Confirmation and observation.
B. Observation and inquiry.
C. Analytical procedures and confirmation.
D. Inquiry and analytical procedures.
AICPA
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Application
Difficulty: Medium
16. 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.
AICPA
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Hard
6-34
17. 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.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Knowledge
Difficulty: Medium
18. 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.
AICPA
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
6-35
19. 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.
AICPA
AACSB: Communication
AICPA BB: Legal
AICPA FN: Reporting
Bloom's: Knowledge
Difficulty: Medium
20. 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.
Original
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Knowledge
Difficulty: Medium
6-36
21. 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.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Hard
22. 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.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Bloom's: Comprehension
Difficulty: Medium
6-37
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Hard
24. 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.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Hard
6-38
25. 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 separation of duties.
AICPA
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Comprehension
Difficulty: Hard
26. 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.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Comprehension
Difficulty: Medium
6-39
27. 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
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
28. 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
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Knowledge
Difficulty: Easy
6-40
29. 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
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Knowledge
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.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
6-41
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
32. 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 audits of all accounts with high inherent risk of fraud.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
6-42
33. 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 "hot line" 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.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
6-43
35. Which of the following combinations is a good means of concealing employee fraud but
an ineffective means of perpetrating management (financial reporting) fraud?
A. Overstating sales revenue and overstating customer accounts receivable balances.
B. Overstating sales revenue and overstating bad debt expense.
C. Understating interest expense and understating accrued interest payable.
D. Omitting the disclosure information about related-party sales to the president's relatives at
below-market prices.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Hard
36. Allison, 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.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
6-44
37. 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
delivered 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 mailed the checks.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
38. 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.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Knowledge
Difficulty: Medium
6-45
39. Which of the following is an effective audit procedure that might be used by an auditor to
detect kiting between intercompany banks?
A. Review 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.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Knowledge
Difficulty: Easy
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Knowledge
Difficulty: Easy
6-46
41. Each morning the controller gets the prior day's listing 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.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
42. Upon receipt of customers' checks in the mail room, 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.
AICPA
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Knowledge
Difficulty: Medium
6-47
43. 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.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
6-48
45. 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.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
46. 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.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
6-49
47. 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.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
48. 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 the check with the voucher and should
stamp "paid" on the voucher documents.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Comprehension
Difficulty: Medium
6-50
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Knowledge
Difficulty: Medium
50. An internal control questionnaire for evaluating the completeness objective of cash
receipts would not include which of the following questions?
A. Does the person who opens the mail make a list of cash received?
B. Are prenumbered sales invoices or receipt books used?
C. Are current receipts controlled by mechanical devices?
D. Does a responsible person approve discounts taken by customers with payments on
account?
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
6-51
51. The characteristics of people who commit the largest frauds would not include
A. Hold middle management positions.
B. Power to override controls.
C. Long tenure with organization.
D. Access to largest amounts of money.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
52. The auditors' information source for vouching the bank reconciliation items is the
A. Standard bank confirmation.
B. Bank statement at audit date.
C. Cutoff bank statement.
D. Accounting journal at year end.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
6-52
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Knowledge
Difficulty: Medium
54. The assertions by management regarding the cash accounts in the financial statements
include all of the following except
A. Cash in all accounts exists in the name of the company.
B. Proper internal control activities exist for all cash accounts.
C. Cash balance properly reflects all cash on hand, in transit or, on deposit with third parties.
D. All restrictions on the use of cash are disclosed.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Application
Difficulty: Medium
6-53
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
56. Which question would be inappropriate when asking questions of personnel during a
regular audit?
A. Do you think fraud is a problem for business in general?
B. Do you think this company has any particular problem with fraud?
C. In your department, who has the potential for committing fraud?
D. Is there any information you would like to furnish regarding possible fraud within this
organization?
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
6-54
57. The standard format for the audit approach to fraud cases would not include
A. Audit of balance.
B. Test of controls.
C. Paper trail.
D. Discovery summary.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Application
Difficulty: Medium
58. Information about criminal rackets, cons and their operations, and reputations of local
businesses can be found at the
A. Police and Drug Enforcement Agency.
B. Standard & Poor Registers.
C. Securities and Exchange Commission.
D. Better Business Bureau.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
6-55
59. Auditors are auditing the cash receipts for Great Wall Corporation. For each audit
procedure performed (numbered 1-5 below) select the control objective being tested by
placing the correct letter in theblank.
1. Existence
2. Completeness
3. Proper period
4. Accounting and
posting
5. Accuracy
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
6-56
3
2
1
5
4
60. For each of the descriptions in Column A, match the correct word or words from Column
B.
1.E, 2.L, 3.O, 4.G, 5.I, 6.N, 7.H, 8.J, 9.K, 10.D
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Hard
6-57
61. Independent auditors of financial statements and fraud examiners approach their work
differently.
TRUE
62. 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.
FALSE
64. The use of confirmations for cash balances is still considered a generally accepted audit
procedure.
TRUE
65. 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.
FALSE
66. The client should request the bank to send a cutoff bank statement directly to the auditor.
TRUE
6-58
68. Fraud examiners are more interested in evaluating internal control weaknesses rather than
strengths.
TRUE
69. Psychotic motivation is characterized by the habitual criminal who steals for the sake of
stealing.
TRUE
70. Control systems enhance trust and reduce the bureaucracy of business.
FALSE
71. The most effective long run prevention of fraud lies in the practice of tight management
controls over people.
FALSE
73. Employee fraud almost always involves people at the top executive level.
FALSE
74. An organization can prevent all fraud if its auditors are acquainted with some detection
techniques.
FALSE
6-59
75. The chain of custody is the crucial link of evidence to the fraud suspect.
TRUE
76. Fraud awareness auditing includes "thinking like a crook" to imagine ways and means of
stealing.
TRUE
77. Employee fraud is an intentional act that injures investors or creditors through materially
misleading financial statements.
FALSE
78. The company's bank reconciliation (audited by independent auditors) is the primary
means of valuing cash in the financial statements.
TRUE
79. 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.
FALSE
6-60
83. A common feature of cash management is to require that persons who handle cash be
bonded under a(n) _____________________________ _____________________________.
fidelity bond
6-61
87. Dual direction testing involves samples selected to obtain evidence about control over
_____________________________ in one direction and control over
_____________________________ in the other direction.
completeness, validity
88. Someone who steals from an organization in order to support a political agenda is said to
have a(n) ____________________ motivation.
ideological
6-62
6-63
98. 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.)
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.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Application
Difficulty: Hard
99. After checks are signed for vendor invoices, why should vouchers be marked "paid" or
otherwise mutilated?
To show they have been processed so they cannot be paid again.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
6-64
100. List, and briefly describe, the three factors that increase the probability of fraud.
Motive, opportunity, and lack of integrity are the three factors that increase the probability of
fraud. Motive is a cause that pressures people into action. Economic motives are common in
business fraud. Opportunity refers to a situation that allows someone with motive to carry out
fraud. An example would be a lack or lapse of a specific control or controls in an
organization. A lack of integrity describes a person who does not stick to the social or
organizational ethical code. They may rationalize their actions to defend such a lack of
integrity. Fraud is most common when these three factors exist together.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Knowledge
Difficulty: Medium
101. What kind of error or fraud could happen if the inventory warehouse manager also had
responsibility for making the physical inventory count and reconciling discrepancies to the
perpetual inventory records?
The inventory manager could
1. Commit an inadvertent error of miscounting and adjust the error into the accounts and
inventory records.
2. Steal inventory and adjust the inventory records permanently to cover up the theft.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
6-65
102. Describe how a lockbox works and indicate the advantages of such a system.
A lockbox is a post office box under the control of the bank. The bank will send employees to
retrieve checks from the box and deposit them in the company's account. The bank will
provide a listing of deposits and the remittance advises to the company. The bank may also
provide images of the checks (if the company is willing to pay for these additional services).
There are two main advantages to this system:
1. Checks are retrieved by the bank and never enter the company. Therefore the risk that
checks will be misplaced or end up in the hands of the wrong individuals is eliminated.
Separation of duties also becomes easier since the custody of the asset is no longer a possible
for record keepers or authorizers.
2. The money is placed immediately into the bank allowing for immediate access to the use of
the funds or interest on the funds.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Application
Difficulty: Medium
6-66
103. Ed's wife Diane owns a printing business in town. Ed works in the accounts payable
department of Jiffy Abs Vitamin Company. Diane prints invoices for work supposedly done
for Jiffy Abs (no actual work was performed) and Ed places in the invoice in the approved for
payment invoice pile. Jiffy Abs pays these invoices and sends Diane a check.
1. Name two internal controls that might prevent or detect these fraudulent payments.
2. Name two audit procedures that might detect this fraud.
1. Controls include:
Voucher package that includes a receiving report.
An approved vendor list and the requirement that the vendor be on the approved vendor list.
The inclusion of an expense account for the charging of all material. Each department gets a
report of all expenses each month for review.
2. Procedures include:
Review of voucher packages to ensure goods were received.
Review of voucher packages to ensure vendors are on the approved vendor list.
Analytical procedures to identify increases in expenditures for specific types of products
(printing services).
Analytical procedures to identify increases in expenditures to specific vendors.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
6-67
104. Micro Chip Corporation (MCC) has a special PO Box for customer payments. Jane is
responsible for:
going to the post office every day,
emptying the post office box,
opening the mail,
making a prelist,
sending the remittance advices to accounts receivable, and
sending the checks to the cashier's office.
Jane has opening a business account at her bank for Master Cleaning Company (MCC).
Several of Micro Chips checks are made out with only the initials MCC. Jane selects certain
checks made out only with the initials MCC and deposits them in her business account. She
would destroy the remittance advice.
1. Name two controls that would prevent or detect this fraud.
2. Name two audit procedures that might detect this fraud.
Controls include:
1. A separate person could empty the PO Box, record how many envelops were in the box and
deliver the unopened mail to Jane. Jane would be required to account for each envelop.
The mail could be picked up under joint custody.
The mail could be opened under joint custody.
Surveillance equipment could be used to monitor the opening and recording of payments.
Since customer complaints would be made because payments would not be credited to their
account, and independent and vigorous complaint resolution process would be a good control.
Mailing of statements each month to customers with balances or activity in their account.
Follow up communication on customer accounts that are past due by someone independent
of accounts receivable.
2. Procedures would include:
Observe the opening of the mail and the recording of cash.
Review of customer complaints for patterns and appropriate follow up by company
personnel.
From a sample of customer complaints, ask customers to send a copy of their payment (front
and back) and review check for endorsement and bank account.
Review of the aging of accounts receivable schedule (accounts where payments were
diverted would begin to have past due balances).
Confirm account balances with customers.
Review responses to follow up communications on customer past due accounts.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Hard
6-68