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Chapter 06

Employee Fraud and the Audit of Cash

True / False Questions


1. Independent auditors of financial statements and fraud examiners
approach their work differently.
True

False

2. It is always good control to have the bookkeeper prepare a list of cash


receipts and then have the bookkeeper record it immediately in the
accounts.
True

False

3. Fidelity bonds are used to prevent embezzlement.


True

False

4. The use of confirmations for cash balances is still considered a


generally accepted audit procedure.
True

False

5. It is not necessary to send confirmations on accounts that a company


represents as closed during the year to get the bank to confirm zero
balances.
True

False

6. The client should request the bank to send a cutoff bank statement
directly to the auditor.
True

False

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

7. Fraud consists of unintentional misstatements or omissions in financial


statements.
True

False

8. Fraud examiners are more interested in evaluating internal control


weaknesses rather than strengths.
True

False

9. Psychotic motivation is characterized by the habitual criminal who


steals for the sake of stealing.
True

False

10 Control systems enhance trust and reduce the bureaucracy of


. business.
True

False

11 The most effective long-run prevention of fraud lies in the practice of


. tight management controls over people.
True

False

12 The key to integrity in business is "accountability."


.
True False
13 Employee fraud generally involves people at the top executive level.
.
True False
14 An organization can prevent all fraud if its auditors are acquainted with
. some detection techniques.
True

False

15 The chain of custody is the crucial link of evidence to the fraud


. suspect.
True

False

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16 Fraud awareness auditing includes "thinking like a crook" to imagine


. ways and means of stealing.
True

False

17 Employee fraud is an intentional act that injures investors or creditors


. by leading to materially misleading financial statements.
True

False

18 The company's bank reconciliation (audited by independent auditors) is


. the primary means of valuing cash in the financial statements.
True

False

19 One of the main requirements under GAAS relating to fraud in a


. financial statement audit is that auditors obtain evidence about the
intent of the persons responsible for the fraud.
True

False

Multiple Choice Questions


20 When auditing financial statements and finding indications of a possible
. misappropriation of assets, independent auditors should

A. Investigate fully to determine the total amount of the


misappropriation.
B. Determine which accounts are affected and the amount by which
they are overstated or understated.
C. Determine the methods by which the misappropriation was carried
out.
D. Identify a person(s) who are likely responsible for the
misappropriation and obtain evidence about some other fraud
indications in their work.
E.
All of the above.

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21 When an employee embezzles company funds from an electric utility


. company for the purpose of paying expenses of an antinuclear protest
organization, the fraudster's motive is said to be

A.
B.
C.
D.

Psychotic.
Egocentric.
Ideological.
Economic.

22 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.
23 Which of the following is not considered one of the three factors
. increasing the probability of fraud?

A.
B.
C.
D.

Motive.
Lack of training.
Opportunity.
Rationalization.

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24 Which of the following is ordinarily considered an extended procedure


. during the independent audit of financial statements?

A. Sending positive confirmations on recorded customer accounts


receivable balances.
B. Performing physical observation and test count during the client's
inventory taking.
C. Measuring the time lag between the date of recording cash receipts
in the books to the date of the deposit credit in the bank.
D. Conducting interviews with the client's sales billing personnel to
learn about sales recording control activities.
25 If an employee altered the amount of a check after it has cleared the
. bank, the change can be detected by

A. Comparing the amount written on the check face to the amount


written in the cash disbursements journal.
B. Comparing the magnetic imprint of the amount paid to the amount
written on the check face.
C. Examining the endorsement on the back of the check.
D. Comparing the check number on the face of the check to the check
number in the cash disbursements journal.
26 Which of the following would be consistent with an employee taking
. cash receipts from customers on account?

A. The total of the accounts receivable subsidiary ledger balances is


less than the accounts receivable control account.
B. The total of the accounts receivable subsidiary ledger balances is
more than the accounts receivable control account.
C. Total cash receipts from customers for the month are less than credit
sales for the month.
D. Total cash receipts from customers for the month are more than
credit sales for the month.

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27 An audit plan of substantive procedures for cash would not include


.
A. Requesting a cutoff bank statement be mailed to the client.
B. Requesting the client to prepare bank reconciliations.
C. Preparing a schedule of interbank transfers for a period of 10
business days before and after year-end date.
D. Obtaining a written client representation concerning compensating
balance agreements.
28 In the audit of cash, the auditor obtains a bank cutoff statement
. primarily to

A. Identify old outstanding checks that the client may exclude from the
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 yearend.
D. Test the propriety of items appearing on the client's year-end bank
reconciliation.
29 Auditors ordinarily send a standard confirmation request to all banks
. with which the client has done business during the year under audit,
regardless of the year-end balances. A purpose of this procedure is to

A. Provide the data necessary to prepare a proof of cash.


B. Request that a cutoff bank statement and related checks be sent to
the audit.
C. Detect questionable bank activities that may otherwise not be
discovered.
D. Seek information about contingent liabilities and security
agreements.

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30 To gather evidence regarding the balance in a bank reconciliation, an


. auditor would examine all of the following except the

A.
B.
C.
D.

Cutoff bank statement.


General ledger.
Bank confirmation.
Year-end bank statement.

31 An entity with a large volume of customer remittances by mail could


. most likely reduce the risk of employee misappropriation of cash by
using

A.
B.
C.
D.

Employee fidelity bonds.


Independently prepared mailroom prelists.
Daily check summaries.
A bank lockbox system.

32 Which of the following sets of information does an auditor usually


. confirm on one form?

A. Accounts payable and purchase commitments.


B.
Cash in bank and collateral for loans.
C. Inventory on consignment and contingent liabilities.
D. Accounts receivable and accrued interest receivable.
33 An unrecorded check issued during the last week of the year would
. most likely be discovered by the auditor when the

A.
B.
C.
D.

Check register for the last month is reviewed.


Cutoff bank statement is reconciled.
Bank confirmation is reviewed.
Search for unrecorded liabilities is performed.

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34 An auditor wishes to perform tests of controls on a client's cash


. disbursements procedures. If the control activities leave no audit trail of
documentary evidence, the auditor most likely will test the activities by
using

A.
B.
C.
D.

Confirmation and observation.


Observation and inquiry.
Analytical procedures and confirmation.
Inquiry and analytical procedures.

35 To provide assurance that each voucher is submitted and paid only


. once, an auditor most likely would examine a sample of paid vouchers
and determine whether each voucher is

A.
B.
C.
D.

Supported by a vendor's invoice.


Stamped PAID by the check signer.
Prenumbered and accounted for.
Approved for authorized purchases.

36 In order for auditors to be able to recognize potential fraud, they must


. be aware of the basic characteristics of fraud. Which of the following is
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.

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37 An auditor who discovers that client employees have committed an


. illegal act that has a material effect on the client's financial statements
most likely would withdraw from the engagement if

A. The illegal act is a violation of generally accepted accounting


principles.
B. The client does not take the remedial action that the auditor
considers necessary.
C. The illegal act was committed during a prior year that was not
audited.
D. The auditor has already assessed control risk at the maximum level.
38 An auditor would least likely initiate a discussion with a client's audit
. committee concerning

A. The methods used to account for significant unusual transactions.


B. The maximum dollar amount of misstatements that could exist
without causing the financial statements to be materially misstated.
C. Indications of fraud and illegal acts committed by a corporate officer
that were discovered by the auditor.
D. Disagreements with management as to accounting principles that
were resolved during the current-year audit.
39 Which of the following statements is correct with respect to the
. elements of the fraud triangle?

A. Motive is a cause that pressures people into action.


B. 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.

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40 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.
41 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.
42 A proof of cash
.
A.
Is required by GAAS.
B. Can be used to test the transactions process.
C. Is most helpful when control risk for cash is low.
D.
Always detects lapping.
43 When counting cash on hand the auditor must exercise simultaneous
. control over all cash and other negotiable assets to prevent

A.
B.
C.
D.

Theft.
Irregular endorsement.
Replacement or substitution of stolen assets.
Deposits in transit.

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44 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.
45 Which of the following should be performed by the persons opening the
. mail and recording payments?

A.
B.
C.
D.

Adding a restrictive endorsement on all checks.


Entering payment information into customer accounts.
Preparing the deposit slip and the delivery of the checks to the bank.
Segregating all payments made on accounts listed as past due.

46 At the end of each business day, Safe Company sends its bank a list 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 list provided by Safe
Company. This system is called

A.
B.
C.
D.

Paychex.
Pay-as-you-go.
Positive pay.
Pay master.

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47 Two people should open mail that includes payments. This control is
. called

A.
B.
C.
D.

Separation of duties.
Joint custody.
Anti-collusion.
Lapping.

48 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 that is not an element of the fraud
triangle?

A.
B.
C.
D.

Motive.
Opportunity.
Capability.
Liquidity.

49 When auditing with "fraud awareness," auditors should especially


. notice and follow up employee activities under which of these
conditions?

A. The company always estimates the inventory but never takes a


complete physical count.
B. The petty cash box is always locked in the desk of the custodian.
C. Management has published a company code of ethics and sends
frequent communication newsletters about it.
D. The board of directors reviews and approves all investment
transactions.

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50 The best way to enact a broad fraud-prevention program is to


.
A. Install airtight control systems of checks and supervision.
B. Name an "ethics officer" who is responsible for receiving and acting
on fraud tips.
C. Place dedicated hot line telephones on walls around the workplace
with direct communication to the company ethics officer.
D. Practice management "of the people and for the people" to help
them share personal and professional problems.
51 A good fraud prevention program should address employees'
. motivation to steal from the company. The best method for doing this is
to

A. Establish employee assistance programs.


B. Require a fidelity bond on all employees.
C. Require reconciliations of all accounts to be reviewed by a
supervisor.
D. Ensure that all accounts with high inherent risk of fraud are audited.
52 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.

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53 Which of the following is least indicative of fraudulent activity?


.
A. Numerous cash refunds have been made to different people at the
same post office box address.
B. Internal auditors cannot locate several credit memos to support
reductions of customers' balances.
C. Bank reconciliation has no outstanding checks or deposits older than
15 days.
D. Three people were absent the day the auditors handed out the
paychecks and have not picked them up four weeks later.
54 Which of the following combinations is a good means to conceal
. 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.
55 Allison Everhart, an employee in accounts payable, believes she can
. run a fictitious invoice through the accounts payable system and collect
the money. She knows payments are subject to an audit. Which account
would be the best place to hide the fraud?

A.
B.
C.
D.

Inventory.
Wage expense.
Consulting service expense.
Property tax expense.

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56 Which of these arrangements of duties could most likely lead to an


. embezzlement or theft?

A. The inventory warehouse manager has responsibility for making the


physical inventory observation and reconciling discrepancies to the
perpetual inventory records.
B. The cashier prepared the bank deposit, endorsed the checks with a
company stamp, and delivered the cash and checks to the bank for
deposit (no other bookkeeping duties).
C. The accounts receivable clerk received a list of payments received by
the cashier so he could make entries in the customers' accounts
receivable subsidiary accounts.
D. The financial vice president received checks made out to suppliers
and the supporting invoices, signed the checks, and mailed the
checks.
57 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.
58 Which of the following is an effective audit procedure that an auditor
. might use to detect kiting between intercompany banks?

A. Review the composition of authenticated deposit slips.


B. Review subsequent bank statements.
C. Prepare a schedule of the bank transfers.
D. Prepare a year-end bank reconciliation.

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59 Immediately upon receipt of cash, a responsible employee should


.
A. Record the amount in the cash receipts journal.
B.
Prepare a remittance listing.
C. Update the subsidiary accounts receivable records.
D.
Prepare a deposit slip in triplicate.
60 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.
61 Upon receipt of customers' checks in the mail room, a responsible
. employee should prepare a remittance list that is forwarded to the
cashier. A copy of the listing should be sent to the

A. Internal auditor to investigate the list for unusual transactions.


B. Treasurer to compare the list with the monthly bank statement.
C. Accounts receivable bookkeeper to update the subsidiary accounts
receivable records.
D. Entity's bank to compare the list with the cashier's deposit slip.

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62 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.
63 Embezzlement is a type of fraud that involves
.
A. An employee's misappropriating an employer's money or property
not entrusted to him or her.
B. A manager's falsification of financial statements for the purpose of
misleading investors and creditors.
C. An employee's mistaken representation of opinion that causes
incorrect accounting entries.
D. An employee misappropriating an employer's money or property
entrusted to the employee's control in the employee's normal job.
64 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.

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65 During an audit of cash, the auditor is most concerned with the


. management assertion of

A.
B.
C.
D.

Existence.
Rights and obligations.
Valuation or allocation.
Occurrence.

66 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.
B.
C.
D.

Prior-years' balances.
Management inquiry.
Cash budgets.
Aged accounts receivable reports.

67 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.
68 The phases of employee fraud do not include the
.
A.
B.
C.
D.

Conversion of money to fraudster's use.


Prosecution.
Fraudulent act.
Cover-up.

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69 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?
70 The characteristics of people who commit the largest frauds would not
. include

A.
B.
C.
D.

Hold middle management positions.


Have power to override controls.
Have long tenure with organization.
Have access to large amounts of money.

71 The auditors' information source for vouching the bank reconciliation


. items is the

A.
B.
C.
D.

Standard bank confirmation.


Bank statement at audit date.
Cutoff bank statement.
Accounting journal at year end.

72 The probability of fraud is not a function of


.
A.
B.
C.
D.

Motive.
Opportunity.
Lack of integrity.
Predication.

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73 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.
74 A practice that would not encourage fraud would include
.
A. Centralizing authority in top management.
B. Considering people pressure in the work place.
C. Making profits the only criterion for success.
D. Insisting that everything be documented with a rule for everything.
75 Which question would not be appropriate 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?
76 The standard format for the audit approach to fraud cases would not
. include

A.
B.
C.
D.

Audit of balance.
Test of controls.
Paper trail.
Discovery summary.

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77 Information about criminal rackets and cons and their operations and
. the reputations of local businesses can be found at the

A.
B.
C.
D.

Police and Drug Enforcement Agency.


Standard & Poor Registers.
Securities and Exchange Commission.
Better Business Bureau.

Fill in the Blank Questions


78 ___________________________ is the use of fraudulent means to take
. money or other property from an employer.
________________________________________
79 Another name for employee fraud and embezzlement is
. _________________________.
________________________________________
80 The three components of the fraud triangle are
. ____________________________, ____________________________, and
____________________________.
________________________________________
81 A common feature of cash management is to require that persons who
. handle cash be bonded under a(n)
________________________________________.
________________________________________
82 Fraud examinations should begin only after sufficient
. _____________________________ leads to the belief that a fraud has
occurred.
________________________________________

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

83 The three necessary elements to commit fraud are the


. ____________________________, ____________________________, and
____________________________.
________________________________________
84 __________________________________ is a reconciliation in which the bank
. balance, the bank report of cash deposited, and the bank report of cash
paid are all reconciled to the client's general ledger.
________________________________________
85 Dual direction testing involves samples selected to obtain evidence
. about control over _____________________________ in one direction and
control over _____________________________ in the other direction.
________________________________________
86 Someone who steals from an organization to support a political agenda
. is said to have a(n) ____________________ motivation.
________________________________________
87 A set of telltale signs of erroneous accounting, missing or altered
. documents, or a "dangling debt" is referred to as a
_____________________________.
________________________________________
88 Simple theft of money or goods not entrusted to an individual is
. referred to as ____________________________.
________________________________________
89 A _____________________________ is some pressure experienced by a
. person who believes that it can't be shared with friends and confidants.
________________________________________

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90 An organization whose only control is


. "__________________________________________ " really has no control.
________________________________________
91 Observation of persons'_____________________________ in
. _____________________________ and _____________________________ may be
red flags of employee fraud.
________________________________________
92 The nature of extended procedures is limited only by a(n)
. ________________________________.
________________________________________
93 Auditors ______________________ perform the company's control function
. of _____________________________ the bank reconciliation.
________________________________________
94 Auditors use a(n) ______________________________________ to obtain
. independent evidence of the proper listing of outstanding checks and
deposits in transit on a bank reconciliation.
________________________________________
95 The term _____________________________ refers to the application of
. accounting and auditing skills to civil and criminal problems.
________________________________________

Short Answer Questions

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96 Auditors are auditing the cash receipts for Great Wall Corporation. For
. each audit procedure performed (numbered 1-5), select the control
objective being tested 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, the auditors compared
the date of receipt to the recording date.
______ 2. The auditors traced a sample of daily cash reports to the cash
receipts journal.
______ 3. The auditors vouched a sample of recorded cash receipts to
the deposits in the bank statement.
______ 4. The auditors recalculate the cash listed on the daily deposit for
a sample of recorded cash receipts.
______ 5. The auditors traced a sample of recorded cash receipts to
postings in the correct customers' accounts.

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97 For each of the descriptions in Column A, match the correct word or


. words from Column B.

Essay Questions

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

98 When you examine canceled checks returned in the bank statement by


. a client's bank, how could you tell whether the amount on a check had
been skillfully increased (perhaps 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.

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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

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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 the invoice in the invoice pile approved
for payment. Jiffy Abs pays these invoices and sends Diane a check.
a. Name two internal controls that might prevent or detect these
fraudulent payments.
b. Name two audit procedures that might detect this fraud

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

104 Micro Chip Corporation (MCC) has a special post office box to which
.
customers send their payments. Chris is responsible for:

Going to the post office every day.


Emptying the post office box and removing the mail.
Opening the mail.
Making a prelist.
Sending the remittance advices to accounts receivable.
Sending the checks to the cashier's office.

Chris has opened a business account for Master Cleaning Company


(MCC) at the bank. Several of Micro Chips checks are made out with
only the initials MCC. Chris selects certain checks made out only with
the initials MCC and deposits them in the business account and then
destroys the remittance advice.
a. Name two controls that would prevent or detect this fraud.
b. Name two audit procedures that might detect this fraud.

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Chapter 06 Employee Fraud and the Audit of Cash Answer Key

True / False Questions


1.

Independent auditors of financial statements and fraud examiners


approach their work differently.
TRUE
Reference: Question also found in study guide

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-01 Define and explain the differences among several kinds of employee fraud that might
occur at an audit client.
Topic: Employee Fraud

2.

It is always good control to have the bookkeeper prepare a list of


cash receipts and then have the bookkeeper record it immediately in
the accounts.
FALSE
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-04 Describe the control activities over the receipt and disbursement of cash.
Topic: The Audit of Cash-Control Activities

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

3.

Fidelity bonds are used to prevent embezzlement.


FALSE
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-04 Describe the control activities over the receipt and disbursement of cash.
Topic: The Audit of Cash-Control Activities

4.

The use of confirmations for cash balances is still considered a


generally accepted audit procedure.
TRUE
Reference: Question also found in study guide

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-05 Describe the types of substantive procedures that are conducted during the audit of
cash.
Topic: The Audit of Cash-Substantive Procedures

5.

It is not necessary to send confirmations on accounts that a company


represents as closed during the year to get the bank to confirm zero
balances.
FALSE
Reference: Question also found in study guide

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-05 Describe the types of substantive procedures that are conducted during the audit of
cash.
Topic: The Audit of Cash-Substantive Procedures

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

6.

The client should request the bank to send a cutoff bank statement
directly to the auditor.
TRUE
Reference: Question also found in study guide

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-05 Describe the types of substantive procedures that are conducted during the audit of
cash.
Topic: The Audit of Cash-Substantive Procedures

7.

Fraud consists of unintentional misstatements or omissions in


financial statements.
FALSE
Reference: Question also found in study guide

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-01 Define and explain the differences among several kinds of employee fraud that might
occur at an audit client.
Topic: Employee Fraud

8.

Fraud examiners are more interested in evaluating internal control


weaknesses rather than strengths.
TRUE
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-04 Describe the control activities over the receipt and disbursement of cash.
Topic: The Audit of Cash-Control Activities

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

9.

Psychotic motivation is characterized by the habitual criminal who


steals for the sake of stealing.
TRUE
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02 Identify and explain the three conditions (i.e.; the fraud triangle) that often exist
when a fraud occurs.
Topic: The Fraud Triangle

10.

Control systems enhance trust and reduce the bureaucracy of


business.
FALSE
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-04 Describe the control activities over the receipt and disbursement of cash.
Topic: The Audit of Cash-Control Activities

11.

The most effective long-run prevention of fraud lies in the practice of


tight management controls over people.
FALSE
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-03 Describe techniques that can be used to prevent employee fraud.
Topic: Fraud Prevention

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

12.

The key to integrity in business is "accountability."


TRUE
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-03 Describe techniques that can be used to prevent employee fraud.
Topic: Fraud Prevention

13.

Employee fraud generally involves people at the top executive level.


FALSE
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-03 Describe techniques that can be used to prevent employee fraud.
Topic: Fraud Prevention

14.

An organization can prevent all fraud if its auditors are acquainted


with some detection techniques.
FALSE
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-03 Describe techniques that can be used to prevent employee fraud.
Topic: Fraud Prevention

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

15.

The chain of custody is the crucial link of evidence to the fraud


suspect.
TRUE
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-03 Describe techniques that can be used to prevent employee fraud.
Topic: Fraud Prevention

16.

Fraud awareness auditing includes "thinking like a crook" to imagine


ways and means of stealing.
TRUE
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-03 Describe techniques that can be used to prevent employee fraud.
Topic: Fraud Prevention

17.

Employee fraud is an intentional act that injures investors or creditors


by leading to materially misleading financial statements.
FALSE
Reference: Question also found in study guide

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-01 Define and explain the differences among several kinds of employee fraud that might
occur at an audit client.
Topic: Employee Fraud

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

18.

The company's bank reconciliation (audited by independent auditors)


is the primary means of valuing cash in the financial statements.
TRUE
Reference: Question also found in study guide

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-05 Describe the types of substantive procedures that are conducted during the audit of
cash.
Topic: The Audit of Cash-Substantive Procedures

19.

One of the main requirements under GAAS relating to fraud in a


financial statement audit is that auditors obtain evidence about the
intent of the persons responsible for the fraud.
FALSE
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-04 Describe the control activities over the receipt and disbursement of cash.
Topic: The Audit of Cash-Control Activities

Multiple Choice Questions

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

20.

When auditing financial statements and finding indications of a


possible misappropriation of assets, independent auditors should

A. Investigate fully to determine the total amount of the


misappropriation.
B. Determine which accounts are affected and the amount by which
they are overstated or understated.
C. Determine the methods by which the misappropriation was carried
out.
D. Identify a person(s) who are likely responsible for the
misappropriation and obtain evidence about some other fraud
indications in their work.
E.
All of the above.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-07 Describe some extended procedures for detecting employee fraud schemes involving
cash.
Source: Original
Topic: Extended Fraud Procedures

21.

When an employee embezzles company funds from an electric utility


company for the purpose of paying expenses of an antinuclear
protest organization, the fraudster's motive is said to be

A.
B.
C.
D.

Psychotic.
Egocentric.
Ideological.
Economic.

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Identify and explain the three conditions (i.e.; the fraud triangle) that often exist
when a fraud occurs.
Source: Original
Topic: Fraud Triangle

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

22.

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 shortterm 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.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-03 Describe techniques that can be used to prevent employee fraud.
Source: Original
Topic: Fraud Prevention

23.

Which of the following is not considered one of the three factors


increasing the probability of fraud?

A.
B.
C.
D.

Motive.
Lack of training.
Opportunity.
Rationalization.

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Identify and explain the three conditions (i.e.; the fraud triangle) that often exist
when a fraud occurs.
Source: Original
Topic: Fraud Triangle

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

24.

Which of the following is ordinarily considered an extended procedure


during the independent audit of financial statements?

A. Sending positive confirmations on recorded customer accounts


receivable balances.
B. Performing physical observation and test count during the client's
inventory taking.
C. Measuring the time lag between the date of recording cash
receipts in the books to the date of the deposit credit in the bank.
D. Conducting interviews with the client's sales billing personnel to
learn about sales recording control activities.
AACSB: Analytic
AICPA BB: Resource Management
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-07 Describe some extended procedures for detecting employee fraud schemes involving
cash.
Source: Original
Topic: Extended Fraud Procedures

25.

If an employee altered the amount of a check after it has cleared the


bank, the change can be detected by

A. Comparing the amount written on the check face to the amount


written in the cash disbursements journal.
B. Comparing the magnetic imprint of the amount paid to the amount
written on the check face.
C. Examining the endorsement on the back of the check.
D. Comparing the check number on the face of the check to the
check number in the cash disbursements journal.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-07 Describe some extended procedures for detecting employee fraud schemes involving
cash.
Source: Original
Topic: Extended Fraud Procedures

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

26.

Which of the following would be consistent with an employee taking


cash receipts from customers on account?

A. The total of the accounts receivable subsidiary ledger balances is


less than the accounts receivable control account.
B. The total of the accounts receivable subsidiary ledger balances is
more than the accounts receivable control account.
C. Total cash receipts from customers for the month are less than
credit sales for the month.
D. Total cash receipts from customers for the month are more than
credit sales for the month.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-01 Define and explain the differences among several kinds of employee fraud that might
occur at an audit client.
Source: Original
Topic: Employee Fraud Types

27.

An audit plan of substantive procedures for cash would not include

A. Requesting a cutoff bank statement be mailed to the client.


B. Requesting the client to prepare bank reconciliations.
C. Preparing a schedule of interbank transfers for a period of 10
business days before and after year-end date.
D. Obtaining a written client representation concerning compensating
balance agreements.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-05 Describe the types of substantive procedures that are conducted during the audit of
cash.
Source: Original
Topic: Substantive Procedures

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

28.

In the audit of cash, the auditor obtains a bank cutoff statement


primarily to

A. Identify old outstanding checks that the client may exclude from
the 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 yearend.
D. Test the propriety of items appearing on the client's year-end bank
reconciliation.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-05 Describe the types of substantive procedures that are conducted during the audit of
cash.
Source: Original
Topic: Substantive Procedures

29.

Auditors ordinarily send a standard confirmation request to all banks


with which the client has done business during the year under audit,
regardless of the year-end balances. A purpose of this procedure is
to

A. Provide the data necessary to prepare a proof of cash.


B. Request that a cutoff bank statement and related checks be sent
to the audit.
C. Detect questionable bank activities that may otherwise not be
discovered.
D. Seek information about contingent liabilities and security
agreements.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-05 Describe the types of substantive procedures that are conducted during the audit of
cash.
Source: Original
Topic: Substantive Procedures

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

30.

To gather evidence regarding the balance in a bank reconciliation, an


auditor would examine all of the following except the

A.
B.
C.
D.

Cutoff bank statement.


General ledger.
Bank confirmation.
Year-end bank statement.

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-05 Describe the types of substantive procedures that are conducted during the audit of
cash.
Source: Original
Topic: Substantive Procedures

31.

An entity with a large volume of customer remittances by mail could


most likely reduce the risk of employee misappropriation of cash by
using

A.
B.
C.
D.

Employee fidelity bonds.


Independently prepared mailroom prelists.
Daily check summaries.
A bank lockbox system.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-04 Describe the control activities over the receipt and disbursement of cash.
Source: AICPA
Topic: Internal Controls

32.

Which of the following sets of information does an auditor usually


confirm on one form?

A. Accounts payable and purchase commitments.


B. Cash in bank and collateral for loans.
C. Inventory on consignment and contingent liabilities.
D. Accounts receivable and accrued interest receivable.
AACSB: Analytic
AICPA BB: Legal

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

AICPA FN: Research


Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-05 Describe the types of substantive procedures that are conducted during the audit of
cash.
Source: AICPA
Topic: Substantive Procedures

33.

An unrecorded check issued during the last week of the year would
most likely be discovered by the auditor when the

A. Check register for the last month is reviewed.


B. Cutoff bank statement is reconciled.
C.
Bank confirmation is reviewed.
D. Search for unrecorded liabilities is performed.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-05 Describe the types of substantive procedures that are conducted during the audit of
cash.
Source: Original
Topic: Substantive Procedures

34.

An auditor wishes to perform tests of controls on a client's cash


disbursements procedures. If the control activities leave no audit trail
of documentary evidence, the auditor most likely will test the
activities by using

A.
B.
C.
D.

Confirmation and observation.


Observation and inquiry.
Analytical procedures and confirmation.
Inquiry and analytical procedures.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-04 Describe the control activities over the receipt and disbursement of cash.
Source: AICPA
Topic: Internal Controls

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

35.

To provide assurance that each voucher is submitted and paid only


once, an auditor most likely would examine a sample of paid
vouchers and determine whether each voucher is

A.
B.
C.
D.

Supported by a vendor's invoice.


Stamped PAID by the check signer.
Prenumbered and accounted for.
Approved for authorized purchases.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 06-04 Describe the control activities over the receipt and disbursement of cash.
Source: AICPA
Topic: Internal Controls

36.

In order for auditors to be able to recognize potential fraud, they


must be aware of the basic characteristics of fraud. Which of the
following is 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.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 06-01 Define and explain the differences among several kinds of employee fraud that might
occur at an audit client.
Source: Original
Topic: Employee Fraud Types

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

37.

An auditor who discovers that client employees have committed an


illegal act that has a material effect on the client's financial
statements most likely would withdraw from the engagement if

A. The illegal act is a violation of generally accepted accounting


principles.
B. The client does not take the remedial action that the auditor
considers necessary.
C. The illegal act was committed during a prior year that was not
audited.
D. The auditor has already assessed control risk at the maximum
level.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-01 Define and explain the differences among several kinds of employee fraud that might
occur at an audit client.
Source: AICPA
Topic: Employee Fraud Types

38.

An auditor would least likely initiate a discussion with a client's audit


committee concerning

A. The methods used to account for significant unusual transactions.


B. The maximum dollar amount of misstatements that could exist
without causing the financial statements to be materially
misstated.
C. Indications of fraud and illegal acts committed by a corporate
officer that were discovered by the auditor.
D. Disagreements with management as to accounting principles that
were resolved during the current-year audit.
AACSB: Communication
AICPA BB: Legal
AICPA FN: Reporting
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 06-03 Describe techniques that can be used to prevent employee fraud.
Source: AICPA
Topic: Fraud Prevention

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

39.

Which of the following statements is correct with respect to the


elements of the fraud triangle?

A. Motive is a cause that pressures people into action.


B. 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.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Risk Analysis
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 06-02 Identify and explain the three conditions (i.e.; the fraud triangle) that often exist
when a fraud occurs.
Source: Original
Topic: Fraud Triangle

40.

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.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 06-04 Describe the control activities over the receipt and disbursement of cash.
Source: Original
Topic: Internal Controls

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

41.

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.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-05 Describe the types of substantive procedures that are conducted during the audit of
cash.
Source: Original
Topic: Substantive Procedures

42.

A proof of cash

A.
Is required by GAAS.
B. Can be used to test the transactions process.
C. Is most helpful when control risk for cash is low.
D.
Always detects lapping.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 3 Hard
Learning Objective: 06-04 Describe the control activities over the receipt and disbursement of cash.
Source: AICPA
Topic: Internal Controls

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

43.

When counting cash on hand the auditor must exercise simultaneous


control over all cash and other negotiable assets to prevent

A.
B.
C.
D.

Theft.
Irregular endorsement.
Replacement or substitution of stolen assets.
Deposits in transit.

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 06-05 Describe the types of substantive procedures that are conducted during the audit of
cash.
Source: Original
Topic: Substantive Procedures

44.

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.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 06-04 Describe the control activities over the receipt and disbursement of cash.
Source: AICPA
Topic: Internal Controls

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

45.

Which of the following should be performed by the persons opening


the mail and recording payments?

A. Adding a restrictive endorsement on all checks.


B. Entering payment information into customer accounts.
C. Preparing the deposit slip and the delivery of the checks to the
bank.
D. Segregating all payments made on accounts listed as past due.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-04 Describe the control activities over the receipt and disbursement of cash.
Source: Original
Topic: Internal Controls

46.

At the end of each business day, Safe Company sends its bank a list
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 list provided
by Safe Company. This system is called

A.
B.
C.
D.

Paychex.
Pay-as-you-go.
Positive pay.
Pay master.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 06-04 Describe the control activities over the receipt and disbursement of cash.
Source: Original
Topic: Internal Controls

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

47.

Two people should open mail that includes payments. This control is
called

A.
B.
C.
D.

Separation of duties.
Joint custody.
Anti-collusion.
Lapping.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-04 Describe the control activities over the receipt and disbursement of cash.
Source: Original
Topic: Internal Controls

48.

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 that is not an element
of the fraud triangle?

A.
B.
C.
D.

Motive.
Opportunity.
Capability.
Liquidity.

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 06-02 Identify and explain the three conditions (i.e.; the fraud triangle) that often exist
when a fraud occurs.
Source: Original
Topic: Fraud Triangle

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

49.

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.
Reference: Question also found in textbook
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-02 Identify and explain the three conditions (i.e.; the fraud triangle) that often exist
when a fraud occurs.
Source: Original
Topic: Fraud Triangle

50.

The best way to enact a broad fraud-prevention program is to

A. Install airtight control systems of checks and supervision.


B. Name an "ethics officer" who is responsible for receiving and
acting on fraud tips.
C. Place dedicated hot line telephones on walls around the workplace
with direct communication to the company ethics officer.
D. Practice management "of the people and for the people" to help
them share personal and professional problems.
Reference: Question also found in textbook
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-03 Describe techniques that can be used to prevent employee fraud.
Source: Original

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Topic: Fraud Prevention

51.

A good fraud prevention program should address employees'


motivation to steal from the company. The best method for doing this
is to

A. Establish employee assistance programs.


B. Require a fidelity bond on all employees.
C. Require reconciliations of all accounts to be reviewed by a
supervisor.
D. Ensure that all accounts with high inherent risk of fraud are
audited.
Reference: Question also found in textbook
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-03 Describe techniques that can be used to prevent employee fraud.
Source: Original
Topic: Fraud Prevention

52.

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.
Reference: Question also found in textbook
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-03 Describe techniques that can be used to prevent employee fraud.
Source: Original
Topic: Fraud Prevention

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

53.

Which of the following is least indicative of fraudulent activity?

A. Numerous cash refunds have been made to different people at the


same post office box address.
B. Internal auditors cannot locate several credit memos to support
reductions of customers' balances.
C. Bank reconciliation has no outstanding checks or deposits older
than 15 days.
D. Three people were absent the day the auditors handed out the
paychecks and have not picked them up four weeks later.
Reference: Question also found in textbook
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-06 Discuss actual cash fraud cases and describe how the schemes were uncovered.
Source: Original
Topic: Fraud Schemes

54.

Which of the following combinations is a good means to conceal


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.
Reference: Question also found in textbook
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 06-06 Discuss actual cash fraud cases and describe how the schemes were uncovered.
Source: Original

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Topic: Fraud Schemes

55.

Allison Everhart, an employee in accounts payable, believes she can


run a fictitious invoice through the accounts payable system and
collect the money. She knows payments are subject to an audit.
Which account would be the best place to hide the fraud?

A.
B.
C.
D.

Inventory.
Wage expense.
Consulting service expense.
Property tax expense.

Reference: Question also found in textbook


AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-05 Describe the types of substantive procedures that are conducted during the audit of
cash.
Source: Original
Topic: Substantive Procedures

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

56.

Which of these arrangements of duties could most likely lead to an


embezzlement or theft?

A. The inventory warehouse manager has responsibility for making


the physical inventory observation and reconciling discrepancies to
the perpetual inventory records.
B. The cashier prepared the bank deposit, endorsed the checks with a
company stamp, and delivered the cash and checks to the bank for
deposit (no other bookkeeping duties).
C. The accounts receivable clerk received a list of payments received
by the cashier so he could make entries in the customers' accounts
receivable subsidiary accounts.
D. The financial vice president received checks made out to suppliers
and the supporting invoices, signed the checks, and mailed the
checks.
Reference: Question also found in textbook
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-02 Identify and explain the three conditions (i.e.; the fraud triangle) that often exist
when a fraud occurs.
Source: Original
Topic: Fraud Triangle

57.

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.
Reference: Question also found in textbook
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 06-04 Describe the control activities over the receipt and disbursement of cash.
Source: Original
Topic: Internal Controls

58.

Which of the following is an effective audit procedure that an auditor


might use to detect kiting between intercompany banks?

A. Review the composition of authenticated deposit slips.


B.
Review subsequent bank statements.
C. Prepare a schedule of the bank transfers.
D. Prepare a year-end bank reconciliation.
Reference: Question also found in textbook
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-05 Describe the types of substantive procedures that are conducted during the audit of
cash.
Source: Original
Topic: Substantive Procedures

59.

Immediately upon receipt of cash, a responsible employee should

A. Record the amount in the cash receipts journal.


B.
Prepare a remittance listing.
C. Update the subsidiary accounts receivable records.
D.
Prepare a deposit slip in triplicate.
Reference: Question also found in textbook
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-04 Describe the control activities over the receipt and disbursement of cash.
Source: AICPA
Topic: Internal Controls

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

60.

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.
Reference: Question also found in textbook
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 06-04 Describe the control activities over the receipt and disbursement of cash.
Source: Original
Topic: Internal Controls

61.

Upon receipt of customers' checks in the mail room, a responsible


employee should prepare a remittance list that is forwarded to the
cashier. A copy of the listing should be sent to the

A. Internal auditor to investigate the list for unusual transactions.


B. Treasurer to compare the list with the monthly bank statement.
C. Accounts receivable bookkeeper to update the subsidiary accounts
receivable records.
D. Entity's bank to compare the list with the cashier's deposit slip.
Reference: Question also found in textbook
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 06-04 Describe the control activities over the receipt and disbursement of cash.
Source: AICPA

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Topic: Internal Controls

62.

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.
Reference: Question also found in textbook
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-06 Discuss actual cash fraud cases and describe how the schemes were uncovered.
Source: Original
Topic: Fraud Schemes

63.

Embezzlement is a type of fraud that involves

A. An employee's misappropriating an employer's money or property


not entrusted to him or her.
B. A manager's falsification of financial statements for the purpose of
misleading investors and creditors.
C. An employee's mistaken representation of opinion that causes
incorrect accounting entries.
D. An employee misappropriating an employer's money or property
entrusted to the employee's control in the employee's normal job.
Reference: Question also found in textbook
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01 Define and explain the differences among several kinds of employee fraud that might
occur at an audit client.
Source: Original
Topic: Employee Fraud Types

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

64.

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.
Reference: Question also found in textbook
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-04 Describe the control activities over the receipt and disbursement of cash.
Source: Original
Topic: Internal Controls

65.

During an audit of cash, the auditor is most concerned with the


management assertion of

A.
B.
C.
D.

Existence.
Rights and obligations.
Valuation or allocation.
Occurrence.

Reference: Question also found in textbook


AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-05 Describe the types of substantive procedures that are conducted during the audit of
cash.
Source: Original
Topic: Substantive Procedures

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

66.

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.
B.
C.
D.

Prior-years' balances.
Management inquiry.
Cash budgets.
Aged accounts receivable reports.

Reference: Question also found in textbook


AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-05 Describe the types of substantive procedures that are conducted during the audit of
cash.
Source: Original
Topic: Substantive Procedures

67.

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.
Reference: Question also found in textbook
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-04 Describe the control activities over the receipt and disbursement of cash.
Source: Original

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Topic: Internal Controls

68.

The phases of employee fraud do not include the

A.
B.
C.
D.

Conversion of money to fraudster's use.


Prosecution.
Fraudulent act.
Cover-up.

Reference: Question also found in study guide


AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 06-01 Define and explain the differences among several kinds of employee fraud that might
occur at an audit client.
Source: Original
Topic: Employee Fraud Types

69.

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?
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-04 Describe the control activities over the receipt and disbursement of cash.
Source: Original
Topic: Internal Controls

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

70.

The characteristics of people who commit the largest frauds would


not include

A.
B.
C.
D.

Hold middle management positions.


Have power to override controls.
Have long tenure with organization.
Have access to large amounts of money.

Reference: Question also found in study guide


AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-01 Define and explain the differences among several kinds of employee fraud that might
occur at an audit client.
Source: Original
Topic: Employee Fraud Types

71.

The auditors' information source for vouching the bank reconciliation


items is the

A.
B.
C.
D.

Standard bank confirmation.


Bank statement at audit date.
Cutoff bank statement.
Accounting journal at year end.

Reference: Question also found in study guide


AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-05 Describe the types of substantive procedures that are conducted during the audit of
cash.
Source: Original
Topic: Substantive Procedures

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

72.

The probability of fraud is not a function of

A.
B.
C.
D.

Motive.
Opportunity.
Lack of integrity.
Predication.

Reference: Question also found in study guide


AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 06-02 Identify and explain the three conditions (i.e.; the fraud triangle) that often exist
when a fraud occurs.
Source: Original
Topic: Fraud Triangle

73.

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.
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-05 Describe the types of substantive procedures that are conducted during the audit of
cash.
Source: Original
Topic: Substantive Procedures

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

74.

A practice that would not encourage fraud would include

A. Centralizing authority in top management.


B. Considering people pressure in the work place.
C. Making profits the only criterion for success.
D. Insisting that everything be documented with a rule for
everything.
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-03 Describe techniques that can be used to prevent employee fraud.
Source: Original
Topic: Fraud Prevention

75.

Which question would not be appropriate 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?
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-07 Describe some extended procedures for detecting employee fraud schemes involving
cash.
Source: Original
Topic: Extended Fraud Procedures

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

76.

The standard format for the audit approach to fraud cases would not
include

A.
B.
C.
D.

Audit of balance.
Test of controls.
Paper trail.
Discovery summary.

Reference: Question also found in study guide


AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-07 Describe some extended procedures for detecting employee fraud schemes involving
cash.
Source: Original
Topic: Extended Fraud Procedures

77.

Information about criminal rackets and cons and their operations and
the reputations of local businesses can be found at the

A.
B.
C.
D.

Police and Drug Enforcement Agency.


Standard & Poor Registers.
Securities and Exchange Commission.
Better Business Bureau.

Reference: Question also found in study guide


AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01 Define and explain the differences among several kinds of employee fraud that might
occur at an audit client.
Source: Original
Topic: Employee Fraud Types

Fill in the Blank Questions

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

78.

___________________________ is the use of fraudulent means to take


money or other property from an employer.
Employee fraud
Reference: Question also found in study guide

79.

Another name for employee fraud and embezzlement is


_________________________.
defalcation
Reference: Question also found in study guide

80.

The three components of the fraud triangle are


____________________________, ____________________________, and
____________________________.
motive; opportunity; rationalization
Reference: Question also found in study guide

81.

A common feature of cash management is to require that persons


who handle cash be bonded under a(n)
________________________________________.
fidelity bond
Reference: Question also found in study guide

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82.

Fraud examinations should begin only after sufficient


_____________________________ leads to the belief that a fraud has
occurred.
predication
Reference: Question also found in study guide

83.

The three necessary elements to commit fraud are the


____________________________, ____________________________, and
____________________________.
fraud; conversion; cover-up
Reference: Question also found in study guide

84.

__________________________________ is a reconciliation in which the


bank balance, the bank report of cash deposited, and the bank report
of cash paid are all reconciled to the client's general ledger.
Proof of cash
Reference: Question also found in study guide

85.

Dual direction testing involves samples selected to obtain evidence


about control over _____________________________ in one direction and
control over _____________________________ in the other direction.
completeness; validity
Reference: Question also found in study guide

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86.

Someone who steals from an organization to support a political


agenda is said to have a(n) ____________________ motivation.
ideological
Reference: Question also found in study guide

87.

A set of telltale signs of erroneous accounting, missing or altered


documents, or a "dangling debt" is referred to as a
_____________________________.
paper trail
Reference: Question also found in study guide

88.

Simple theft of money or goods not entrusted to an individual is


referred to as ____________________________.
larceny
Reference: Question also found in study guide

89.

A _____________________________ is some pressure experienced by a


person who believes that it can't be shared with friends and
confidants.
motive
Reference: Question also found in study guide

90.

An organization whose only control is


"__________________________________________ " really has no control.
trustworthy employees
Reference: Question also found in study guide

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91.

Observation of persons'_____________________________ in
_____________________________ and _____________________________ may
be red flags of employee fraud.
changes; habits; lifestyles
Reference: Question also found in study guide

92.

The nature of extended procedures is limited only by a(n)


________________________________.
auditor's imagination
Reference: Question also found in study guide

93.

Auditors ______________________ perform the company's control


function of _____________________________ the bank reconciliation.
should not; preparing
Reference: Question also found in study guide

94.

Auditors use a(n) ______________________________________ to obtain


independent evidence of the proper listing of outstanding checks and
deposits in transit on a bank reconciliation.
cutoff bank statement
Reference: Question also found in study guide

95.

The term _____________________________ refers to the application of


accounting and auditing skills to civil and criminal problems.
forensic accounting
Reference: Question also found in study guide

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Short Answer Questions


96.

Auditors are auditing the cash receipts for Great Wall Corporation. For
each audit procedure performed (numbered 1-5), select the control
objective being tested 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, the auditors
compared the date of receipt to the recording date.
______ 2. The auditors traced a sample of daily cash reports to the
cash receipts journal.
______ 3. The auditors vouched a sample of recorded cash receipts to
the deposits in the bank statement.
______ 4. The auditors recalculate the cash listed on the daily deposit
for a sample of recorded cash receipts.
______ 5. The auditors traced a sample of recorded cash receipts to
postings in the correct customers' accounts.

1. G; 2. B; 3. A; 4. D; 5. F
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-04 Describe the control activities over the receipt and disbursement of cash.
Source: Original
Topic: Internal Controls

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97.

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
Feedback: Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 3 Hard
Learning Objective: 06-01 Define and explain the differences among several kinds of employee fraud that might
occur at an audit client.
Learning Objective: 06-02 Identify and explain the three conditions (i.e.; the fraud triangle) that often exist
when a fraud occurs.
Learning Objective: 06-03 Describe techniques that can be used to prevent employee fraud.
Source: Original
Topic: Fraud Terminology

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Essay Questions
98.

When you examine canceled checks returned in the bank statement


by a client's bank, how could you tell whether the amount on a check
had been skillfully increased (perhaps 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
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 06-07 Describe some extended procedures for detecting employee fraud schemes involving
cash.
Source: Original
Topic: Extended Fraud Procedures

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
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-04 Describe the control activities over the receipt and disbursement of cash.
Source: Original
Topic: Internal Controls

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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 adhere to the social or organizational ethical
code. The person may rationalize the 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
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 06-02 Identify and explain the three conditions (i.e.; the fraud triangle) that often exist
when a fraud occurs.
Source: Original
Topic: Fraud Triangle

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


a. Commit an inadvertent error of miscounting and adjust the error
into the accounts and inventory records.
b. Steal inventory and adjust the inventory records permanently to
cover up the theft.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-02 Identify and explain the three conditions (i.e.; the fraud triangle) that often exist
when a fraud occurs.
Source: Original
Topic: Fraud Triangle

102. Describe how a lockbox works and indicate the advantages of such a
system

A lockbox is box that locks, such as ones at a post office under the
control of a bank. The bank sends employees to retrieve checks from
the box and then deposits them in the company's account. The bank
provides a list of deposits and the remittance advices to the
company. The bank may also provide images of the checks (if the
company is willing to pay for these additional services).
The two main advantages to this system are that
a. 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 because the custody of the asset is no longer a
possibility for record keepers or authorizers.
b. The money is placed immediately into the bank, allowing
immediate access to the use of the funds or interest on them.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-04 Describe the control activities over the receipt and disbursement of cash.
Source: Original
Topic: Internal Controls

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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 the invoice in the invoice pile
approved for payment. Jiffy Abs pays these invoices and sends Diane
a check.
a. Name two internal controls that might prevent or detect these
fraudulent payments.
b. Name two audit procedures that might detect this fraud

a. Controls include:
Using a voucher package that includes a receiving report.
Using an approved vendor list and requiring that the vendor be on
the approved vendor list.
Including an expense account for charges of all material. Each
department receives a report of all expenses each month for review.
b. Procedures include:
Reviewing voucher packages to ensure that goods were received.
Reviewing voucher packages to ensure that vendors are on the
approved vendor list.
Using analytical procedures to identify increases in expenditures for
specific types of products (printing services).
Using analytical procedures to identify increases in expenditures to
specific vendors.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-03 Describe techniques that can be used to prevent employee fraud.
Source: Original
Topic: Fraud Prevention

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

104. Micro Chip Corporation (MCC) has a special post office box to which
customers send their payments. Chris is responsible for:

Going to the post office every day.


Emptying the post office box and removing the mail.
Opening the mail.
Making a prelist.
Sending the remittance advices to accounts receivable.
Sending the checks to the cashier's office.

Chris has opened a business account for Master Cleaning Company


(MCC) at the bank. Several of Micro Chips checks are made out with
only the initials MCC. Chris selects certain checks made out only with
the initials MCC and deposits them in the business account and then
destroys the remittance advice.
a. Name two controls that would prevent or detect this fraud.
b. Name two audit procedures that might detect this fraud.

a. Controls include:
Having a different person empty the post office box, record how
many envelopes were in the box, and deliver the unopened mail to
Chris. Chris would be required to account for each envelope.
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.
Customers would be made because payments would not be
credited to their account, and an independent and vigorous
complaint resolution process to address these complaints would be a
good control.
Statements should be mailed each month to customers with
balances or activity in their account.
Someone independent of accounts receivable should provide
follow-up communication on customer accounts that are past due.
b. Procedures include these:

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Someone should observe the opening of the mail and the recording
of cash.
Customer complaints should be reviewed for patterns and
appropriately followed up by company personnel
Individuals identified from a sample of customer complaints should
be asked to send a copy of their payment (front and back) and the
appropriate employee should review the checks for the endorsement
and bank account
The aging of accounts receivable schedule (accounts whose
payments were diverted would begin to have past due balances)
should be reviewed.
Account balances should be confirmed with customers.
Responses to follow-up communications on customer past due
accounts should be reviewed.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 06-03 Describe techniques that can be used to prevent employee fraud.
Source: Original
Topic: Fraud Prevention

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.