CHAPTER 6

Question 1

employee fraud (misappropriation of assets)

Answer 1

A type of fraud where the employee is stealing assets from the company

Question 2

3 phases of employee fraud

Answer 2

1. The fraudulent act
2. The conversion of assets to the fraudster’s use
3. The cover up

Question 3

embezzlement

Answer 3

An employee steals something that is entrusted to that employee.
Ex. stealing cash

Question 4

management fraud

Answer 4

Inflating financial statements rather than stealing assets

Question 5

elements of the fraud triangle

Answer 5

1. incentive or pressure
2. opportunity
3. attitude

Question 6

If all three elements of the fraud triangle are present,

Answer 6

the likelihood of fraud is significantly higher

Question 7

fraud triangle:
incentive or pressure

Answer 7

Creates a motive:

• Economic (somebody wants money)
• Egocentric (somebody wants to look good for other people)
• Psychotic (they just like doing it)
• Ideological (doing it to punish the company because they view their actions as just)

Question 8

fraud triangle:
opportunity

Answer 8

What allows somebody to do it
- Generally a lack of controls

Question 9

fraud triangle:
attitude

Answer 9

Ability to rationalize what someone is doing

Question 10

red flags of fraudsters

Answer 10

Defensive, argumentative, doing something unusual (working alone late at night & weekends so nobody sees what they’re doing)

Question 11

red flags & indicators of fraud by auditors

Answer 11

• Missing or altered documents
• Unexplained adjustments or unusual patterns
• Unbalanced accounts
• Customer complaints or inventory shortages

Question 12

components of fraud preventino

Answer 12

• A strong control environment and tone at the top
• Managing people pressures in the workplace
• Internal control activities and employee monitoring
• Tone at the top

Question 13

components of auditing cash (documents used)

Answer 13

lead schedule

bank reconciliation

bank statements

confirmations

Question 14

lead schedule

Answer 14

Shows the account balances for last year and for the current year.

• They’re then referenced to the places that the current year balances are tested.

Question 15

Bank reconciliation

Answer 15

1. Balance per bank
   - Confirm directly with bank
   - Agree amount to bank statement
2. Add deposits-in-transit
   - Trace from cash receipts journal
   - Vouch to cutoff bank statement (next month’s statement)
3. Subtract outstanding checks
   - Vouch to cash disbursements journal
   - Trace checks cleared from cutoff bank statement
   (next month’s statement)
4. Add / Subtract other Debit / Credit memos
   - Inspect bank credit/ debit memo and audit for
   reasonableness.
   - Examine relevant supporting documentation.
5. Balance per books
   - Foot the entire reconciliation for mathematical accuracy
   - Trace the amount to the trial balance.

Question 16

Deposits in transit

Answer 16

deposits made on the last day of the year, but has not yet cleared the bank statement, even though personnel rom the company took it to the bank

Question 17

outstanding checks

Answer 17

checks that the company wrote sometime during the year that weren’t cashed or deposited by the recipient

Question 18

Bank statements

Answer 18

Used to test things on the bank reconciliation.

Question 19

Confirmations

Answer 19

Direct communication with the bank where the auditor asks the bank to say how much the client has in the bank account.

• That number is used to verify the starting place on the bank reconciliation.

Question 20

Relevant assertions for cash

Answer 20

existence

valuation

presentation & disclosure

Question 21

existence

Answer 21

The cash balance may not exist in the company’s bank accounts

Question 22

valuation

Answer 22

The cash balance that is held in foreign countries may not have been translated properly.

Question 23

presentation & disclosure

Answer 23

There may be restrictions on the cash balance that were not properly disclosed

Question 24

NOT indicative of fraud

Answer 24

social non-conformity