Chapter 6: Employee Fraud and Audit of Cash

Question 1

When auditors brainstorm about fraud, key engagement team members should:
- set aside any prior beliefs that management is honest and has integrity
- start with a belief about management’s honesty and integrity based on the results of the prior year’s audit
- assume management is honest and has integrity unless there is evidence to the contrary

Answer 1

set aside any prior beliefs that management is honest and has integrity

Question 2

An entity’s auditors, accountants and security personnel must be acquainted with the basics of fraud awareness ______.
- because not all fraud schemes can be thwarted or detected
- to ensure all fraud schemes are stopped before they occur

Answer 2

because not all fraud schemes can be thwarted or detected

Question 3

Misappropriation of assets is another term for ____ _____.

Answer 3

employee fraud

Question 4

Fraudster behaviors often include ____ (select all that apply)
- frequent vacations
- working standing up
- defensiveness
- inability to relax

Answer 4

• working standing up
• defensiveness
• inability to relax

Question 5

What is embezzlement?

Answer 5

type of fraud that involves steling assets entrusted in employees’ care, custody, or control

Question 6

A typical white collar criminal has ____. (select all that apply)
- been with the company over 10 years
- attended college
- no arrest record
- some type of religious affiliation

Answer 6

• attended college
• no arrest record
• some type of religious affiliation

Reason: employment tenure ranges from 1 - 20 years

Question 7

What conditions make up the fraud triangle?

Answer 7

1. inventive/pressure
2. opportunity
3. attitude/rationalization

Question 8

Auditors must gain an understanding of internal controls that are in place to mitigate assessed fraud risk and, at a minimum, ____.
- present the understanding in a report to the Board of Directors or audit committee
- include a paragraph documenting the understanding in the audit report
- document that understanding in the workpapers

Answer 8

• document that understanding in the workpapers

Question 9

Employee fraud ____. (Select all that apply)
- usually involves some type of falsification
- generally includes a cover-up
- is easiest to catch in the conversion stage
- is also called misappropriation of assets

Answer 9

• is also called misappropriation of assets
• usually involves some type of falsification
• generally includes a cover-up

Question 10

Failure to count inventory on a regular basis provides ____ to commit fraud.

Answer 10

opportunity

Question 11

Fraudster behaviors often include __.
- sleeping too much
- irritability
- working late
- drinking too much

Answer 11

• irritability
• working late
• drinking too much

Reason: sleeplessness is a common behavior

Question 12

A typical white collar criminal is ____. (Select all that apply)
- Socially conforming
- Typically over 40 years of age
- Not married
- Generally acting alone

Answer 12

• Socially conforming
• Generally acting alone

Age rages from teens to over 60

Question 13

A typical white collar criminal has _____ . (Select all that apply)
- been with the company for over 10 years
- some type of religious affiliation
- no arrest record
- attended college

Answer 13

• some type of religious affiliation
• no arrest record
• attended college

Employee tenure can rage from 1 - 20 years

Question 14

A code of conduct for employees ____. (Select all that apply)
- must be supported by the control environment
- must be elaborate to be effective
- is more likely to be supported if the Board chairman follows it
- helps send the right message from the top

Answer 14

• must be supported by the control environment
• is more likely to be supported if the Board chairman follows it
• helps send the right message from the top

Whether simple or elaborate, not guaranteed to be effective

Question 15

T/F: The bank reconciliation is an opportunity for management to monitor the separation of duties between cash receipts and disbursements.

Answer 15

True

Question 16

Which of the following statements regarding a company’s fraud prevention program are true? (Select all that apply)
- It is essential that management establish a strong control environment
- In an electronic payment environment, lack of controls can lead to costly fraud
- Controls must be implemented to prevent or detect fraud even if they occasionally impede business activity
- Building a good fraud prevention program is a moderately difficult task

Answer 16

• It is essential that management establish a strong control environment
• In an electronic payment environment, lack of controls can lead to costly fraud

Controls must be implemented w/o impeding business activity; Building a good fraud prevention program is extremely difficult

Question 17

When a material misstatement is not prevented or detected by the client’s internal controls or auditors’ substantive procedures, ___ __ has been manifested.

Answer 17

audit risk

Question 17

Which of the following statements are correct? (Select all that apply)
- a control violation may be the audit team’s first indication of fraud
- fraud cover-up attempts rarely appear in the accounting records
- the possibility of detection can be an effective fraud deterrent
- trustworthy employees may be the only internal control some entities need

Answer 17

• a control violation may be the audit team’s first indication of fraud
• the possibility of detection can be an effective fraud deterrent

Question 18

The responsibility for setting the tone at the top rests with _____.
- upper management
- the audit committee
- the Board of Directors

Answer 18

upper management

Question 19

For cash, ____ is always a relevant assertion in the audit plan.
- valuation
- presentation and disclosure
- existence

Answer 19

existence

Valuation & presentation and disclosure are also relevant assertions for cash

Question 20

The primary document used to test the cash balance in the financial statements is the company’s ____ _____.

Answer 20

bank reconciliation

Question 21

For each relevant assertion identified by the auditor, professional standards require auditors to first gain an understanding of the ____ ____ that have been designed to mitigate the risk of material misstatement.

Answer 21

internal controls

Question 22

At the end of each day a copy of the check listing, a report of payments recorded in accounts receivable and a copy of the bank deposit slip should be received by _____.
- the accountant who records cash receipts
- the cashier
- an internal auditor
- an independent employee

Answer 22

an independent employee

Question 23

Detection risk is set based on the level of ____ _ and risk of material misstatement.

Answer 23

audit risk

risk of material misstatement is combination of inherent and control risk

Question 24

The auditor selects examples of a transaction and traces them from initial receipt to the recording in the accounting records when performing a(n) ______.

Answer 24

walkthrough

Question 25

Typical relevant assertions for cash are ____. (Select all that apply) - valuation - rights and obligations - presentation and disclosure - existence

Answer 25

- valuation - presentation and disclosure - existence

Question 26

T/F: When doing a WCGW analysis, the question the auditor should ask is, "Has the client designed and implemented a control that, if operating perfectly, would mitigate the identified risk of material misstatement?"

Answer 26

False (Should be testing operating effeciency, not perfection)

Question 27

Due to the lack of predictability of the cash balance, auditors ____ use substantive analytical procedures to test cash. - rarely - always - often

Answer 27

rarely

Question 28

T/F: A walkthrough can be used to provide evidence of whether the client's control activities were operating effectively during the period under audit.

Answer 28

False (a walkthrough is too limited in scope to provide such evidence)

Question 29

A method to discover unrecorded transactions is a four-column bank reconciliation which is called a(n) _ *of* _.

Answer 29

proof of cash