Question 1

Which of the following situations most likely represents the highest risk of a misstatement arising from misappropriation of assets?

Accepted Answer

Bearer bonds are unregistered securities owned by the holder (bearer), making them susceptible to theft and unauthorized use, thus representing a high risk of misstatement due to misappropriation of assets. Unlike assets with serial numbers or low-value items, bearer bonds do not require verification of ownership for transactions, making them particularly vulnerable.

Question 2

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

Accepted Answer

Motive, opportunity, and rationalization are the three factors that increase the probability of fraud. However, lack of training is not one of the factors. It may contribute to the opportunity factor if employees are not trained on how to detect and prevent fraud, but it is not a separate factor in itself.

Question 3

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

Accepted Answer

D

Question 4

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

Accepted Answer

The cutoff bank statement is reconciled after the end of the accounting period to ensure that all transactions are recorded in the correct period. Any unrecorded checks would be detected during the reconciliation process. Therefore, the auditor would most likely discover the unrecorded check when the cutoff bank statement is reconciled.

Question 5

Which of the following is ordinarily considered an "extended procedure" during the independent audit of financial statements?

Accepted Answer

The answer of Which of the following is ordinarily considered...

Question 6

When an employee embezzles company funds from an electric utility company for the purpose of paying expenses of an anti-nuclear protest organization,the fraudster's motive is said to be

Accepted Answer

The fraudster's motive of using company funds for the expenses of an anti-nuclear protest organization suggests an ideological motive. The fraudster may have believed in the cause of the organization and the protest against nuclear power, and therefore used the embezzled funds to support it.

Question 7

In the audit of cash the auditor obtains a bank cutoff statement primarily to

Accepted Answer

The bank cutoff statement is used by the auditor to test the propriety of items appearing on the client's year-end bank reconciliation, such as deposits in transit and outstanding checks. This statement provides information about transactions that occurred between the client's banking activity date and the date of receipt of the statement. It is not used to identify old outstanding checks that may be excluded from the reconciliation, to obtain sufficient information to reconcile the client's bank account, or to obtain direct confirmation of the client's bank balances.

Question 8

An auditor has identified the controller's review of the bank reconciliation as a control to test.In connection with this test,the auditor interviews the controller to understand the specific data reviewed on the reconciliation.In addition,the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs.Which of the following types of audit procedures do these actions illustrate?

Accepted Answer

The auditor is performing inquiry by interviewing the controller to understand the specific data reviewed on the reconciliation. The auditor is also performing inspection of records by verifying that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their sign-offs. Therefore, the actions illustrate the audit procedure of inquiry and inspection of records. Observation, confirmation, reperformance, and analytical procedures are not being performed in this specific scenario.

Question 9

Which of the following sets of information does an auditor usually confirm on one form?

Accepted Answer

The answer of Which of the following sets of information...

Question 10

Each of the following is a type of known misstatement,except

Accepted Answer

Misstatements in financial statements can arise from inaccuracies in processing data, misapplication of accounting principles, and incorrect classification of financial statement elements. However, differences between management and the auditor's judgment regarding estimates are not considered a type of misstatement but rather a difference in opinion or judgment. Misstatements typically involve errors or fraud in the financial records, not subjective differences in estimates.

Question 11

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

Accepted Answer

Since there is no audit trail of documentary evidence available for the control activities, the best way for the auditor to test the activities would be through observation and inquiry. The auditor can observe the activities being performed and inquire about the procedures and policies related to cash disbursements to gain assurance about the effectiveness of the control activities. Confirmation and analytical procedures may not provide relevant information in this scenario.

Question 12

If the amount of a check is altered by an employee after it has cleared the bank,the change can be detected by

Accepted Answer

Comparing the magnetic imprint of the amount paid to the amount written on the check face can easily detect any alterations made to the check amount. This is because the magnetic imprint is generated by the bank and cannot be altered. Therefore, any discrepancy between the amount written and the magnetic imprint would indicate tampering. The other options (A, C, D) may not necessarily reveal alterations made to the check amount.

Question 13

An audit plan of substantive procedures for cash would not include

Accepted Answer

Requesting a cutoff bank statement to be mailed directly to the client rather than the auditor does not align with standard audit procedures for verifying cash balances. Typically, auditors request that such statements be mailed directly to them to ensure the integrity of the information received.

Question 14

To gather evidence regarding the bank's balance in a bank reconciliation,an auditor would examine all of the following except the

Accepted Answer

The general ledger is an internal record of the company's transactions, including its bank transactions, but it does not serve as evidence for the bank's balance in a bank reconciliation. The bank's balance is verified through external documents like bank statements, cutoff bank statements, and bank confirmations.

Question 15

An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using

Accepted Answer

A bank lockbox system would be the best choice in reducing the risk of employee misappropriation of cash. This system allows the entity's customers to send their remittances directly to a designated bank account, bypassing the entity's mailroom and employees. This reduces the opportunity for employees to steal or misplace cash. Additionally, the bank can provide a daily summary of deposited checks and cash, enabling quick identification and investigation of any discrepancies.

Question 16

An auditor is considering whether the omission of the confirmation of investments impairs the auditor's ability to support a previously expressed unmodified opinion.The auditor need not perform this omitted procedure if

Accepted Answer

If the results of alternative procedures that were performed compensate for the omission, the auditor need not perform this omitted procedure. This is because the auditor has obtained sufficient evidence to support their opinion on the financial statements. The other options, such as a low assessed level of detection risk, documentation of the omission, or lack of materiality of individual investments, do not necessarily provide sufficient justification for omitting the confirmation of investments.

Question 17

A company employs three accounts payable clerks and one treasurer.Their responsibilities are as follows:  Which of the following would indicate a weakness in the company's internal controls?

Accepted Answer

The answer of A company employs three accounts payable clerks...

Question 18

Which of the following would be consistent with an employee taking cash receipts from customers on account?

Accepted Answer

When an employee takes cash receipts from customers on account, it would not be recorded, leading to the accounts receivable control account (which is supposed to decrease with cash receipts) being higher than the total of the individual accounts in the subsidiary ledger. This discrepancy occurs because the control account reflects expected reductions from payments that are not matched in the subsidiary ledger due to the theft.

Question 19

Which of the following management policies would increase the probability of fraud in a company?

Accepted Answer

Measuring performance and awarding bonuses based on short-term operating results increases the pressure on employees to achieve immediate goals, which can lead to unethical behavior, including fraud. This policy may encourage employees to manipulate data or engage in fraudulent activities to meet the targets required for the reward.

Question 20

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

Accepted Answer

When auditors find indications of a possible misappropriation of assets, they should investigate fully to determine the total amount of the misappropriation, determine which accounts are affected and the amount by which they are overstated or understated, determine the methods by which the misappropriation was carried out, identify a person(s) who are likely responsible for the misappropriation, and obtain evidence about some other fraud indications in their work. Therefore, all of the options are appropriate actions for independent auditors to take when investigating indications of possible misappropriation of assets.

Quiz 6: Employee Fraud and the Audit of Cash