Question 1

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

Accepted Answer

The bank cutoff statement is used to test the propriety of items appearing on the client's year-end bank reconciliation. This allows the auditor to ensure that all reconciling items have been properly recorded and any necessary adjustments are made. Obtaining direct confirmation of the client's bank balances would require a bank confirmation, not a cutoff statement. Identifying old outstanding checks that the client may exclude from the year-end bank reconciliation in order to misappropriate cash is a potential fraud risk, but this is not the purpose of obtaining a bank cutoff statement.

Question 2

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

Accepted Answer

The given options include three types of known misstatements- inaccuracy in processing data, misapplication of accounting principles, and difference in classification according to GAAP. Option C, however, does not describe a type of misstatement but rather a difference in judgment between management and the auditor regarding estimates.

Question 3

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

Accepted Answer

When auditing financial statements and finding indications of a possible misappropriation of assets, independent auditors 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 persons who are likely responsible for the misappropriation, and obtain evidence about some other fraud indications in their work. Therefore, all of these choices are the best options for auditors.

Question 4

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 5

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

Accepted Answer

A large number of bearer bonds on hand represents a high risk for misappropriation because they are easily transferable and valuable, and are typically not recorded in an accounting system, making it easier for an employee to steal them without detection. The other options do not have the same level of risk for misappropriation.

Question 6

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 7

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 8

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 9

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 detect any alteration made by an employee after the check has cleared the bank. The magnetic ink character recognition (MICR) line includes the amount and can be compared to the written amount on the check face. This can reveal any discrepancies or alterations.

Question 10

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? $$\begin{array} { l l } 
\underline { \text { Employee } } &  { \underline { \text { Responsibility } } } \
\text { Clerk 1 } & \text { Reviews vendor invoices for proper signature approval. } \
\text { Clerk } 2 & \text { Enters vendor invoices into the accounting system and verifies } \
&\text { payment terms. } \
\text { Clerk } 3 & \text { Posts entered vendor invoices to the accounts payable ledger for } \
& \text { Payment and mails checks. } \
\text { Treasurer } &\text { Reviews the vendor invoices and signs each check. }
\end{array}$$

Accepted Answer

Clerk 3 mailing the checks after they have been signed is a weakness because it combines the duties of recording and custody, which should be segregated to prevent fraud or errors.

Question 11

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 in this scenario is ideological, as they embezzled funds to support their anti-nuclear protest organization.

Question 12

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 can create pressure on employees to cut corners or engage in fraudulent behavior in order to meet the desired results. This is a common factor in many financial frauds, where executives manipulate financial statements for short-term gains or to hit earnings targets. The other choices promote a culture of accountability, collaboration, and feedback, which can help to prevent fraud.

Question 13

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 14

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

The standard confirmation request to banks is used to obtain information about contingent liabilities and security agreements, which may not be evident from the client's records.

Question 15

An auditor wishes to perform tests of controls on a client's cash disbursements procedures.If the control activities leave no audit trail of documentary evidence,the auditor most likely will test the activities by

Accepted Answer

If there is no audit trail of documentary evidence, the auditor would have to rely on observation (watching the client perform the control activities) and inquiry (asking questions of management and other employees involved in the cash disbursements procedures) to perform tests of controls. Confirmation may not be effective in this situation since there may be no independent third party to confirm the control activities, and analytical procedures may not provide sufficient evidence without supporting documentation.

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 compensate for the omission of confirmation of investments, the auditor need not perform this procedure. This is in accordance with auditing standards.

Question 17

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 because it involves having customers mail their remittances directly to a bank-controlled post office box. The bank then collects and processes the payments, providing a secure and controlled environment that reduces the risk of employee misappropriation of cash. The other choices, such as employee fidelity bonds and daily check summaries, can also be helpful in reducing employee theft of cash, but they do not address the risk associated with handling customer remittances by mail. Independently prepared mailroom prelists may also be useful, but they are not as effective as a bank lockbox system in reducing the risk of employee misappropriation of cash.

Question 18

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 using inquiry to understand the specific data reviewed by the controller and inspection of records to verify the sign-offs on the bank reconciliation.

Question 19

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 20

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

Accepted Answer

Lack of training is not considered one of the three factors increasing the probability of fraud. The three factors are Motive, Opportunity, and Rationalization.

Quiz 6: Employee Fraud and the Audit of Cash