Auditing Quiz

1) If employees are bonded

a. it means that they are not allowed to handle cash.

b. they have worked for the company for at least 10 years.

c. they have been insured against misappropriation of assets.

d. it is impossible for them to steal from the company.

2) From an internal control standpoint, the asset most susceptible to improper diversion & us

a. prepaid insurance.

b. cash.

c. buildings.

d. land.

3) Having one person post entries to accounts receivable subsidiary ledger and a different per

post to the Accounts Receivable Control account in the general ledger is an example o

a. inadequate internal control.

b. duplication of effort.

c. external verification.

d. segregation (separation) of duties.

4) When two or more people get together for the purpose of circumventing prescribed contro

it is called

a. a fraud committee.

b. collusion.

c. a division of duties.

d. bonding of employees.

5) Sarbanes Oxley applies to

a. U.S companies but not international companies.

b. international companies but not U.S. companies.

c. U.S. and Canadian companies but not other international companies.

d. companies listed on U.S. exchanges.

6) Fraud continues to occur at smaller organizations at a rate higher than that of larger

organizations. Explain why this is the case.

7) A delivery truck driver for Coca-Cola delivers a shipment of merchandise to a corner store in

Bridgeport. The driver does not collect any cash payment from the store, but instead gives the store owner an invoice with terms 2/10, n/30. Describe two reasons why the driver does not collect any cash (use your common sense to answer this question!).

8) What is the auditor’s primary responsibility for reporting a fraud that has been detected and

corrected? In your answer, please be sure to cover (discuss) the differences in communication when the fraud is considered material as opposed to being not material to the financial statements. To whom should the existence of fraud be communicated?

9) Explain what procedures the auditor should employ upon identifying fraud risk factors.

10) Please identify four (4) internal control weaknesses in this scenario:

An agent for a large insurance company has a small office in a rural town. There are only two employees in the office: the agent, and his secretary.

The agent spends all of his time in meeting with customers and selling insurance products to them. The secretary processes all of the paperwork connected with the insurance policies, including processing the collection of premiums and the paying out of claims.

The agent feels that he is a “big man” and that his time is very valuable, and that he should not bother himself with “clerical work,” so he does not supervise the secretary’s work, nor does he look at the accounting records, cash documents or bank statements. Besides, he trusts the secretary as she is very hard-working; in fact, she has never missed a day of work in five years and does not even take her annual leave.

The agent works for a large insurance company; however, because the number of policies and customers handled by the office is relatively small, the insurance company’s internal audit office has not bothered to audit the office’s records/cash for several years; the external auditors have also never visited the office.