The following questions address fraud risks in specific audit areas and accounts.
a. Cash receipts from sales on account have been misappropriated. Which of the following acts will conceal this embezzlement and be least likely to be detected by the auditor?
(1) Understating the sales journal.
(2) Overstating the accounts receivable control account.
(3) Overstating the accounts receivable subsidiary records.
(4) Understating the cash receipts journal.
b. An auditor discovers that a client’s accounts receivable turnover is substantially lower for the current year than for the prior year. This trend may indicate that
(1) fictitious credit sales have been recorded during the year.
(2) employees have stolen inventory just before year-end.
(3) the client recently tightened its credit-granting policies.
(4) an employee has been lapping receivables in both years.
c. Which of the following internal controls will best detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars?
(1) Maintain a perpetual inventory of only the more valuable items, with frequent periodic verification of the validity of the perpetual inventory records.
(2) Have an independent auditing firm examine and report on management’s assertion about the design and operating effectiveness of the control activities relevant to inventory.
(3) Have separate warehouse space for the more valuable items, with sequentially numbered tags.
(4) Require an authorized officer’s signature on all requisitions for the more valuable items.
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