The following questions address fraud risks in specific audit areas
and accounts.
a. 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 asser-
tion 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.
b. Cash receipts from sales on account have been misappropriated. Which of the fol-
lowing 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
c. 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) the client recently tightened its credit-granting policies.
(2) employees have stolen inventory just before year end.
(3) fictitious credit sales have been recorded during the year.
(4) an employee has been lapping receivables in both years.
