Question 1

Employee Fraud (Misappropriation of Assets)

Accepted Answer

This concept covers the theft of
company assets.

Question 2

Skimming

Accepted Answer

Stealing cash before it is ever recorded in the accounting system
(e.g., an employee pockets cash from a sale and never rings it up). This is the hardest fraud to detect as it leaves no audit trail.

Question 3

Lapping

Accepted Answer

Stealing cash receipts after they are recorded. The employee
covers the theft of Customer A's payment by applying a later payment from Customer B to Customer A's account. This fraud requires the employee to have access to both cash and the A/R records

Question 4

The Fraud Triangle

Accepted Answer

Incentive/Pressure, Opportunity, Rationalization

Question 5

Imprest Bank Account

Accepted Answer

A payroll bank account funded with the exact amount of net pay

Question 6

Segregation of Duties

Accepted Answer

Separating cash Custody (handling the cash/checks)
from Recording (posting to the A/R sub-ledger) and Authorization (approving
write-offs).

Question 7

Independent Bank Reconciliation

Accepted Answer

Having someone with no cash-handling
duties perform the monthly bank reconciliation.

Question 8

Fidelity Bond

Accepted Answer

An insurance policy that protects the company against losses
from employee theft

Question 9

Substantive Testing

Accepted Answer

Bank Reconciliation This is the primary test for the Existence
of cash. The auditor obtains a Cutoff Bank Statement to vouch the key reconciling items: deposits in transit (ensuring they cleared) and outstanding checks (ensuring they were valid).

Question 10

Cutoff Bank Statement

Accepted Answer

a bank statement for the first 7-10 days after year-end

Question 11

Bill of Lading (Shipping Document)

Accepted Answer

To perform a sales cutoff test, an auditor compares the Sales Invoice to the

Question 12

Checking Kiting Test

Accepted Answer

fraud that overstates cash by using the "float"
time between banks. The auditor prepares a Schedule of Interbank Transfers to analyze transfers around year-end and ensure cash wasn't recorded in two places at once

Question 13

Proof of Cash

Accepted Answer

An advanced procedure that reconciles not only the cash
balance but also all cash transactions (deposits and disbursements) recorded in the books with what cleared the bank during the period

Question 14

Main Revenue Cycle Concerns

Accepted Answer

Existence/Occurrence and overstating the revenue through fictitious sales

Question 15

Standard Costs are no GAAP. The auditor must test if the:

Accepted Answer

Standard cost "Variance" is immaterial

Question 16

Key control of the revenue cycle

Accepted Answer

Three-Way match, Customer Sales Order, Bill of Lading/ Shipping Document, and Sales Invoice

Question 17

Customer Sales Order

Accepted Answer

What the customer ordered

Question 18

Bill of Lading/Shipping Document

Accepted Answer

What was shipped

Question 19

Sales Invoice

Accepted Answer

What the customer was billed for

Question 20

A/R Confirmations (Existence)

Accepted Answer

A generally required audit procedure where the auditor communicates directly with the client's customers to
verify the existence and amount of the A/R balance.

Question 21

What doc match ensures a recorded sale actually occurred and was shipped?

Accepted Answer

Sales Invoice & Bill of Lading

Question 22

Test: Selecting an item from the "shelf" and checking the "count Sheet" tests

Accepted Answer

Completeness

Question 23

Test: Selecting an item off the sheet and seeing if it's on the shelf

Accepted Answer

Existence

Question 24

Positive Confirmation

Accepted Answer

Asks the customer to respond whether the balance is correct or incorrect. Used for high-risk or large-dollar accounts

Question 25

Negative Confirmation

Accepted Answer

Asks the customer to respond only if the balance is
incorrect. Used for low-risk or small-dollar accounts

Question 26

Substantive Testing for the Revenue Cycle 1

Accepted Answer

Allowance for Doubtful Accounts (Valuation)

Question 27

Allowance for Doubtful Accounts

Accepted Answer

The auditor tests the Valuation of A/R by examining the Aged Trial Balance (A/R Aging). The auditor evaluates the reasonableness of management's estimate for uncollectible
accounts.

Question 28

Substantive Testing for the Revenue Cycle 2

Accepted Answer

Sales Cutoff Tests (Cutoff/Occurrence)

Question 29

Bill of Material

Accepted Answer

lists the raw material needed to make one unit of a product

Question 30

Factoring

Accepted Answer

The process of selling accounts receivable to a third party

Question 31

Sales Cutoff Tests

Accepted Answer

The auditor compares the date on the Sales Invoice to the date on the Bill of Lading (shipping document). This ensures that sales (and the related A/R) are recorded in the period
when the goods were actually shipped.

Question 32

Bill and Hold

Accepted Answer

A scheme where a company invoices a customer but does not
ship the goods, violating revenue recognition criteria.

Question 33

Primary Risk of Acquisition and Expenditure Cycle

Accepted Answer

Completeness, The auditor's main concern is that management will understate Accounts Payable (A/P) and expenses
to inflate net income

Question 34

The 2 primary inherent risks for Inventory

Accepted Answer

Existence and Valuation

Question 35

Key controls for Risk of Acquisition and Expenditure Cycle

Accepted Answer

This is the most important internal control
in this cycle, designed to prevent fraudulent or duplicate payments. Before authorizing payment, the A/P department must match: The Purchase Order, The Receiving Report, The Vendor Invoice

Question 36

The Purchase Order

Accepted Answer

What we ordered from an Approved Vendor

Question 37

The Receiving Report

Accepted Answer

What we received

Question 38

Vendor Invoice

Accepted Answer

What we were billed for

Question 39

An auditor tests a clients "sales forecast" to gather evidence for which assertion

Accepted Answer

Valuation (LCNRV)

Question 40

Substantive Testing for Acquisition and Expenditure Cycle

Accepted Answer

Search for Unrecorded Liabilities (Completeness)

Question 41

Search for Unrecorded Liabilities

Accepted Answer

The auditor samples cash disbursements made after year-end (e.g., in January) and vouches them back to the Receiving Report Date to see if the goods/services were received in the prior year. If so, an AJE is proposed to record the missing liability.

Question 42

Payroll Fraud

Accepted Answer

Ghost Employees A fraud where a non-existent employee is added to the payroll. A key control to prevent this is using an Imprest Bank Account for payroll, which is funded with the exact amount of the net pay, making it easy to spot
discrepancies

Question 43

Primary Risks of the Production Cycle and Auditing Inventory

Accepted Answer

Existence & Valuation These are the two highest-risk assertions for inventory. Existence (Does the inventory physically exist?) and Valuation (Is it recorded at the correct cost and written down for obsolescence?).

Question 44

Impact of Inventory Fraud

Accepted Answer

Overstating Ending Inventory (e.g., faking counts, as in
the Crazy Eddie's case) causes a mathematical decrease in Cost of Goods Sold
(COGS), which directly increases Net Income.

Question 45

Substantive Testing of Production Cycle and Auditing Inventory

Accepted Answer

Inventory Observation (Existence)

Question 46

Inventory Observation

Accepted Answer

A generally required audit procedure where the auditor attends the client's physical inventory count. The auditor does not do the count; they observe the client's count procedures and perform test counts.

Question 47

Dual-Direction Testing at the Count

Accepted Answer

Existence (Tracing): Select items from the client's count sheets and trace them to the physical items on the shelf. Completeness (Vouching): Select physical items from the shelf and vouch them back to the count sheets.

Question 48

Cost accounting and GAAP (Valuation) Production cycle and auditing inventory

Accepted Answer

Clients often use Standard Costs and Overhead Allocation based on a Bill of Materials. Since Standard Costs are not GAAP, the auditor must test the standard cost variance to ensure it is not material and that allocation methods are reasonable.

Question 49

Rights & Obligations: Consignment - Production Cycle and Auditing Inventory

Accepted Answer

The auditor must test for inventory held on
consignment (goods held by the client but owned by someone else) to ensure it is
excluded from the inventory count.

Question 50

A standard bank confirmation confirms what two items on one form?

Accepted Answer

Cash balance and outstanding liabilities/loans

Term	Definition
Employee Fraud (Misappropriation of Assets)	This concept covers the theft of company assets.
Skimming	Stealing cash before it is ever recorded in the accounting system (e.g., an employee pockets cash from a sale and never rings it up). This is the hardest fraud to detect as it leaves no audit trail.
Lapping	Stealing cash receipts after they are recorded. The employee covers the theft of Customer A's payment by applying a later payment from Customer B to Customer A's account. This fraud requires the employee to have access to both cash and the A/R records
The Fraud Triangle	Incentive/Pressure, Opportunity, Rationalization
Imprest Bank Account	A payroll bank account funded with the exact amount of net pay
Segregation of Duties	Separating cash Custody (handling the cash/checks) from Recording (posting to the A/R sub-ledger) and Authorization (approving write-offs).
Independent Bank Reconciliation	Having someone with no cash-handling duties perform the monthly bank reconciliation.
Fidelity Bond	An insurance policy that protects the company against losses from employee theft
Substantive Testing	Bank Reconciliation This is the primary test for the Existence of cash. The auditor obtains a Cutoff Bank Statement to vouch the key reconciling items: deposits in transit (ensuring they cleared) and outstanding checks (ensuring they were valid).
Cutoff Bank Statement	a bank statement for the first 7-10 days after year-end
Bill of Lading (Shipping Document)	To perform a sales cutoff test, an auditor compares the Sales Invoice to the
Checking Kiting Test	fraud that overstates cash by using the "float" time between banks. The auditor prepares a Schedule of Interbank Transfers to analyze transfers around year-end and ensure cash wasn't recorded in two places at once
Proof of Cash	An advanced procedure that reconciles not only the cash balance but also all cash transactions (deposits and disbursements) recorded in the books with what cleared the bank during the period
Main Revenue Cycle Concerns	Existence/Occurrence and overstating the revenue through fictitious sales
Standard Costs are no GAAP. The auditor must test if the:	Standard cost "Variance" is immaterial
Key control of the revenue cycle	Three-Way match, Customer Sales Order, Bill of Lading/ Shipping Document, and Sales Invoice
Customer Sales Order	What the customer ordered
Bill of Lading/Shipping Document	What was shipped
Sales Invoice	What the customer was billed for
A/R Confirmations (Existence)	A generally required audit procedure where the auditor communicates directly with the client's customers to verify the existence and amount of the A/R balance.
What doc match ensures a recorded sale actually occurred and was shipped?	Sales Invoice & Bill of Lading
Test: Selecting an item from the "shelf" and checking the "count Sheet" tests	Completeness
Test: Selecting an item off the sheet and seeing if it's on the shelf	Existence
Positive Confirmation	Asks the customer to respond whether the balance is correct or incorrect. Used for high-risk or large-dollar accounts
Negative Confirmation	Asks the customer to respond only if the balance is incorrect. Used for low-risk or small-dollar accounts
Substantive Testing for the Revenue Cycle 1	Allowance for Doubtful Accounts (Valuation)
Allowance for Doubtful Accounts	The auditor tests the Valuation of A/R by examining the Aged Trial Balance (A/R Aging). The auditor evaluates the reasonableness of management's estimate for uncollectible accounts.
Substantive Testing for the Revenue Cycle 2	Sales Cutoff Tests (Cutoff/Occurrence)
Bill of Material	lists the raw material needed to make one unit of a product
Factoring	The process of selling accounts receivable to a third party
Sales Cutoff Tests	The auditor compares the date on the Sales Invoice to the date on the Bill of Lading (shipping document). This ensures that sales (and the related A/R) are recorded in the period when the goods were actually shipped.
Bill and Hold	A scheme where a company invoices a customer but does not ship the goods, violating revenue recognition criteria.
Primary Risk of Acquisition and Expenditure Cycle	Completeness, The auditor's main concern is that management will understate Accounts Payable (A/P) and expenses to inflate net income
The 2 primary inherent risks for Inventory	Existence and Valuation
Key controls for Risk of Acquisition and Expenditure Cycle	This is the most important internal control in this cycle, designed to prevent fraudulent or duplicate payments. Before authorizing payment, the A/P department must match: The Purchase Order, The Receiving Report, The Vendor Invoice
The Purchase Order	What we ordered from an Approved Vendor
The Receiving Report	What we received
Vendor Invoice	What we were billed for
An auditor tests a clients "sales forecast" to gather evidence for which assertion	Valuation (LCNRV)
Substantive Testing for Acquisition and Expenditure Cycle	Search for Unrecorded Liabilities (Completeness)
Search for Unrecorded Liabilities	The auditor samples cash disbursements made after year-end (e.g., in January) and vouches them back to the Receiving Report Date to see if the goods/services were received in the prior year. If so, an AJE is proposed to record the missing liability.
Payroll Fraud	Ghost Employees A fraud where a non-existent employee is added to the payroll. A key control to prevent this is using an Imprest Bank Account for payroll, which is funded with the exact amount of the net pay, making it easy to spot discrepancies
Primary Risks of the Production Cycle and Auditing Inventory	Existence & Valuation These are the two highest-risk assertions for inventory. Existence (Does the inventory physically exist?) and Valuation (Is it recorded at the correct cost and written down for obsolescence?).
Impact of Inventory Fraud	Overstating Ending Inventory (e.g., faking counts, as in the Crazy Eddie's case) causes a mathematical decrease in Cost of Goods Sold (COGS), which directly increases Net Income.
Substantive Testing of Production Cycle and Auditing Inventory	Inventory Observation (Existence)
Inventory Observation	A generally required audit procedure where the auditor attends the client's physical inventory count. The auditor does not do the count; they observe the client's count procedures and perform test counts.
Dual-Direction Testing at the Count	Existence (Tracing): Select items from the client's count sheets and trace them to the physical items on the shelf. Completeness (Vouching): Select physical items from the shelf and vouch them back to the count sheets.
Cost accounting and GAAP (Valuation) Production cycle and auditing inventory	Clients often use Standard Costs and Overhead Allocation based on a Bill of Materials. Since Standard Costs are not GAAP, the auditor must test the standard cost variance to ensure it is not material and that allocation methods are reasonable.
Rights & Obligations: Consignment - Production Cycle and Auditing Inventory	The auditor must test for inventory held on consignment (goods held by the client but owned by someone else) to ensure it is excluded from the inventory count.
A standard bank confirmation confirms what two items on one form?	Cash balance and outstanding liabilities/loans

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Audit Exam 2