Koss Corporation is a publicly traded company that designs and sells stereo headphones. The Koss family controls a majority of the Company’s stock. On November 17, 2010, Sujata “Sue” Sachdeva, the former Vice-President of Finance was sentenced to 11 years in prison for embezzling $34 million from the Company. Her attorney claimed that she was a shopaholic. From 1992 to 2009, Sachdeva was the Principal Accounting Officer, Secretary, and Vice-President of Finance at Koss. As a result of the embezzlement, Koss Corporation was required to restate its financial statements for 2008, 2009, and the first quarter of 2010. Sachdeva used the embezzled funds to sustain a lavish lifestyle including purchasing a vacation ownership interest in Hawaii, a Mercedes Benz, and other automobiles. She also used the proceeds to pay for luxury travel and numerous personal items, including luxury clothing, furs, designer shoes, jewelry, and art. One neighbor stated that packages delivered to her front porch would sometimes reach 6 feet high! Sachdeva also maintained a large household staff. Such purchases were well beyond her Koss salary (approximately $175,000). She explained her life style by stating that her husband earned a couple of million dollars a year and that they both came from wealthy families. The massive misappropriation was ultimately discovered when American Express notified the Company that funds were being wired from a Company bank account to pay for expenses on Sachdeva’s personal credit card. According to the SEC, Sachdeva authorized at least 206 wire transfers of funds from Koss bank accounts to pay for her American Express credit card bills and issued more than 500 cashier’s checks from company accounts to pay for personal expenses. Sachdeva used the cashier’s checks to make direct payments to retailers, such as Neiman Marcus and Saks Fifth Avenue. Sachdeva attempted to conceal the identities of the recipients of the checks by using acronyms on the checks such as “S.F.A. Inc.” for Saks Fifth Avenue, “N.M. Inc.” for Neiman Marcus, and others. Sachdeva was able to conceal the fraud by directing other Koss employees to make numerous fraudulent entries in Koss’s books and records. Julie Mulvaney, the Company’s senior accountant who was responsible for making journal entries, reconciling accounts receivable, reconciling the Company’s bank statements, ordering cashier’s checks, processing wire transfers, and checking the daily bank account balances assisted Sachdeva in covering up the fraud. Other information about the Company: ∙Michael Koss simultaneously held 5 senior management positions: Vice Chairman, Chief Executive, Chief Operating Officer, President, and Chief Financial Officer. Koss had little or no educational background or experience in the areas of accounting or finance and allegedly delegated important responsibilities typically performed by the CFO to Sachdeva on a regular basis. Koss did not have an internal audit function. ∙ Koss Corporation’s control environment appears to have been remarkably relaxed and its corporate board rarely changed. Excluding a member added in 2006 and founder John Koss, board members had an average tenure of 27 years. Unlike the proxy statements of typical public companies, Koss made no mention of any accounting expertise among audit committee members. ∙ Because it was a small company, Koss was not subject to a section of the Sarbanes-Oxley Act that requires outside auditors to evaluate a company’s internal controls over financial reporting. ∙ During the embezzlement, Koss’s audit fees were reduced by half from $114,900 in 2007 to $63,600 in 2008. ∙ In 2006, Sachdeva co-chaired a fundraising gala for Big Brothers Big Sisters with one of Koss’s outside auditors. Required: 1. Assume that you are a member of the audit team. Identify the fraud risk factors for misappropriation of assets that were present at Koss Corporation. 2. Is it appropriate for one individual to hold 5 significant senior management positions all at the same time in a publicly traded company? Why or why not?
> Periodic or cycle counts of selected inventory items are made at various times during the year rather than via a single inventory count at year-end. Which of the following is necessary if the auditor plans to observe inventory at interim dates? a. Comple
> Inquiries of warehouse personnel concerning possibly obsolete or slow-moving inventory items provide assurance about management’s assertion of a. Completeness. b. Existence. c. Presentation. d. Valuation.
> When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that a. All goods purchased before year-end are received before the physical inventory count. b. No goods held on consignment for customers ar
> After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items a. Included in the listing have been counted. b. Represented by inventory tags are included in the l
> The auditors for Weston University are conducting their audit for the fiscal year ended December 31, 2018. Specifically, the audit firm is now focusing on the audit of revenue from this season’s home football games. While planning the audit of sales of f
> An entity maintains perpetual inventory records in both quantities and dollars. If the level of control risk were set at high, an auditor would probably a. Insist that the entity perform physical counts of inventory items several times during the year. b
> Which of the following internal control activities is most likely to address the completeness assertion for inventory? a. The work-in-process account is periodically reconciled with subsidiary records. b. Employees responsible for custody of finished goo
> An auditor’s tests of controls over the issuance of raw materials to production would most likely include a. Reconciliation of raw materials and work-in-process perpetual inventory records to general ledger balances. b. Inquiry of the custodian about the
> Independent internal verification of inventory (i.e., proper segregation of duties) occurs when employees who a. Issue raw materials obtain materials requisitions for each issue and prepare daily totals of materials issued. b. Compare records of goods on
> Which of the following would most likely be an internal control activity designed to detect errors and fraud concerning the custody of inventory? a. Periodic reconciliation of work in process with job cost sheets. b. Segregation of functions between gene
> Which of the following control activities would be most likely to assist in reducing the control risk related to the occurrence of inventory transactions? a. Inventory manager does not have ability to record inventory transactions. b. Summary of the rece
> The objectives of internal control for an inventory management process are to provide assurance that transactions are properly authorized and recorded and that a. Independent internal verification of activity reports is established. b. Transfers to the f
> An auditor is most likely to perform substantive tests of details on payroll transactions and balances when a. Cutoff tests indicate a substantial amount of accrued payroll expense. b. The level of control risk relative to payroll transactions is set at
> Effective control activities over the payroll function may include a. Reconciliation of totals on job time sheets with job reports by employees responsible for those specific jobs. b. Verification of agreement of job time sheets with employee recorded ho
> Which of the following audit tests would most likely be used to test the occurrence assertion for payroll transactions? a. Trace a sample of time sheets to the payroll register. b. Re compute the mathematical accuracy of a sample of payroll checks. c. Tr
> Part I. Lernout & Hauspie (L&H) was the world’s leading provider of speech and language technology products, solutions, and services to businesses and individuals worldwide. Both Microsoft and Intel invested millions in L&H. However, accounting scandals
> Why is independence such an important requirement for auditors? How does independence relate to the agency relationship between owners and managers?
> It would be appropriate for the payroll department to be responsible for which of the following functions? a. Approval of employee time records. b. Preparation of periodic governmental reports as to employees’ earnings and withholding taxes. c. Maintenan
> An auditor who is testing IT controls in a payroll system would most likely use test data (discussed in Advanced Module 2 in Chapter 7) that contain conditions such as a. Deductions not authorized by employees. b. Overtime not approved by supervisors. c.
> The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the a. Human resource function from the controllership function. b. Administrative controls from the internal accounting controls. c. Authorization o
> For an appropriate segregation of duties, journalizing and posting summary payroll transactions should be assigned to a. The treasurer’s department. b. General accounting. c. Payroll accounting. d. The timekeeping department.
> In meeting the control objective of safeguarding of assets, which department should be responsible for the following? Distribution of Paychecks Custody of Unclaimed Paychecks a. Treasurer Treasurer b. Рayroll Treasurer C. Treasurer Payroll d. Payrol
> Which of the following procedures would most likely be considered a weakness in an entity’s internal controls over payroll? a. A voucher for the amount of the payroll is prepared in the general accounting department based on the payroll department’s payr
> During the year being audited, the Matthews Corporation changed from a system of recording time worked on time sheets to an IT payroll system in which employees record time in and out with magnetic cards. The IT system automatically updates all payroll r
> When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be a. Vendors with whom the entity has previously done business. b. Amounts recorded in the accounts payable
> Which of the following procedures is least likely to be performed before the balance sheet date? a. Test of internal control over cash. b. Confirmation of receivables. c. Search for unrecorded liabilities. d. Observation of inventory.
> Purchase cutoff procedures should be designed to test whether all inventory a. Purchased and received before the end of the year was paid for. b. Ordered before the end of the year was received. c. Purchased and received before the end of the year was re
> Ando Company, a diversified manufacturer, has six divisions that operate throughout the United States and Puerto Rico. Ando has historically allowed its divisions to operate autonomously. Ando does not have an internal audit department and corporate inte
> Which of the following audit procedures is best for identifying unrecorded trade accounts payable? a. Examination of unusual relationships between monthly accounts payable balances and recorded cash payments. b. Reconciliation of vendors’ statements to t
> To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all a. Vendor invoices. b. Purchase orders. c. Receiving reports. d.
> For effective internal control purposes, which of the following individuals should be responsible for mailing signed checks? a. Receptionist. b. Treasurer. c. Accounts payable clerk. d. Payroll clerk.
> In a properly designed purchasing process, the same employee most likely would match vendors’ invoices with receiving reports and a. Post the detailed accounts payable records. b. Re compute the calculations on vendors’ invoices. c. Reconcile the account
> Which of the following control activities is not usually performed in the accounts payable department? a. Matching the vendor’s invoice with the related receiving report. b. Approving vouchers for payment by having an authorized employee sign the voucher
> Internal control is strengthened when the quantity of merchandise ordered is omitted from the copy of the purchase order sent to the a. Department that initiated the requisition. b. Receiving department. c. Purchasing agent. d. Accounts payable departmen
> When goods are received, the receiving clerk should match the goods with a. The purchase order and the requisition form. b. The vendor invoice and the purchase order. c. The vendor shipping document and the purchase order. d. The vendor invoice and the v
> In a properly designed accounts payable system, a voucher is prepared after the invoice, purchase order, requisition, and receiving report are verified. The next step in the system is a. Cancelation of the supporting documents. b. Entry of the check amou
> In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity’s aging of receivables to support management’s financial statement assertion of a. Existence. b. Valuation and allocation. c. Completeness. d. Ri
> An auditor should perform alternative procedures to substantiate the existence of accounts receivable when a. No reply to a positive confirmation request is received. b. No reply to a negative confirmation request is received. c. The collectibility of th
> On February 14, 2013, former city comptroller and treasurer of Dixon, IL, Rita Crundwell was sentenced to 191̸2 years in prison for diverting $53 million from city funds for her own benefit. It appears that the fraud began in 1990 at a relatively small a
> The negative request form of accounts receivable confirmation is useful particularly when The Number of Consideration by the Recipient Is The Assessed Level of Control Risk Relating to Receivables Is Small Balances Is Low High Likely Unlikely Likely
> Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because a. A majority of recipients usually lack the willingness to respond objectively. b. Some recipients may report incorrect balances tha
> Which of the following is most likely to be detected by an auditor’s review of an entity’s sales cutoff? a. Unrecorded sales for the year. b. Lapping of year-end accounts receivable. c. Excessive sales discounts. d. Unauthorized goods returned for credit
> If the number of days’ sales in accounts receivable (365 days/receivables turnover) decreases significantly, which of the following assertions for accounts receivable most likely is violated? a. Existence or occurrence. b. Completeness. c. Rights and obl
> If accounts receivable turnover (credit sales/receivables) was 7.1 times last year compared to only 5.6 times in the current year, it is possible that there were a. Unrecorded credit sales in the current year. b. Unrecorded cash receipts last year. c. Mo
> Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor? a. Understating the sales journal. b. Overstating the accounts receivable control
> Smith Corporation has numerous customers. A customer file is maintained and includes a customer record with a name, an address, a credit limit, and an account balance. The auditor wishes to test this file to determine whether credit limits are being exce
> Which of the following internal controls would be most likely to deter the lapping of collections from customers? a. Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries. b. Authorization of
> Which of the following controls is most likely to help ensure that all credit revenue transactions of an entity are recorded? a. The billing department supervisor sends a copy of each approved sales order to the credit department for comparison to the cu
> For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not also approve a. Employee overtime wages. b. Credit granted to customers. c. Write-offs of customer accounts. d. Cash disbursements.
> Which of the following would most likely be an advantage in using classical variables sampling rather than monetary-unit sampling? a. An estimate of the standard deviation of the population’s recorded amounts is not required. b. The auditor rarely needs
> In classical variables sampling, which of the following must be known in order to estimate the appropriate sample size required to meet the auditor’s needs in a given situation? a. The qualitative aspects of misstatements. b. The total dollar amount of t
> Which of the following statements concerning the auditor’s use of statistical sampling is correct? a. An auditor needs to estimate the dollar amount of the standard deviation of the population in order to use classical variables sampling. b. An assumptio
> An auditor is performing substantive procedures of pricing and extensions of perpetual inventory balances consisting of a large number of items. Past experience indicates that there may be numerous pricing and extension errors. Which of the following sta
> How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details? Increase in Tolerable Misstatement Increase in Assessed Level of Control Risk Decrease sample size Decrease sam
> Which of the following statements concerning monetary-unit sampling is correct? a. The sampling distribution should approximate the normal distribution. b. Overstated units have a lower probability of sample selection than units that are understated. c.
> The risk of incorrect acceptance relates to the a. Effectiveness of the audit. b. Efficiency of the audit. c. Planning materiality. d. Allowable risk of tolerable misstatement.
> Considering each independently, a change in which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account? Expected Misstatement Tolerable Misstatement a. No No b. Yes Yes C.
> A number of factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size? a. Greater reliance on internal controls. b. Greater reliance
> Which of the following sampling methods would be used to estimate a numeric measurement of a population, such as a dollar value? a. Random sampling. b. Numeric sampling. c. Attribute sampling. d. Variable sampling.
> On September 2, 2010, the Securities & Exchange Commission brought an action against Sujata Sachdeva, vice president of finance, and Koss senior accountant and subordinate, Julie Mulvaney, who allegedly helped her cover up the fraudulent scheme. The SEC
> As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk lower than appropriate. The most likely explanation for this situation is that a. The deviation rates of both the auditor’s sample and the popul
> Assume an auditor is evaluating a statistical attribute sample of 50 items that resulted in three deviations. What should the auditor conclude if the tolerable deviation rate is 7 percent, the expected population deviation rate is 5 percent, and the allo
> Which of the following statements is correct concerning statistical sampling in tests of controls? a. Deviations from controls at a given rate usually result in misstatements at a higher rate. b. As the population size doubles, the sample size should als
> The following table depicts the possible outcomes for the auditor’s estimated computed upper deviation rate based on a sample relative to the auditor’s tolerable deviation rate (i.e., the computed upper deviation rate
> Based on the information above, the planned allowance for sampling risk was a. 5½ percent. b. 4½ percent. c. 3½ percent. d. 1 percent.
> In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because the a. Tolerable deviation rate (7 percent) was less than the computed upper deviation rate (8 percent). b. Expected populat
> Which of the following combinations results in the greatest decrease in sample size in an attribute sample for a test of controls? An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a sta
> When assessing the tolerable deviation rate, the auditor should consider that, while deviations from control procedures increase the risk of material misstatements, such deviations do not necessarily result in misstatements. This explains why a. A record
> Samples to test internal controls are intended to provide a basis for an auditor to conclude whether a. The controls are operating effectively. b. The financial statements are materially misstated. c. The risk of incorrect acceptance is too high. d. Mate
> An auditor’s flowchart of an entity’s accounting system is a diagrammatic representation that depicts the auditor’s a. Program for tests of controls. b. Understanding of the system. c. Understanding of the types of fraud that are probable, given the pres
> Mincin, CPA, is the auditor of the Raleigh Corporation. Mincin is considering the audit work to be performed in the accounts payable area for the current year’s engagement. The prior year’s working papers show that confirmation requests were mailed to 10
> An auditor anticipates assessing control risk at a low level in an IT environment. Under these circumstances, on which of the following controls would the auditor initially focus? a. Data capture controls. b. Application controls. c. Output controls. d.
> Significant deficiencies are matters that come to an auditor’s attention that should be communicated to an entity’s audit committee because they represent a. Disclosures of information that significantly contradict the auditor’s going concern assumption.
> SOC 1, Type 2 reports issued by the service organization’s auditor typically a. Provide reasonable assurance that their financial statements are free of material misstatements. b. Ensure that the entity will not have any misstatements in areas related to
> The highest-quality and most reliable audit evidence that segregation of duties is properly implemented is obtained by a. Inspection of documents prepared by a third party but which contain the initials of those applying entity controls. b. Observation b
> Which of the following audit techniques would most likely provide an auditor with the least assurance about the effectiveness of the operation of a control? a. Inquiry of entity personnel. b. Re performance of the control by the auditor. c. Observation o
> Assessing control risk below high involves all of the following except a. Identifying specific controls to rely on. b. Concluding that controls are ineffective. c. Performing tests of controls. d. Analyzing the achieved level of control risk after perfor
> Regardless of the assessed level of control risk, an auditor would perform some a. Tests of controls to determine the effectiveness of internal controls. b. Analytical procedures to verify the design of internal controls. c. Substantive procedures to res
> After obtaining an understanding of an entity’s internal control system, an auditor may set control risk at high for some assertions because the auditor a. Believes the internal controls are unlikely to be effective. b. Determines that the pertinent inte
> Monitoring is a major component of the COSO Internal Control— Integrated Framework. Which of the following is not correct in how the company can implement the monitoring component? a. Monitoring can be an ongoing process. b. Monitoring can be conducted a
> Internal control is a process designed to provide reasonable assurance regarding the achievement of which objective? a. Effectiveness and efficiency of operations. b. Reliability of financial reporting. c. Compliance with applicable laws and regulations.
> Friendly Furniture, Inc., a manufacturer of fine hardwood furniture, is a publicly held SEC-registered company with a December 31 year-end. During May, Friendly had a flood due to heavy rains at its major manufacturing facility that damaged about $525,00
> Which of the following statements about internal control is correct? a. A properly maintained internal control system reasonably ensures that collusion among employees cannot occur. b. The establishment and maintenance of internal control is an important
> The substantive analytical procedure known as trend analysis is best described by a. The comparison, across time or to a benchmark, of relationships between financial statement accounts or between an account and nonfinancial data. b. Development of a mod
> The primary objective of final analytical procedures is to a. Obtain evidence from details tested to corroborate particular assertions. b. Identify areas that represent specific risks relevant to the audit. c. Assist the auditor in assessing the validity
> An audit document that reflects the major components of an amount reported in the financial statements is referred to as a(n) a. Lead schedule. b. Supporting schedule. c. Audit control account. d. Working trial balance.
> The permanent file section of the working papers that is kept for each audit client most likely contains a. Review notes pertaining to questions and comments regarding the audit work performed. b. A schedule of time spent on the engagement by each indivi
> The current file of the auditor’s working papers should generally include a. A flowchart of the accounting system. b. Organization charts. c. A copy of the financial statements. d. Copies of bond and note indentures.
> The assurance bucket is filled with all of the following types of evidence except a. Test of controls. b. The audit report. c. Substantive analytical procedures. d. Tests of details.
> An auditor would be least likely to use confirmations in connection with the examination of a. Inventory held in a third-party warehouse. b. Refundable income taxes. c. Long-term debt. d. Stockholders’ equity.
> Audit evidence can come in different forms with different degrees of reliability. Which of the following is the most persuasive type of evidence? a. Bank statements obtained from the entity. b. Computations made by the auditor. c. Pre numbered entity sal
> Search the Internet (e.g., an entity’s website or sec.gov), and find an audit report for an entity’s audit of internal control over financial reporting that expresses an adverse opinion with respect to the effectiveness of internal control.
> Forestcrest Woolen Mills is a closely held North Carolina company that has existed since 1920. The company manufactures high-quality woolen cloth for men’s and women’s outerwear. Your firm has audited Forestcrest for 15 years. Five years ago, Forestcrest
> Search the Internet (e.g., an entity’s website or sec.gov), and find an audit report for an entity’s audit of internal control over financial reporting. Determine whether the entity used the combined or separate format. Specify whether the report identif
> Which of the following statements concerning audit evidence is correct? a. To be appropriate, audit evidence should be either persuasive or relevant but need not be both. b. The measure of the reliability of audit evidence lies in the auditor’s judgment.
> In testing the existence assertion for an asset, an auditor ordinarily works from the a. Financial statements to the potentially unrecorded items. b. Potentially unrecorded items to the financial statements. c. Accounting records to the supporting docume
> Which of the following procedures would an auditor most likely rely on to verify management’s assertion of completeness? a. Reviewing standard bank confirmations for indications of cash manipulations. b. Comparing a sample of shipping documents to relate
> Which of the following would an auditor most likely use in determining overall materiality when planning the audit? a. The anticipated sample size of the planned substantive tests. b. The entity’s income before taxes for the period-to-date (e.g., 6 month
> Tolerable misstatement is a. The amount of misstatement that management is willing to tolerate in the financial statements. b. Materiality for the balance sheet as a whole. c. Materiality for the income statement as a whole. d. Materiality used to establ
> The engagement partner and manager review the work of engagement team members to evaluate which of the following? a. The work was performed and documented. b. The objectives of the procedures were achieved. c. The results of the work support the conclusi
