When auditing with "fraud awareness," auditors should especially notice and follow up employee activities under which of these conditions?
A) The company always estimates the inventory but never takes a complete physical count.
B) The petty cash box is always locked in the desk of the custodian.
C) Management has published a company code of ethics and sends frequent communication newsletters about it.
D) The board of directors reviews and approves all investment transactions.

Question

Quizplus · Accepted Answer

When a company always estimates inventory, there is a higher risk of inventory-related fraud, such as overstating inventory. Thus, auditors should pay close attention and perform additional procedures to ensure the accuracy of the inventory valuation.

Answer: C
 A published code of ethics and frequent communication newsletters indicate that the company is actively trying to promote an ethical culture, which can reduce the chances of fraud. Thus, auditors should acknowledge this positive indication and focus on other areas where fraud might be more likely to occur.

Answer: None of the Above
 Neither locking the petty cash box nor the board of directors reviewing investment transactions are particularly indicative of fraud risk. They may be part of good internal controls, but they do not necessarily increase or decrease the likelihood of fraud.

When Auditing with "Fraud Awareness," Auditors Should Especially Notice and Follow