A production manager for a moderate-size manufacturing company began ordering

excessive raw materials and had them delivered to a wholesale company he runs as a
side business. He falsified receiving documents and approved the invoices for payment.
Which of the following audit procedures would most likely detect this fraud?
Take a sample of cash disbursements; compare purchase orders, receiving reports, invoices,
and check copies.
Take a sample and confirm the amount purchased, purchase price, and date of shipment
with the vendors.
Observe the receiving dock and count material received; compare your counts to
receiving reports completed by receiving personnel.
Prepare analytical tests, comparing production, material purchased, and raw material
inventory levels, and investigate differences.

Incorrect. Because documents are falsified, all supporting documents would

match for each cash disbursement.
Incorrect. Vendors would confirm all transactions, because all have been made.
Incorrect. Fraudulent orders are shipped to another location; the receiving
dock procedures would appear correct.
Correct. Because materials are shipped and used in another business,
the analytic comparisons would show an unexplained increase in materials used.

A major focus of a risk committee is on which of the following?

Risk culture and risk profiles
Risk maturity and risk
sensitivity
Risk attitudes and risk
behaviors
Risk appetite and risk
tolerance
Incorrect. This is a minor focus of the risk committee.
Incorrect. This is a minor focus of the risk committee.
Incorrect. This is a minor focus of the risk committee.
Correct. The risk appetite of an organization is the total amount or level of risk that
it is willing to accept. Risk tolerance is the maximum amount or rate of risk that an
organization is willing to accept before changing its mind. The major focus of the
 risk committee must be the level of risk and the amount of risk.
Auditors have been advised to look at red flags to determine whether management is
involved in a fraud. Which of the following does not represent a difficulty in using the red
flags as fraud indicators?
Many common red flags are also associated with situations where no fraud exists.
Some red flags are difficult to quantify or to evaluate.
Red flag information is not gathered as a normal part of an audit engagement.
The red flags literature is not well enough established to have a positive impact on
auditing.
Incorrect. This is a difficulty in using red flags. Red flags are developed
through correlation analysis, not necessarily causation analysis.
Incorrect. Many red flags, such as management's attitude, are difficult to
quantify.
Incorrect. When performing an audit, internal auditors should be alert to the
possibility of intentional wrongdoing, errors, omissions, inefficiency, waste,
ineffectiveness, and conflicts of interest.
Correct. This is not a difficulty. The red flags literature is well established.
Although red flags will be refined in the future as research is done, this does
not preclude their effective use.