ACC 415 - Chapter 10

Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting?

Prepare a schedule of bank transfers

A company's decision to use the fair value option for valuation of marketable securities is most likely to affects which of the following assertions the most?

Presentation and Disclosure.

Which procedure is an auditor most likely to use to detect a check outstanding at year-end that was not recorded as outstanding on the year-end bank reconciliation?

Receive a cutoff statement directly from the client's bank.

An auditor may obtain information on 12/31 month-end balance per bank in which of the following?

Standard Confirmation Form - yes January 1-10 Cutoff Statement - yes

Cash audit objectives

Substantiate the existence of recorded cash Verify the cutoff and accuracy of cash transactions Determine that the client has rights to recorded cash Determine that the disclosure of cash including restricted funds, are appropriate

Control over cash receipts is best achieved when

Two or more employees participate in each transaction.

Which of the following manipulations of cash transactions would overstate the cash balance on the financial statements?

Understatement of outstanding checks

Cash equivalents

Frequently combined with cash for presentation in the financial statements. They are short-term, highly liquid investments that are readily convertible to cash.

to gather evidence regarding the balance per bank in the bank reconciliation, an auditor could examine all of the following except:

General ledger

For the purpose of an audit of financial statements, electronic confirmation of cash balances:

Is acceptable when properly controlled.

Which of the following is correct relating to kiting?

It is more difficult to accomplish in an electronic environment as contrasted to a non-electric environment.

Bank cutoff statement

Obtained directly from the bank and is prepared ten business days after the balance sheet date.

Which of the following is not a control that generally is established over cash transactions?

Obtaining a receipt for every disbursement.

Proof of cash

reconciles the bank's beginning balance, cash deposits, cleared checks, and ending balance with the client's records

An auditor may obtain information on the 12/31 month-end balance per bank in which of the following?

12/31 Bank Statement - Yes Schedule of Bank (cash) Transfers - No

Which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees?

A bank lockbox system

Which of the following controls would be most likely to reduce the risk of diversion of customer receipts by the client's employees?

A bank lockbox system

On the proof of cash, a collection by the bank on the last day of the prior month would result in:

A deduction from the Prior month balance and an addition to the current month receipts.

The Parmalat fraud case involved:

A fraudulent cash confirmation

By preparing a four-column reconciliation at year-end, an auditor will generally not be able to detect:

A second payment of an account payable which had already been paid in full two months earlier.

The auditors should insist that a representative of the client be present during the physical examination of securities in order to:

Acknowledge the receipt of securities returned.

On the proof of cash, a deposit in transit on the last day of the prior month would result in:

An addition to the prior month balance and a deduction from the current month receipts.

What is kiting?

An irregularity whereby an overstatement of cash is created by a cash transfer between bank accounts. The deposit is recorded in cash receipts but disbursement is not recorded in cash disbursements.

By preparing a four-column reconciliation for the last month of the year, an auditor will generally be able to detect:

An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation.

By preparing a four-column bank reconciliation at year-end, an auditor will generally be able to detect:

An unrecorded deposit made at the bank at the end of the month.

Which of the following is the best audit procedure for the detection of lapping?

Comparison of postings of cash receipts to accounts with the details of cash deposits.

Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department?

Canceling supporting documentation after payment.

Banks may process electronic "substitute checks" in place of customer written hard copy checks due to

Check clearing for the 21st Century Act.

The auditors use a bank cutoff statement to compare

Check dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.

On receiving a bank cutoff statement, the auditor should trace

Checks dated prior to year end to the outstanding checks listed on the year-end bank reconciliation.

On receiving the bank cutoff statement, the auditor should trace:

Checks dated prior to year end to the outstanding checks listed on the year-end bank reconciliation.

Kiting would least likely be detected by:

Comparing customer remittance advises with recorded disbursements in the cash disbursements journal.

A practical and effective audit procedure for the detection of lapping is

Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank.

Jones was engaged to audit the financial statements of Gamma Corporation for the year ended June 30. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income?

Comparing recorded dividends with a standard financial reporting service's record of dividends.

Jones embezzled $10,000 from his company's account in Bank A. At year-end he hid the shortage by making a deposit on 12/31 in Bank A, drawn on Bank B. He has not recorded the transaction on the books. Which of the following is most likely to be effective in detecting the fraud?

Comparison of bank cutoff statement to the cash receipts and disbursements records.

Which of the following statements is not correct?

Confirmation of cash should only be prepared as of the balance statement date because the auditor expresses an opinion as of that date.

To audit a cash account the auditor should obtain:

Copy of bank reconciliation Bank confirmation Cutoff Bank Statement

The auditor's count of the client's cash should be coordinated to coincide with the

Count of investment securities.

Cash reported on the financial statements represents

Currency on hand Cash on deposit in bank accounts Including certificates of deposit, time deposits, and savings accounts.

A proof of cash used by an auditor:

Determines whether any unauthorized disbursements or unrecorded deposits were made for the given time period

When a client engages in transactions involving derivatives, the auditor should:

Develop an understanding of the economic substance of each derivative.

Which of the following is not a control over cash disbursements?

Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse.

In a manufacturing company which one of the following audit procedures would give the least assurance of the existence of the assets in the general ledger balance of investment in stocks and bonds at the audit date?

Examination of paid checks issued in payment of securities purchased.

What are the auditor's primary concerns with regard to cash?

Existence Completeness Physical Control Presentation and disclosure

Jones embezzled $10,000 from his company's account in Bank A. At year-end he hid the shortage by making a deposit on 12/31 in Bank A, drawn on Bank B. He has not recorded the transaction on the books. This is an example of:

Kiting

Which of the following is correct concerning "window dressing" for cash?

Many forms of it require no action by the auditors.

Verification of cash and other liquid assets on the same date

May prevent substitution of one form of asset for another.

Sources of cash equivalents

Money market funds Certificates of deposit Savings certificates.

Your client left the cash receipts journal open after year-end for an extra day and included January 1 cash receipts in the 12/31 totals. All of those cash receipts were due to cash sales. Assuming the client uses a periodic inventory system with a 12/31 count of the physical inventory, which of the following is most likely to be true relating to the year end financial statements?

Net income is overstated

The auditor's compare information on canceled checks with information contained in cash disbursement journal. The objective of this test is to determine that:

No discrepancies exist between the data on the checks and the data in the journal.

Internal control over marketable securities is enhanced when:

Securities are held under joint control of two or more officials.

Which of the following is not confirmed on the standard form used for cash balances at financial institutions?

Securities held for the client by the financial institution.

An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the best evidence on operating effectiveness?

Select and examine canceled checks and test whether the related receiving reports are dated no later than the checks

In October, three months before year-end, the bookkeeper erroneously recorded the receipt of a one year bank loan with a debit to cash and a credit to miscellaneous revenue. The most effective method for detecting this type of error is:

Send a bank confirmation as of year-end.

Which of the following is not a universal rule for achieving internal control over cash?

Separate record-keeping from accounting for cash to the extent possible.

Properly designed internal control will permit the same employee to:

Sign checks, and also cancel supporting documents.

Which of the following would the auditor consider to be an incompatible operation if the cashier received remittances from the mail room?

The cashier posts the receipts to the accounts receivable subsidiary ledger.

An auditor's analytical procedures have revealed that the accounts receivable of a client have doubled since the end of the prior year. However, the allowance for doubtful accounts, as a % of accounts receivable remained the same. Which of the following client explanations most likely would satisfy the auditor?

The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

The standard form to confirm account balances with financial institutions includes information on all of the following except:

The principal amount paid on a direct liability.

As one of the year-end audit procedures, the auditor instructed the client's personnel to prepare a confirmation request for the bank account that had been closed during the year. After the client's treasurer has signed the request, it was mailed by the assistant treasurer. What is the major flaw in this audit procedure?

The request was mailed by the assistant treasurer.

Which of the following is not a control generally established over cash receipts?

To insure accurate posting, the accounts receivable clerk should post the customer's receipts from customer's checks.

An auditor compares annual revenues and expenses with similar amounts from prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that:

Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.

What will not be detected by a bank reconciliation?

Unrecorded checks not cleared by bank Unrecorded deposits not cleared by bank Checks written for incorrect amounts.

What will a bank reconciliation help the auditor to determine?

Whether all client cash receipts have been deposited. Whether all bank deposits have been recorded in client cash receipts records. Whether all cash payments have been paid by the bank. Whether all bank payments have been recorded in client cash payments records.

Sources of cash

general checking account payroll checking accounts petty cash savings accounts