Auditing Chap 10

Reconciliation of the bank account should not be performed by an individual who also

(Processes cash disbursements.) Has custody of securities. Prepares the cash budget. Reviews inventory reports. Explanation: The individual who reconciles the bank account should not be involved in the processing of cash receipts or disbursements. Therefore, answer (Processes cash disbursements.) is correct. All of the other functions are compatible with reconciliation responsibilities.

Substantive Procedures: 1. Prepare a bank transfer schedule. 2. Prepare a four-column proof of cash. 3. Use a standard confirmation form to confirm account balance information. 4. Obtain bank cutoff statements. 5. Search for large checks to directors, officers, and employees.

A Primary Objective of the Procedure is to: 1. Detect kiting. 2. Reconcile cash receipt and disbursement totals between company records and bank records. 3.Verify year-end cash and liability balance information. 4.Verify reconciling items on the year-end bank reconciliation. 5. Identify related party transactions.

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

A bank lockbox system. Explanation: A bank lockbox is a post office box controlled by a company's bank at which cash remittances from customers are received. With such a system the bank collects the remittances, immediately credits the cash to the company's bank account, and forwards the remittance advices to the company. Use of a bank lockbox system makes it extremely difficult for employees to divert cash receipts since those cash receipts are sent directly to the post office box controlled by the bank.

The auditors who physically examine securities should insist that a client representative be present in order to:

Acknowledge the receipt of securities returned. Explanation : Because of the liquidity of many securities, the auditor should insist that a client representative be present in order to acknowledge the receipt of securities returned. In the event of subsequent "disappearance" of a security the auditor will not be a suspect.

Hall Company had large amounts of funds to invest on a temporary basis. The board of directors decided to purchase securities and derivatives and assigned the future purchase and sale decisions to a responsible financial executive. The best person or persons to make periodic reviews of the investment activity would be:

An investment committee of the board of directors. Explanation: The investment committee of the board of directors is not involved in the routine of making buy and sell decisions and can therefore review the transactions objectively. On the other hand, the chief operating officer, the controller, and the treasurer may be closely associated on a daily basis with the financial executive responsible for the investment decisions.

You have been assigned to the year-end audit of a financial institution and are planning the timing of audit procedures relating to cash. You decide that it would be preferable to:

Coordinate the count of cash with the count of marketable securities and other negotiable assets. Explanation : Unless all negotiable assets are verified at one time, an opportunity exists for a dishonest officer or employee to conceal a shortage by transferring it from one asset category to another a step ahead of the auditors. For example, marketable securities could be pledged as collateral for a loan.

The auditors suspect that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditors most likely would compare the:

Details of bank deposit slips with details of credits to customer accounts. Explanation : Lapping will result in a delay in the recording of specific remittance credits in the financial records, but the checks will be deposited in the bank as they are received. Therefore, a comparison of the checks deposited to the credits to customer accounts will likely uncover the scheme.

Which of the following procedures would the auditors most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet?

Observe the consistency of the employees' use of cash registers and tapes.

In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also:

Is responsible for mailing the checks. Explanation : When checks are signed they should not be returned to the accounting department

In order to guard against the misappropriation of company-owned marketable securities, which of the following is the best course of action that can be taken by a company with a large portfolio of marketable securities?

Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent. Explanation : Having the securities held in safekeeping by a bank or stockbroker provides strong internal control because they are not available to employees responsible for maintaining the accounting records of the securities. Thus the separation of the custody of securities from the accounting function is complete.

To provide assurance that each voucher is submitted and paid only once, the auditors most likely would examine a sample of paid vouchers and determine whether each voucher is:

Stamped "paid" by the check signer. Explanation : The auditors will determine whether each voucher is stamped "paid" by the check signer to avoid a situation in which supporting documents are used a second time to elicit a second payment.

The best way to verify the amounts of dividend revenue received during the year is:

Verification by reference to dividend record books. Explanation : Comparing the recorded amount of dividend revenue with dividend record books (published by investment advisory services) provides evidence of the amount of dividend revenue that should have been received during the year. It is virtually impossible to confirm the receipt of dividends with the company paying those dividends.

To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except:

Year-end bank statement. Cutoff bank statement. (General ledger.) Bank confirmation. Explanation : The general ledger will not have information on the balance per bank. The cutoff bank statement, year-end bank statement and bank confirmation will all include information on the balance per bank.