Chapter 10 Cash
12) By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally be able to detect: 12) ______ A) An unrecorded deposit made at the bank at the end of the month. B) A second payment of an account payable which had already been paid in full two months earlier. C) An embezzlement of cash receipts that occurred before they had been deposited into the bank was not recorded in the cash receipts journal. D) A receivable collected that had previously been written off as uncollectible.
A
25) Which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees? 25) ______ A) A bank lockbox system. B) Approval of all disbursements by an individual independent of cash receipts. C) Monthly bank cutoff statements. D) Prenumbered remittance advices.
A
11) An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to: 11) ______ A) Verify the cash balance reported on the bank confirmation inquiry form. B) Verify reconciling items on the client's bank reconciliation. C) Detect lapping. D) Detect kiting.
B
13) Kiting would least likely be detected by: 13) ______ A) Analyzing details of large cash deposits around year-end. B) Comparing customer remittance advices with recorded disbursements in the cash disbursements journal. C) Preparing a four-column bank reconciliation for all major cash accounts. D) Preparing a schedule of interbank transfers by using the client's records and bank statements around year-end.
B
16) By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally not be able to detect: 16) ______ A) An unrecorded deposit made at the bank at the end of the month. B) A second payment of an account payable which had already been paid in full two months earlier. C) An unrecorded check cashed during that month. D) A bank charge during the month not recorded on the books.
B
21) Which of the following statements is not correct? 21) ______ A) Cash is important to the audit process because of its vulnerability to misappropriation, despite the fact that the balance at the balance sheet date may be immaterial. B) Payroll cash account balances kept on an imprest basis are more easily controlled than others not so kept. C) Confirmation of cash should only be performed as of the balance sheet date because the auditor expresses an opinion as of that date. D) Reviewing interbank transfers is important to the auditor because of the possibility that the client may be engaged in kiting.
C
30) Anderson embezzled $20,000 from her company's account in Bank X. At year-end, she hid the shortage by making a deposit on December 31 in Bank X, drawn on Bank Y. She has not recorded the transaction on the books. Which of the following is most likely to be effective in detecting this fraud? 30) ______ A) Bank confirmation. B) Bank transfer schedule prepared using only the cash receipts and cash disbursements journals. C) Comparison of bank cutoff statement to the cash receipts and disbursements records. D) Receivable confirmation.
C
32) Which of the following is not a control over cash disbursements? 32) ______ A) Disbursements should be made by check. B) A check protecting machine should be used. C) Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse. D) Voided checks should be defaced and filed with paid checks.
C
20) Which of the following is correct concerning "window dressing" for cash? 20) ______ A) A segregation of duties within the cash function effectively eliminates its occurrence. B) It generally involves manipulation of inventory. C) It is illegal, and an audit is designed to provide reasonable assurance of its detection. D) It may increase but not falsify cash position.
D
24) Which of the following is not a control that generally is established over cash transactions? 24) ______ A) Separating cash handling from recordkeeping. B) Centralizing the receipt of cash. C) Depositing each day's receipts intact. D) Obtaining a receipt for every disbursement.
D
1) The auditors should always count small petty cash funds at year-end to make sure that balance is not overstated on the financial statements. 1) ______ ⊚ true ⊚ false
False
2) Control over the receipt of cash sales is best achieved when two or more employees participate in each transaction. 2) ______ ⊚ true ⊚ false
True
18) An auditor may obtain information on the December 31 month-end balance per bank in which of the following? A) Option A B) Option B C) Option C D) Option D
A
27) By preparing a four-column bank reconciliation ("proof of cash") for the last month of the year, an auditor will generally be able to detect: 27) ______ A) An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation. B) A cash sale whichwas not recorded on the books and wasstolen by a bookkeeper. C) An embezzlement of unrecorded cash receipts on receivables before they had been deposited into the bank. D) A credit sale which has been recorded twice in the sales journal.
A
31) Which of the following is not a universal rule for achieving internal control over cash? 31) ______ A) Separate recordkeeping from accounting for cash to the extent possible. B) Deposit each day's cash receipts intact. C) Separate cash handling from recordkeeping. D) Have monthly bank reconciliations prepared by employees not responsible for the issuance of checks.
A
33) Which of the following is the best audit procedure for the detection of lapping? 33) ______ A) Comparison of postings of cash receipts to accounts with the details of cash deposits. B) Confirmation of the cash balance. C) Reconciliation of the cash account balances. D) Preparing a proof of cash.
A
34) Which of the following manipulations of cash transactions would overstate the cash balance on the financial statements? 34) ______ A) Understatement of outstanding checks. B) Overstatement of outstanding checks. C) Understatement of deposits in transit. D) Overstatement of bank services charges.
A
29) Anderson embezzled $20,000 from her company's account in Bank X. At year-end, she hid the shortage by making a deposit on December 31 in Bank X, drawn on Bank Y. She has not recorded the transaction on the books. This is an example of: 29) ______ A) Lapping. B) Kiting. C) Effective cash management. D) Related party transactions.
B
17) 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? 17) ______ A) Prepare a bank transfer schedule using the client's cash receipts and cash disbursements journal. B) Receive a cutoff bank statement directly from the client's bank. C) Prepare a four column bank reconciliation using the year-end bank statement. D) Confirm the year-end balance using the standard form to confirm account balance information with financial institutions.
B
19) An auditor may obtain information on the December 31 month-end balance per bank in which of the following? A) Option A B) Option B C) Option C D) Option D
B
22) The auditors use a bank cutoff statement to compare: 22) ______ A) Deposits in transit on the year-end cash general ledger account to deposits in the cash receipts journal. B) Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation. C) Deposits listed on the cutoff statement to disbursements in the cash disbursements journal. D) Checks dated subsequent to year-end to the outstanding checks listed on the year-end bank statement.
B
23) A practical and effective audit procedure for the detection of lapping is: 23) ______ A) Preparing an interbank transfer schedule. B) Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank. C) Tracing recorded cash receipts to postings in customers' ledger cards. D) Preparing a proof of cash.
B
26) Which of the following is not a control that generally is established over cash receipts? 26) ______ A) To prevent abstraction of cash, a control listing of cash receipts should be prepared by mailroom personnel. B) To ensure accurate posting, the accounts receivable clerk should post the customers' receipts from customers' checks. C) To ensure accuracy of the accounts receivable records, the records should be reconciled monthly to the accounts receivable controlling account. D) To prevent theft of cash, receipts should be deposited daily.
B
28) In November, two 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 interest revenue. The most effective method for detecting this type of error is: 28) ______ A) Foot the cash receipts journal for November. B) Send a bank confirmation as of year-end. C) Prepare a bank reconciliation as of year-end. D) Prepare a bank transfer schedule as of year-end.
B
14) 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/XX totals. All of those cash receipts were due to cash sales. Assuming the client uses a periodic inventory system with a 12/31/XX count of the physical inventory, which of the following is most likely to be true relating to the year XX financial statements? 14) ______ A) Sales are understated. B) Accounts receivable are understated. C) Inventory is overstated. D) Net income is overstated.
D
15) 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? 15) ______ A) Select and examine receiving reports and test whether the related canceled checks are dated no earlier than the receiving reports. B) Select and examine receiving reports and test whether the related canceled checks are dated no later than the receiving reports. C) Select and examine canceled checks and test whether the related receiving reports are dated no earlier than the checks. D) Select and examine canceled checks and test whether the related receiving reports are dated no later than the checks.
D
35) Which of the following is not confirmed on the standard confirmation form used for cash balances at financial institutions? 35) ______ A) Cash checking account balances. B) Cash savings account balances. C) Loans payable. D) Securities held for the client by the financial institution.
D
10) For investments in securities accounted for by the equity method, the auditors are primarily concerned with verifying the fair value of the investments. 10) ______ ⊚ true ⊚ false
False
3) Mailroom personnel of a company should prepare a control listing of incoming cash receipts and deposit them intact daily. 3) ______ ⊚ true ⊚ false
False
4) Signed checks should be returned to the cash disbursements clerk for mailing. 4) ______ ⊚ true ⊚ false
False
6) Confirmations for cash balances should be mailed only to the financial institutions with which the client has a cash balance at year-end. 6) ______ ⊚ true ⊚ false
False
7) A proof of cash is an audit procedure that is performed on almost every engagement. 7) ______ ⊚ true ⊚ false
False
8) A compensating balance agreement always requires that cash be reclassified as a noncurrent asset. 8) ______ ⊚ true ⊚ false
False
5) Lapping of accounts receivable by an employee can occur when there is adequate segregation of duties with respect to cash disbursements. 5) ______ ⊚ true ⊚ false
True
9) Verification of cash and other liquid assets on the same date may prevent substitution of one form of asset for another. 9) ______ ⊚ true ⊚ false
True