Chapter 10 - Cash and Financial Investments

Check 21 Act

under the _____, any financial institution in the check clearing process may destroy paper checks and create a substitute check for processing

proof of cash

An audit procedure that reconciles the bank's record of cash activity with the client's accounting records for a test period (it proves that everything in the bank statement is recorded in the general ledger)

Yes. 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.

Do all negotiable assets, such as cash funds, securities, and other investments, notes receivable, and warehouse receipts need to be verified at one time?

compare details of bank deposit slips with receipts recorded in the accounting records.

How might auditors detect lapping?

compensating balance

Specified minimum amount that a general account must maintain ______

1. existence and occurrence. 2. accuracy. 3. completeness. 4. cutoff. 5. rights. 6. presentation and disclosure.

Substantive procedures in the audit of cash are:

1. Consider inherent risks. (environment) 2. Understand internal controls of cash. 3. Assess the risks of material misstatement of cash and design test of controls and substantive procedures.

The auditor's objectives in the audit of cash and cash transactions are to:

True. (see p.401)

True or False: Auditors may select a sample of the reconciliations performed during the year, noting who performed them, and re-perform the reconciliation process by reference to accounting records, bank statements, and canceled checks

True

True or False: In companies in which the cashier has access to the general accounting records, shortages created in lapping have sometimes been transferred to inventory accounts or elsewhere in the records for temporary concealment.

True

True or False: using substitute checks makes it virtually impossible for a client to kite checks

internal control

_____ detect most errors that happen in cash and financial investment accounts

voucher

a document authorizing a cash disbursement and usually procedures space for employees to initial after they have performed approval functions

brokers' advices

a notification sent by a stockbrokerage firm to a customer reporting the terms of a purchase or sale of securities

lockbox

a post office box controlled by a company's bank at which cash remittances from customers are received. the bank picks up the remittances, immediately credits the cash to the company's bank account, and forwards the remittance advices to the company

dividend record books

a reference book published monthly by investment advisory services reporting detailed information concerning all listed and many unlisted securities: includes dividend dates and amounts, current prices of securities and other condensed financial data

electronic data interchange (EDI) systems

a reference network between companies that allows the interchange of data from one company's computer to the other's

voucher register

a special journal used to record the liabilities for payment originating in a voucher system

window dressing

action taking by the client shortly before the balance sheet date to improve the financial picture presented in the financial statements

1. centralization of disbursement authority (requiring signatures). 2. permanent record of disbursements (remittance advice). 3. reduction in amount of cash kept on hand.

advantages of requiring disbursements by checks

overstatement

are most misstatements due to asset overstatement or understatement?

flowchart or written description

auditors' working papers for cash typically include a _____ or _____ of controls

brokers or banks for safekeeping

client-owned securities and other financial instruments will often be in the hands of:

standard confirmation form

designed to provide corroborating evidence, only, about the client's account balances and outstanding loans

derivative

financial instruments that "derive" their value from other financial instruments, underlying assets or indexes. Examples are options, forward contracts and futures contracts.

cutoff bank statement

form that provides assurance that the amount of cash shown on the balance sheet was not overstated by omission of one or more checks from the list of checks outstanding

weakened

if checks remain outstanding for long periods, internal control over cash disbursement is ____

simultaneously from the same source documents

in a computer based system, journal and ledger entries are entered _____

journal; ledger

in a manual system, information on source documents is entered first in a _____ and then the information is summarized and posted into the _____.

1. verify arithmetical accuracy. 2. comparing balances to bank statement and ledger account. 3. investigate the reconciling items.

inspection of a reconciliation prepared by the client will include: (3)

business risk

is management more concerned with inherent or business risk?

lapping

is the concealment of a cash shortage by delaying the recording of cash receipts

kiting

manipulations causing an amount of cash to be included simultaneously in the balance of two or more bank accounts. based on the floating period

joint control

means that neither of the two custodians may have access to the securities except in the presence of the other

walk-through

means to trace a transaction or a few transactions through each step of the system to determine that transactions actually are being processed in the manner indicated by the flowchart

voucher system

one method of achieving strong internal control over cash disbursements by providing assurance that all disbursements are properly authorized and reviewed before the check is issued.

safekeeping agent

segregation of the functions of custody and record keeping is achieved by the use of an independent _____

1. analyze cash balances and reconcile those balances to the general ledger. 2. verify amounts deposited by sending "Standard Confirmation Forms" to financial institutions. 3. reconcile bank accounts. 4. obtain cutoff bank statement (of past seven days subsequent to balance sheet date). 5. count and list cash on hand. 6. verify the cutoff of cash receipts and disbursements. 7. analyze bank transfers of the last week of the audit year and first week of the following year (to detect kiting). 8. investigate checks that are unusual. 9. evaluate proper financial statement presentation and disclosure.

steps of the substantive procedures for cash transactions and balances.

1. obtain or prepare analyses of the investment accounts and other related accounts. 2. inspect securities on hand and review agreements underlying derivatives. 3. confirm securities and derivative instruments. 4. vouch selected purchase and sales of financial investments. 5. review investment committee minutes and reports. 6. perform analytical procedures. 7. make independent computations of revenue from securities. 8. inspect documentation of management's intent to classify derivative transactions as hedging activities. 9. evaluate the method of accounting for investments. 10. test the valuation methods. 11. evaluate financial statement presentation and disclosure.

substantive procedures of financial investments

detail

the _____ of cash receipts refers to a listing of the amount of each individual check and the total amount of currency composing the day's receipts

cutoff bank statement

the information from this form is used to test the accuracy of the year-end reconciliation of the company's bank accounts

marketable stocks and bonds because they are found more frequently and usually are of greater dollar value than other kinds of investment holdings

the most important group of financial investments, to the auditors, are:

float period

the time necessary for a check deposited in one bank to clear the bank on which it was drawn

increases

the use of derivatives almost always [increases or decreases] the risk of material misstatement of the financial statements

Check 21 Act (Check Clearing for the 21st Century Act)

this act allows financial institutions to create and process electronic (substitute checks" in place of customer written hard-copy checks

standard confirmation form

this form is used to corroborate the EXISTENCE of recorded information but provides little evidence regarding the COMPLETENESS of recorded amounts

control listing

this listing shows the amount received from each customer and identifies the customer by name and account number

(1) mailroom listings and register tapes to the (2) detail of the daily deposit tickets

to provide assurance that cash receipts have been deposited intact, the auditors should compare what?

custodian

whenever auditors make a cash count, they should insist that the _____ of the funds be present to avoid the possibility of an employee trying to explain a cash shortage by claiming that the funds were intact when turned over to the auditors

mailroom

where an employee endorses the checks for "deposit only" to the company's account and prepares a control listing of the income cash receipts

True

True or False: testing cash disbursements involves tracing selected items back through the cash disbursements journal to original source documents, including vouchers, purchase orders, receiving reports, invoices, and paid checks

electronic point-of-sale systems

_____ provide strong control over cash sales and can be programmed to perform many control functions

lapping

______ is most easily carried when an employee who receives collections from customers is responsible for the posting of customers' accounts

General accounts

_______ are checking accounts similar in nature to those maintained by individuals

cash equivalents

_________ include money market funds, certificates of deposit, savings certificates, and other similar types of deposits

cutoff bank statement

a bank statement covering a specified number of business days after the client's balance sheet date

voided checks

a check that is not negotiable and usually results from an error in preparing the check

electronic funds transfer (EFT) systems

a computer system that transmits and processes funds related cash disbursement and receipt transactions

1. Assess inherent risks including fraud risks 2. Obtain understanding of internal control over investments. 3. Assess the risks of material statements of investments and design further audit procedures

The auditor's objectives in the audit of financial investments are?

canceled checks

a check the amount of which has been subtracted from the depositor's account and has been marked as "canceled" by a financial institution. It is endorsed by the payee and paid by the drawee financial institution

1. written description. 2. flow charts or questionnaires

in obtaining an understanding internal controls over cash, what would be used for a. 1. small company. 2. large company.

p.407 - it is good practice for the client to eliminate long-outstanding checks of this nature by an entry debiting the cash accounting back and then crediting unclaimed wages or another special liability account

in order to increase the internal control over cash disbursements of checks that are remaining outstanding for long periods, what should be implemented as good practice?

operations control group

in recording cash receipts, the manual follow-up procedures on exception reports (from computer program when cash receipts are entered into the computer) and the reconciliations of control totals are performed by the _____

voucher system

this usually replaces a purchase journal

brokers' advices and cash records

to determine that investments purchased and sold during the period are recorded properly, the auditors couch a sample of transactions by reference to: