Chapter 16 - Audit
Which of the following is a test of transactions for cash receipts to provide evidence regarding authorization? Examine a sample of remittance advices for proper account classification. For a sample of weeks, foot the cash receipts journal and agree posting to the general ledger. For a sample of days, example the signature on the deposit slip and check endorsements. Trace a sample of remittance advices to the cash receipts journal and, if necessary, to deposit slips.
For a sample of days, example the signature on the deposit slip and check endorsements.
An employee prepares a check on one account before year end but does not record it as a disbursement. The same check is deposited and recorded as a cash receipt in a second account before year end. The employee is engaged in ________
kiting
After obtaining sufficient appropriate evidence though _____ tests, the auditor then evaluates whether management's measures and disclosures are in accordance with GAAP.
substantive
Select all that apply Reasons the audit testing of a payroll or branch account is less extensive than testing for the general account include ______. all cash disbursement have been recorded in the entity's cash disbursements journal these types of accounts generally contain a minimal balance the types of disbursements from the account are homogeneous
these types of accounts generally contain a minimal balance the types of disbursements from the account are homogeneous
When the model used by management is complex, the markets for the assets or liabilities are not currently active, or a high degree of estimation uncertainty exists the auditor often engages a(n) ______ ______ to help obtain audit evidence regarding fair value
valuation specialist
Select all that apply Which of the following are affected if securities are misclassified among held-to-maturity, trading, and available-for-sale? Balance sheet Income statement Statement of cash flows
Balance sheet Income statement
Held-to-maturity securities are ______ assets. classified as either current or noncurrent always classified as current always classified as noncurrent always classified as other
classified as either current or noncurrent
Comparing current-year interest and dividend income with the reported income for prior years and with the expected return on investment is a ______. substantive analytical procedure test of controls test of details of balances
substantive analytical procedure
FASB ASC Topic 820 provides a hierarchy of levels that distinguish the types of inputs used to value different types of assets and liabilities are their appropriate fair values. A valuation based on directly or indirectly observable market data for similar or comparable assets or liabilities best describes Level ______. 3 2 1
2
Which of the following is not one of the four columns used on a proof of cash? Balance of cash per general ledger. Reconciliation of cash disbursed through the bank account with the cash disbursement recorded in the cash disbursements journal. Reconciliation of cash deposited in the bank with the cash receipts recorded in the cash receipts journal. Bank reconciliation for the beginning of the period.
Balance of cash per general ledger.
Which of the following is a test of transactions for cash receipts to provide evidence regarding accuracy? For a sample of weeks, foot the cash receipts journal and agree posting to the general ledger. For a sample of days, example the signature on the deposit slip and check endorsements. Examine a sample of remittance advices for proper account classification. Trace a sample of remittance advices to the cash receipts journal and, if necessary, to deposit slips.
For a sample of weeks, foot the cash receipts journal and agree posting to the general ledger.
Select all that apply Which of the following statements are correct? Internal auditors often document and perform tests of controls over petty cash. External auditors seldom perform substantive procedures on the petty cash fund. Because the balance in the petty cash fund is not material there is almost no potential for fraud.
Internal auditors often document and perform tests of controls over petty cash. External auditors seldom perform substantive procedures on the petty cash fund.
Which of the following is used to reconcile the cash receipts and disbursements recorded on the entity's books with the cash deposited into and disbursed from the entity's bank account for a specific period of time? Proof of cash Bank confirmation Extended bank reconciliation Kiting test
Proof of cash
FASB ASC Topic 820 provides a hierarchy of levels that distinguish the types of inputs used to value different types of assets and liabilities are their appropriate fair values. Which of the following best describes Level 3? Valuations are based on directly or indirectly observable market data for similar or comparable assets or liabilities. Valuations are based on quoted prices in active markets for identical assets or liabilities. Valuations are based on management's best judgment and involve management's assumptions.
Valuations are based on management's best judgment and involve management's assumptions.
FASB ASC Topic 820 provides a hierarchy of levels that distinguish the types of inputs used to value different types of assets and liabilities are their appropriate fair values. Which of the following best describes Level 1? Valuations are based on management's best judgment and involve management's assumptions. Valuations are based on quoted prices in active markets for identical assets or liabilities. Valuations are based on directly or indirectly observable market data for similar or comparable assets or liabilities.
Valuations are based on quoted prices in active markets for identical assets or liabilities.
If an auditor is inspecting securities held by an entity, the auditor should insist that a representative of the entity be present during the physical examination in order to ______. confirm that all securities the entity owns are present and accounted for validate auditor access to the securities confirm that all counterparties have sent the appropriate securities to the entity acknowledge that all securities inspected are returned
acknowledge that all securities inspected are returned
Select all that apply Examples of disclosure issues for cash include ______ an accounting policy for defining cash and cash equivalents interbank transfer schedules cash balances restricted by foreign exchange contracts minutes of board of director's meetings letters of credit
an accounting policy for defining cash and cash equivalents letters of credit cash balances restricted by foreign exchange contracts
Select all that apply To audit a payroll or branch bank account the auditor uses a(n) ______. bank reconciliation review of irregular entires to the cash accounts standard bank confirmation cutoff bank statement interbank transfer schedule
bank reconciliation standard bank confirmation cutoff bank statement
An auditor's use of substantive analytical procedures for auditing cash can include comparing the ______. cash balance with industry standards. ratio of cash to accounts receivable and comparing with last year's ratio cash balance with budgeted amounts. cash balance with the prior year's balance
cash balance with budgeted amounts. cash balance with the prior year's balance
Cash includes checks returned as insufficient funds certifications of deposit savings accounts currency on hand
certificates of deposit savings account currency on hand
Select all that apply Auditing standards state that the auditor should perform certain procedures when gathering evidence for existence including ______. confirmation of unsettled transactions with the broker-dealer confirmation with the counterparty recomputing current-year interest income using face amount of security, interest rate and time period held examining broker invoices or similar documents reading executed partnership agreements
confirmation of unsettled transactions with the broker-dealer confirmation with the counterparty reading executed partnership agreements
When preparing a bank reconciliation, NSF checks are ______. deducted from the balance per bank added to the balance per bank deducted from the balance per bank, unadjusted added to the balance per books, unadjusted
deducted from the balance per bank
Select all that apply Major reconciling items in bank reconciliation working papers include ______. deposits in transit bank service charges cleared checks outstanding checks
deposits in transit bank service charges outstanding checks
Cash ______ a predictable relationship with other financial statement accounts. always has does not have generally has
does not have
A Treasury bill is an example of a cash _____
equivalent
The auditor generally confirms account balance information with ______. the banks and financial institution where the entity maintains general cash accounts only a sample of the banks and financial institutions that maintain an account for the entity every bank and financial institution that maintains an account for the entity the banks and financial institutions where the entity maintains imprest accounts and branch accounts only
every bank and financial institution that maintains an account for the entity
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date is the FASB ASC Topic 820 definition of
fair value
Select all that apply Indicators that the value decline of an investment may not be temporary include: downgrade of a debt security by a rating agency decline is value is not attributable to specific adverse conditions fair value that is significantly below cost dividends have been reduced or eliminated
fair value that is significantly below cost dividends have been reduced or eliminated downgrade of a debt security by a rating agency
True or false: Because the potential for defalcation is high, external auditors must perform substantive procedures on the petty cash fund.
false
True or false: If an auditor suspects cash was stolen without being recorded in the entity's books, (s)he should perform a proof of cash.
false
Auditors might prepare a proof of cash or test for kiting when _____ activities in the cash accounts is suspected.
fraudulent
A proof of cash cannot detect ______. if there was a theft of cash before it was recorded in the entity's books bank transactions that have been omitted from the entity's accounting records if all cash disbursements recorded in the entity's cash disbursements journal have cleared the entity's bank account if all cash receipts in the entity's cash receipts journal were deposited in the entity's bank account
if there was a theft of cash before it was recorded in the entity's books
After obtaining sufficient appropriate evidence though substantive tests, the auditor then evaluates whether management's measures and disclosures are ______. in accordance with GAAP all at Level 1 on the ASC Topic 820 valuation model unbiased
in accordance with GAAP
Select all that apply According to ASC Topic 820, fair value ______. is the price that would be received to sell an asset or transfer a liability in an orderly transaction must be measured in accordance with GAAP should always be assigned based on observable orderly transactions at the measurement date
is the price that would be received to sell an asset or transfer a liability in an orderly transaction must be measured in accordance with GAAP
Covering a cash shortage by transferring money between bank accounts and recording the transfer improperly on the books is a practice known as ______
kiting
When an employee tries to cover a cash shortage by transferring money from one bank account to another and recording the transaction improperly on the entity's books, the employee is engaged in ______. kiting lapping skimming proving cash
kiting
If a company uses electronic wire transfers ______. kiting cannot be accomplished due to the immediate recording of the deposit a shortage in cash can be eliminated by recording a credit memo after the wire transfer is recorded kiting is still possible due to a one-day delay in recording cash can be moved from one customer's account to another customer's account to cover a cash shortage
kiting is still possible due to a one-day delay in recording
Select all that apply When considering important financial statement disclosures for cash, primary documents an auditor might review include ______. loan agreements line-of-credit arrangements sinking fund requirements minutes of board of director's meetings cash balances restricted by foreign exchange contracts
minutes of board of director's meetings line of credit arrangements loan agreements
Select all that apply An auditor can gain an understanding of the entity's process for determining fair value measurements and disclosures by considering the ______. nature and extent of documentation supporting management's assumptions markets for the assets or liabilities that are not currently active and require a high degree of estimation accounting and auditing framework associated with fair value measurements extent to which the entity's process relies on a service organization to provide fair value measurements
nature and extent of documentation supporting management's assumptions extent to which the entity's process relies on a service organization to provide fair value measurements
A typical way to cover cash defalcations is to manipulate the ______. general ledger cash accounts reconciling items in the bank reconciliation deposit slips of cleared deposits accounts receivable subsidiary ledger
reconciling items in the bank reconciliation
For an entity with a large investment portfolio, the auditor is likely to follow a(n) ______ strategy in which internal control is formally evaluated and tests of controls are performed.
reliance
For entities that do not require an audit of internal controls over financial reporting, it is more efficient for the auditor to follow a(n) _____ strategy for auditing investment securities at year-end.
substantive
Recomputing current-year interest income using face amount of security, interest rate and time period held is an example of a(n) _______ ______ procedure
substantive analytical
When an auditor examines the disposition of the reconciling items included on the prior month's reconciliations and the reconciling items included in the current bank reconciliation, the auditor most likely ______. suspects fraud and is performing extended bank reconciliation procedures is testing for bank reconciliation errors has not received a sufficient number of standard bank confirmation forms
suspects fraud and is performing extended bank reconciliation procedures
Select all that apply Substantive audit procedures for Level 2 or Level 3 valuations, such as complicated derivatives, include ______. testing management's assumptions for bias performing sensitivity analysis to determine the effects of changes in the assumptions on the fair value estimate testing whether management's rationale for the method selected is reasonable determining the extent to which the entity's process relies on a service organization to provide fair value measurements
testing management's assumptions for bias performing sensitivity analysis to determine the effects of changes in the assumptions on the fair value estimate testing whether management's rationale for the method selected is reasonable
Select all that apply Extended audit procedures that auditors typically use to detect fraudulent activities in the cash account include ______. tests for kiting extended bank reconciliation procedures proof of cash tracing remittance advices to cash receipts journal standard bank confirmation
tests for kiting extended bank reconciliation procedures proof of cash
Select all that apply A valuation specialist is often engaged to help obtain audit evidence when ______. the extent to which the entity relies on a service organization to provide fair value measurements is unknown the markets for the assets or liabilities are not currently active the valuation model used by management is complex a high degree of estimation uncertainty exists
the valuation model used by management is complex the markets for the assets or liabilities are not currently active a high degree of estimation uncertainty exists
Which of the following is always classified as a current asset? held to maturity securities trading securities treasury stock available for sale securities
trading securities
True or false: The standard bank confirmation form is used to confirm information regarding account balances, loans and lines of credit for the entity.
true
Select all that apply An auditor can gain an understanding of the entity's process for determining fair value measurements and disclosures by considering the ______. way that management assigns Level 1, 2 or 3 to the valuation of the asset way management considered the nature of the asset or liability being valued controls related to the review and approval of accounting estimates type of accounts or transactions requiring fair value measurements
type of accounts or transactions requiring fair value measurements way management considered the nature of the asset or liability being valued controls related to the review and approval of accounting estimates
The auditor needs to determine if there has been any changes to the fair value of the investment security because if the investment ______. value is determined to be a temporary impairment, the security is written down and a new carrying value established does not have a fair value that can be readily obtained from market data it should be written down value is determined to be other than temporarily impaired, the security is written down and a new carrying value established
value is determined to be other than temporarily impaired, the security is written down and a new carrying value established