Audit CH 16

Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity's employees?

a bank lockbox system

One purpose of sending a standard confirmation to financial institutions with which the entity has done business with during the year is to:

corroborate information regarding deposit and loan balances

An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when the:

cutoff bank statement is reconciled

Which of the following control activities would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments?

maintenance of a securities ledger that records all securities owned by the entity

Auditors will need to perform more substantive tests than normal to obtain sufficient appropriate evidence that a financial instrument is fairly stated if which of the following conditions exist?

management's key assumptions are subject to volatility

Which of the following pairs of accounts would an auditor most likely analyze on the same working paper?

notes receivable and interest income

To satisfy the valuation assertion when auditing an investment, an auditor would most likely:

obtain market quotations from financial newspapers, periodicals, or electronic outlets

An imprest cash account is

one that contains a stipulated amount of money and is issued for limited purposes

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

prepare a schedule of bank transfers

The cashier of Brooks Company covered a shortage in the cash working fund with cash obtained on December 31 from a local bank by cashing, but not recording, a check drawn on the company's out-of-town bank. How would the auditor discover this manipulation?

preparing and detail testing a bank transfer schedule

Which of the following audit procedures is the most appropriate when internal control over cash is weak or when an entity requests an investigation of cash transactions?

proof of cash

Of the following, which is the most effective audit procedure for verification of interest earned on bond investments?

recomputing interest earned using the interest rate and bond amount

Under which of the following circumstances would an auditor be most likely to intensify an examination of $1,000 petty cash und maintained on an imprest basis?

reimbursement of the fund from the general cash account occurs twice or more each week

An entity has a large and active investment portfolio that is kept in a bank safe-deposit box. If the auditor is unable to examine and count the securities at the balance sheet date but will examine and count the securities shortly thereafter, the auditor most likely will

request that the entity have the bank seal the safe-deposit box until the auditor can count the securities at a subsequent date

Examining brokers' advices for a sample of securities purchased during the year is a test for the assertion of

rights and obligations

An auditor ordinarily should send a standard confirmation request to all banks with which the entity has done business during the year under audit, regardless of the year-end balance, because this procedure

seeks information about indebtedness to the bank

When there is a large number of negotiable securities in multiple locations, careful planning of the physical inspection and count of the securities by the auditor is necessary to guard against:

substitution of securities already counted at one location for other securities that should be on hand at a different location but are not

As one of the year-end audit procedures, the auditor instructed the client's personnel to prepare a confirmation request for a 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 controls would a company most likely use to safeguard marketable securities when an independent trust agent is not employeed?

there is periodic inspection of securities in a safe or safe-deposit box by an individual independent of both the custodial and accounting responsibilities for securities

When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the:

trust company has no direct contact with the entity employees responsible for maintaining investment accounting records

An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily to:

verify reconciling items on the entity's bank reconciliation

Which of the following procedures most likely would give the greatest assurance that securities held as investments are safeguarded?

when securities are held by the entity, they are stored in a safe or safe-deposit box and periodically inspected

To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine all of the following

-cutoff bank statement -year-end bank statement -bank confirmation

All of the following can assist the auditor in testing the existence assertion for investment securities:

-physical examination -confirmation with the issuer -confirmation with the custodian

If fraud is suspected, auditors may complete all of the following procedures

-testing for kiting -performing a proof of cash -performing extended bank reconciliation procedures, including detailed examination of reconciling items

All of the following are the auditor's primary objective in an examination of marketable securities

-to determine whether securities are the property of the entity -to determine whether securities actually exist -to determine whether securities are properly classified on the balance sheet

An interbank transfer schedule:

helps the auditor test for kiting

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

acknowledge the receipt of securities returned

Which of the following controls would an entity most likely use in safeguarding against the loss of marketable securities?

an independent custodian that has no direct with the employees who have recordkeeping responsibilities has possession of the securities

A company has additional temporary funds to invest. The Board of Directors decided to purchase marketable securities and assigned the future purchase and sale decisions to a responsible financial executive. The best person(s) to make periodic reviews of the investment activity authorized by that executive should be

an investment committee of the Board of Directors

Examining a sample of cancelled checks for an authorized signature tests which of the following assertions for cash?

authorization

The least crucial element of internal control over cash is:

batch processing of checks

An auditor should trace interbank transfers for the last part of the audit period and the first part of the subsequent period to detect whether:

cash balances were overstated because of kiting

Jones was engaged to examine the financial statements of Virginia 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 services' record of dividends

An auditor usually tests the reasonableness of dividend income from investments in stock of public companies by computing the amounts that should have been received by referring to

comparisons of current-year dividend income with the reported income from prior years

Tracing a sample of remittance advices to entries in the cash receipts journal tests which of the following assertions for cash?

completeness

When an auditor is unable to inspect and count an entity's investment securities until after the balance sheet date, the bank where the securities are held in a safe-deposit box should be notified on or before the balance sheet date that it will be asked to:

confirm that there has been no access to the box between the balance sheet date and the security-count date

In establishing the existence and ownership of a long-term investment in stock of a publicly traded company, an auditor should inspect the securities or:

confirm the number of shares owned that are held by an independent custodian

Which of the following procedures would be important in the audit of an investment valued at fair value?

develop an independent estimate of the fair measurement

A primary purpose of the proof of cash is to:

ensure that all cash receipts recorded in the cash receipts journal were deposited in the bank account

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

examination of cancelled checks issued in payment of securities purchased

In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the entity's name, an auditor most likely gathers evidence in support of management's financial statement assertions regarding

existence, rights and obligations, and completeness