AUDIT CH16
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 _____. 2 1 3
2
When stock prices are volatile, employee stock options as a whole would likely be categorized as an ASC Topic 820 Level ____. 3 1 1 or 2 2 or 3
2 or 3
Which of the following procedures is NOT used to test the bank reconciliation? Agree the bank balance on the bank reconciliation with balance shown on the standard bank confirmation. Agree any charges included on the bank statement to the cutoff bank statement. Compare outstanding checks on the bank reconciliation with the cutoff bank statement. Verify accuracy of the bank reconciliation working paper and agree balance per books to the general ledger.
Agree any charges included on the bank statement to the cutoff bank statement.
Which of the following is not one of the four columns used on a proof of cash? Reconciliation of cash disbursed through the bank account with the cash disbursement recorded in the cash disbursements journal. Balance of cash per general ledger. Bank reconciliation for the beginning of the period. Reconciliation of cash deposited in the bank with the cash receipts recorded in the cash receipts journal.
Balance of cash per general ledger.
Which of the following procedures is used to test the bank reconciliation? Compare outstanding checks on the bank reconciliation with the cutoff bank statement. Verify accuracy of the bank reconciliation working paper and agree balance per books to the bank statement. Agree the bank balance on the bank reconciliation with balance shown on the cutoff bank statement. Agree any charges included on the bank statement to the cutoff bank statement.
Compare outstanding checks on the bank reconciliation with the cutoff bank statement.
True or false: A standard bank confirmation can be relied upon to identify all information about an entity's bank deposits or loans.
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 (A proof of cash will not detect the theft of unrecorded cash)
True or false: Most firms typically have adequate segregation of duties for investment activities.
False (Only entities that engage in a significant number of investment activities are likely to have adequate segregation of duties)
True or false: Because the potential for defalcation is high, external auditors must perform substantive procedures on the petty cash fund.
False (The balance is not material and auditors seldom perform substantive procedures)
True or false: A proof of cash is often referred to as a two-column proof of cash.
False (It's often referred to as a four-column proof of cash)
Which of the following is a test of transactions for cash receipts to provide evidence regarding authorization?
For a sample of days, example the signature on the deposit slip and check endorsements.
Which of the following is a test of transactions for cash receipts to provide evidence regarding accuracy? Trace a sample of remittance advices to the cash receipts journal and, if necessary, to deposit slips. Examine a sample of remittance advices for proper account classification. For a sample of days, example the signature on the deposit slip and check endorsements. For a sample of weeks, foot the cash receipts journal and agree posting to the general ledger.
For a sample of weeks, foot the cash receipts journal and agree posting to the general ledger.
Which of the following are affected if securities are misclassified among held-to-maturity, trading, and available-for-sale? Income statement Statement of cash flows Balance sheet
Income statement Balance sheet
Which of the following statements are correct? 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.
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? Bank confirmation Proof of cash Extended bank reconciliation Kiting test
Proof of cash
Which of the following investments in other entities is considered the easiest to account for an audit? Convertible bonds Derivatives Stock of a publicly traded company Asset-backed securities
Stock of a publicly traded company
Which of the following is a test of transactions for cash receipts to provide evidence regarding completeness? For a sample of days, example the signature on the deposit slip and check endorsements. For a sample of weeks, foot the cash receipts journal and agree posting to the general ledger. Trace a sample of remittance advices to the cash receipts journal and, if necessary, to deposit slips. 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.
Which of the following is always classified as a current asset? Available-for-sale securities Treasury stock Held-to-maturity securities Trading securities
Trading securities
Which of the following statements are correct? Valuation models rarely provide exact values and should be viewed as providing a range of reasonable values. In testing the models used by management, it is important for auditors to understand the inherent weaknesses of valuation models. Good valuation models should take qualitative factors into account when creating a fair value.
Valuation models rarely provide exact values and should be viewed as providing a range of reasonable values. In testing the models used by management, it is important for auditors to understand the inherent weaknesses of valuation models.
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 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 directly or indirectly observable market data for similar or comparable assets or liabilities.
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 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 quoted prices in active markets for identical assets or liabilities.
Which of the following is an important control over cash disbursements? Daily preparation of a bank reconciliation. Checks are restrictively endorsed "For deposit only". Voucher packages have been independently approved. Daily cash disbursements are reconciled with postings to the accounts receivable subsidiary ledger.
Voucher packages have been independently approved.
A valuation specialist is often engaged to help obtain audit evidence when ____. a high degree of estimation uncertainty exists the extent to which the entity relies on a service organization to provide fair value measurements is unknown 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 the valuation model used by management is complex the markets for the assets or liabilities are not currently active
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 _____. validate auditor access to the securities acknowledge that all securities inspected are returned confirm that all securities the entity owns are present and accounted for confirm that all counterparties have sent the appropriate securities to the entity
acknowledge that all securities inspected are returned
When securities are initially purchased they are recorded at ____. acquisition cost fair value amortized cost the lower of cost or net-realizable val
acquisition cost
Third-party providers of electronic confirmation services _____. are a free service provided by the SEC address the risk of fraud have an indirect relationship with banks
address the risk of fraud
Third-party providers of electronic confirmation services _____. are a free service provided by the SEC address the risk of fraud address the risk of fraud have an indirect relationship with banks
address the risk of fraud
Completeness controls for investments help ensure that _____. all securities are properly classified and appropriate prices are used to accurately value investments for financial statement purposes the purchase of all securities was properly initiated by authorized individuals all securities are recorded
all securities are recorded
Debt securities that are to be held to maturity should be valued at _____ cost. acquisition amortized fair value effective
amortized
Paper-based bank confirmations are sent and received by the _____. auditor entity's Treasurer entity's accounting personnel entity's banks
auditor
A major control that directly affects the audit of cash is the completion of a monthly _____ _____ by ensure the entity's books reflect the same balance as the bank's after required adjustments have been considered.
bank reconciliation
If the control risk assessment is _____ the maximum for both cash receipts and disbursements, the auditor can reduce the extent of substantive evidence gathered for the cash balances. below above equal to
below
When considering valuations, auditors must test management's assumptions for _____ which can be difficult to detect at the account level and may be considered fraudulent in nature when there is an intent to mislead present.
bias
If the control risk assessment is below the maximum for _____ cash receipts and disbursements, the auditor can reduce the extent of substantive evidence gathered for the cash balances. neither both either
both
The auditor obtains a cutoff bank statement _____. from the internal auditing department of the entity from the entity's accounting department by having the entity request the bank send the statement to the auditor through direct request to the bank to send the statement to the auditor
by having the entity request the bank send the statement to the auditor
Interbank transfer schedules _____. can be used to find errors should not be used when fraud is suspected provide evidence on proper transaction cutoff may be used when control activities are adequate
can be used to find errors provide evidence on proper transaction cutoff may be used when control activities are adequate
In reporting the expense for employee stock options, small changes in assumptions in fair value-measurement models ______ on the financial statements. should have no noticeable effect can have a significant impact
can have a significant impact
An auditor's use of substantive analytical procedures for auditing cash can include comparing the _____. cash balance with industry standards. cash balance with budgeted amounts. ratio of cash to accounts receivable and comparing with last year's ratio cash balance with the prior year's balance
cash balance with budgeted amounts. cash balance with the prior year's balance
Held-to-maturity securities are ____ assets. classified as either current or noncurrent always classified as noncurrent always classified as other always classified as current
classified as either current or noncurrent
The auditor should evaluate the maintenance of a securities ledger that records all securities owned by the entity to test the _____ assertion.
completeness
Auditing standards state that the auditor should perform certain procedures when gathering evidence for existence including ____. confirmation of unsettled transactions with the broker-dealer recomputing current-year interest income using face amount of security, interest rate and time period held examining broker invoices or similar documents confirmation with the counterparty reading executed partnership agreements
confirmation of unsettled transactions with the broker-dealer confirmation with the counterparty reading executed partnership agreements
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 controls related to the review and approval of accounting estimates 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 type of accounts or transactions requiring fair value measurements way management considered the nature of the asset or liability being valued
An investment owned by an entity might include hybrid securities such as ______ bonds and stocks.
convertible
Cash includes _____. currency on hand time deposits post-dated checks payable to the entity certificates of deposit
currency on hand time deposits certificates of deposit
Interbank transfers are used when fraud is suspected and can also provide the auditor with evidence on the proper _____ for each transaction.
cutoff
The auditor obtains a(n) _____ bank statement to test reconciling items included in the bank reconciliation.
cuttoff
When preparing a bank reconciliation, NSF checks are _____. deducted from the balance per bank deducted from the balance per bank, unadjusted added to the balance per bank added to the balance per books, unadjusted
deducted as an adjustment to books
When preparing a bank reconciliation, outstanding checks are _____. added to the balance per bank deducted from the balance per bank deducted from the balance per bank, unadjusted added to the balance per books, unadjusted
deducted from the balance per bank
Major reconciling items in bank reconciliation working papers include _____. deposits in transit outstanding deposits bank service charges cleared checks
deposits in transit outstanding deposits/checks bank service charges
Imprest accounts are frequently used for _____. disbursing dividend checks disbursing payroll the human resource management process the purchasing process
disbursing dividend checks disbursing payroll
Indicators that the value decline of an investment may not be temporary include: dividends have been reduced or eliminated decline is value is not attributable to specific adverse conditions fair value that is significantly below cost downgrade of a debt security by a rating agency
dividends have been reduced or eliminated fair value that is significantly below cost downgrade of a debt security by a rating agency
Cash ______ a predictable relationship with other financial statement accounts. generally has always has does not have
does not have
Investments generally measured at fair value with changes in fair value recognized in net income are _____ securities.
equity
A Treasury bill is an example of a cash _____.
equivalent
The auditor generally confirms account balance information with _____. every bank and financial institution that maintains an account for the entity a sample of the banks and financial institutions that maintain an account for the entity the banks and financial institution where the entity maintains general cash accounts only 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
A test of details of balances for cash calls for confirming the bank account balance with the financial institution. This is most likely done to provide evidence regarding _____. classification cutoff accuracy existence
existence
ASC Topic 718 requires that the expense for employee stock options be reported at _____. amortized cost fair value actual cost higher of actual cost or fair value
fair value
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
ASC Topics 320 and 321 require the aggregate _____ ____ and _____ ____ holding gains or losses on securities be presented for available-for-sale and held-to-maturity securities.
fair value, gross unrealized
Auditors might prepare a proof of cash or test for kiting when _____ activities in the cash accounts is suspected.
fraudulent, fraud, or defalcation
The main cash account for most entities is called the _____ cash account.
general
Branch accounts can be operated as _____ accounts. general cash disbursal imprest
general cash imprest
ASC Topics 320 and 321 require the aggregate fair value and gross unrealized holding gains or losses on securities be presented for _____ securities. held-to-maturity all newly purchased available-for-sale trading
held-to-maturity available-for-sale
Sources of cash disbursements include the _____. revenue process sale of land human resource management process purchasing process proceeds from issuing capital stock
human resource management process purchasing process
A proof of cash cannot detect _____. 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 bank transactions that have been omitted from the entity's accounting records
if there was a theft of cash before it was recorded in the entity's books
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
A stipulated amount of money to be used for a specific purpose is contained in a(n) _____ cash account.
imprest
After obtaining sufficient appropriate evidence though substantive tests, the auditor then evaluates whether management's measures and disclosures are _____. in accordance with GAAP unbiased all at Level 1 on the ASC Topic 820 valuation model
in accordance with GAAP
The judgment and complexity associated with investments such as derivatives generally causes auditors to assess the _____ risk as high.
inherent
One method used to test for kiting is the preparation of a(n) _____ _____ schedule.
interbank transfer
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 should always be assigned based on observable orderly transactions at the measurement date must be measured in accordance with GAAP
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 _____. proving cash skimming lapping kiting
kiting
If a company uses electronic wire transfers _____. kiting cannot be accomplished due to the immediate recording of the deposit cash can be moved from one customer's account to another customer's account to cover a cash shortage 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
kiting is still possible due to a one-day delay in recording
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 _____.
kitting
Examples of disclosure issues for cash include ____. letters of credit interbank transfer schedules an accounting policy for defining cash and cash equivalents minutes of board of director's meetings cash balances restricted by foreign exchange contracts
letters of credit an accounting policy for defining cash and cash equivalents cash balances restricted by foreign exchange contracts
When considering important financial statement disclosures for cash, primary documents an auditor might review include _____. loan agreements minutes of board of director's meetings line-of-credit arrangements cash balances restricted by foreign exchange contracts sinking fund requirements
loan agreements minutes of board of director's meetings line-of-credit arrangements
Under ASC Topic 820, an individual fair value measurement may contains inputs from more than one level but measurement in its entirety is categorized based on the _____ level of its significant inputs. highest lowest middle
lowest
When companies operate in multiple locations branch accounts _____. should only be used as imprest accounts should not be used should only be used as general cash accounts may be used as imprest or general cash accounts
may be used as imprest or general cash accounts
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 extent to which the entity's process relies on a service organization to provide fair value measurements 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
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
The use of prenumbered vouchers for withdrawing funds and a limit on the size of reimbursements are common controls over the _____ ____ fund.
petty cash
To test for kiting auditors often _____. review irregular entries to the cash accounts prepare a proof of cash prepare interbank transfer schedules review journal entries involving write-offs and credit memos
prepare interbank transfer schedules
Occurrence and authorization controls for investments include _____. proper approval of the commitment of resources to investment activities adequate documentation of proper initiation and approval of purchases and sales general policies to guide the entity's investment activities established by the board of directors maintenance of a securities ledger that records all securities owned by the entity
proper approval of the commitment of resources to investment activities adequate documentation of proper initiation and approval of purchases and sales general policies to guide the entity's investment activities established by the board of directors
Sources of cash receipts include _____. the purchasing process property sales issuance of long-term debt the human resource management process issuance of capital stock
property sales issuance of long-term debt issuance of capital stock
A typical way to cover cash defalcations is to manipulate the _____. accounts receivable subsidiary ledger deposit slips of cleared deposits reconciling items in the bank reconciliation general ledger cash accounts
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
The major source of cash receipts for the general cash account is the _____ process. revenue branch account human resource management purchasing
revenue
To audit a payroll or branch bank account the auditor uses a(n) _____. standard bank confirmation review of irregular entires to the cash accounts interbank transfer schedule bank reconciliation cutoff bank statement
standard bank confirmation bank reconciliation cutoff bank statement
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
Comparing current-year interest and dividend income with the reported income for prior years and with the expected return on investment is a ______. test of controls test of details of balances substantive analytical procedure
substantive analytical procedure
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 _____. has not received a sufficient number of standard bank confirmation forms is testing for bank reconciliation errors suspects fraud and is performing extended bank reconciliation procedures
suspects fraud and is performing extended bank reconciliation procedures
Obtaining a cutoff bank statement is a _____. substantive test of transactions for cash disbursements substantive test of transactions for cash receipts test of details of balances for cash
test of details of balances for cash
Substantive audit procedures for Level 2 or Level 3 valuations, such as complicated derivatives, include ____. testing whether management's rationale for the method selected is reasonable testing management's assumptions for bias determining the extent to which the entity's process relies on a service organization to provide fair value measurements 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 testing management's assumptions for bias performing sensitivity analysis to determine the effects of changes in the assumptions on the fair value estimate
Substantive audit procedures for Level 2 or Level 3 valuations, such as complicated derivatives, include _____. verifying market prices with corroborating evidence from sources such as The Wall Street Journal testing whether the assumptions appropriately reflect observable market assumptions developing an independent point estimate or range for corroborative purposes testing that the underlying data used in the model are accurate, complete and relevant
testing whether the assumptions appropriately reflect observable market assumptions developing an independent point estimate or range for corroborative purposes testing that the underlying data used in the model are accurate, complete and relevant
Extended audit procedures that auditors typically use to detect fraudulent activities in the cash account include _____. tests for kiting standard bank confirmation extended bank reconciliation procedures proof of cash tracing remittance advices to cash receipts journal
tests for kiting extended bank reconciliation procedures proof of cash
The accounting used for investments in other entities is affected by ____. the degree of influence exercised over the entity whether the investment is debt, equity or hybrid the percentage of the other entity owned classification of the investment as a current or noncurrent asset
the degree of influence exercised over the entity the percentage of the other entity owned classification of the investment as a current or noncurrent asset
On the bank reconciliation, a tick mark next to a deposit in transit indicates _____. an adjustment to the entity's books is necessary the deposit was traced by the auditor to the cutoff bank statement the deposit in transit was agreed to the general ledger
the deposit was traced by the auditor to the cutoff bank statement
Occurrence and authorization controls for investments help ensure _____. the purchase of an investment is properly initiated by appropriate individuals that all investment transactions are recorded that all securities are properly classified and appropriate prices are used to accurately value investments for financial statement purposes
the purchase of an investment is properly initiated by appropriate individuals
A valuation specialist is often engaged to help obtain audit evidence when ____. the valuation model used by management is complex a high degree of estimation uncertainty exists the markets for the assets or liabilities are not currently active the extent to which the entity relies on a service organization to provide fair value measurements is unknown
the valuation model used by management is complex a high degree of estimation uncertainty exists the markets for the assets or liabilities are not currently active
Reasons the audit testing of a payroll or branch account is less extensive than testing for the general account include _____. these types of accounts generally contain a minimal balance the types of disbursements from the account are homogeneous 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
Debt securities bought and held principally for the purpose of selling them in the near term are classified as _____ securities. available-for-sale current held-to-maturity trading
trading
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 (This form provides evidence regarding account balances, loans, lines of credit and security arrangements.)
Common controls over petty cash include _____. use of prenumbered petty cash vouchers for withdrawing cash from the fund a limit on the size of reimbursements from the fund surprise counts of petty cash by the person responsible for the fund review of vouchers by the accounts receivable clerk before the fund is replenished
use of prenumbered petty cash vouchers for withdrawing cash from the fund a limit on the size of reimbursements from the fund
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
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
