Audit Chapter 10 Homework study

a. Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client's employees?

A bank lockbox system.

c. Which of the following correctly identifies a risk facing SSC that might adversely affect sales during the coming years?

A general slowdown in the economy.

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

Acknowledge the receipt of securities returned.

k. The auditors who physically examine securities should insist that a client representative be present in order to:

Acknowledge the receipt of securities returned.

The auditors use a bank cutoff statement to compare:

Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.

Financial investments should be registered in the name of the ____________.

Company

e. You have been assigned to the year-end audit of a financial institution and are planning the timing of audit procedures relating to cash. You decide that it would be preferable to:

Coordinate the count of cash with the count of marketable securities and other negotiable assets.

The auditors' count of the client's cash should be coordinated to coincide with the:

Count of investment securities.

. An auditor suspects that the controller wrote several checks and recorded the cash disbursements just before year-end but did not mail the checks until after the first week of the subsequent year. (Select only 1 procedure.)

D. Obtain the cutoff bank statement and compare the cleared checks to the year-end bank reconciliation.

c. In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also:

Is responsible for mailing the checks.

Which of the following is correct concerning "window dressing" for cash?

It may increase but not falsify cash position.

12. The auditor suspects that the entity's controller has overstated sales and accounts receivable by recording fictitious sales to regular customers in the entity's books. (Select only 2 procedures.)

J,L. ------- J Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer.

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?

Net income is overstated.

g. Reconciliation of the bank account should not be performed by an individual who also:

Processes cash disbursements.

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom?

The cashier posts the receipts to the accounts receivable subsidiary ledger.

8. The auditor suspects that vouchers were prepared and processed by an accounting department employee for merchandise that was neither ordered nor received by the entity. (Select only 1 procedure.)

U. Examine the supporting purchase orders and receiving reports for selected paid vouchers.

Listed below are four interbank cash transfers, indicated by the letters a, b, c and d, of a client for late December 20X1, and early January 20X2. Your answer choice for the next two questions should be selected from this list. For each of transfers a through d indicate whether cash is understated, unaffected, or overstated by the transfer.

a. 1/02 12/30 12/31 12/30 unaffected

"Kiting" of cash.

a. Preparing and verifying a schedule of bank transfers.

"Lapping" of accounts receivable.

b. Tracing remittance advices to postings in the accounts receivable records.

The standard form to confirm cash accounts also requests the financial institution to confirm any __________ to the bank.

balanced owed

Control over cash sales is increased if a centrally located ___________ participates in each transaction.

cashier

A ___________ is a required minimum account balance that may be required by a bank when making a loan to a customer.

compensating balance

A ___________ is a bank statement covering a few days after year end that is used by the auditors to verify the client's bank reconciliation.

cutoff bank statement

2. Separate sequences of prenumbered checks are used for each bank account.

disagree

4. No checks are made payable to cash.

disagree

6. All cash receipts (checks) received through the mail are prelisted by the two individuals who open the mail.

disagree

Omitting an important financial statement disclosure item related to a loan agreement obtained from a nonfinancial institution.

f. Confirm terms of debt agreements using a debt confirmation request form.

Receiving a loan from the company's primary banking institution and not recording the entry, but placing the cash in overseas account not recorded in the company's accounting records.

g. Confirm using public accounting profession's standard form to confirm account balance information with financial institutions.

. 1/02 1/02 12/31 1/02

overstated

b. 1/04 12/31 1/02 12/31

unaffected

c. 1/03 12/31 1/02 1/02

understated

Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department?

Canceling supporting documentation after payment.

a. Which of the following represents a correct statement concerning the risk of misappropriation of cash for SSC?

Deposit of cash into a lockbox system decreases the risk of misappropriation.

Which of the following is not a control over cash disbursements?

Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse. Correct

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:

Kiting.

f. Which of the following procedures would the auditors most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet?

Observe the consistency of the employees' use of cash registers and tapes.

The auditor suspects that fictitious employees have been placed on the payroll by the entity's payroll supervisor, who has access to payroll records and to the paychecks. (Select only 1 procedure.)

P. Observe payroll check distribution on a surprise basis.

3. "The comment is a "boilerplate" disclaimer of liability that definitely does not affect the reliability of the information we obtained."

Replace with "This comment (disclaimer) on the confirmation may cast doubt about the completeness and accuracy of the information contained in the response and, accordingly, we should obtain further audit evidence."selected answer correct

7. "No further audit response is necessary related to check 2027."

Replace with "We should perform further procedures to determine why the account reconciliation excludes this item, which should be listed as an outstanding check as of year-end."selected answer correct

2. "No adjusting entry is needed as of 12/31/year 5."

Replace with "We should propose an adjusting entry as of 12/31/year 5 debiting cash and crediting accounts receivable for $6,000."selected answer correct

b. To provide assurance that each voucher is submitted and paid only once, the auditors most likely would examine a sample of paid vouchers and determine whether each voucher is:

Stamped "paid" by the check signer.

d. To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except:

General ledger

You are working on the Coleman audit. Assume that each of the four sections of this question are unrelated. Ashley Wilson, another staff member, has given you the following list of what she refers to as "internal control deficiencies" and has asked you to review each point and make sure that you agree that each is an internal control deficiency. 1. Voided checks are torn up and destroyed.

agree

Which of the following has made it difficult to engage in kiting in recent years?

Electronic processing of checks.

f. In addition to the risk factor identified in the preceding question, another risk factor relating to misstatements arising from fraudulent financial reporting is:

Earnings this year are lower than management had hoped.

5. "This is because it was not written until 1/1/year 6."

Replace with "But since the bank transfer schedule shows that it was received on 12/31/year 5 in the special account, we should investigate this transaction further."

Signed checks should be returned to the cash disbursements clerk for mailing.

false

5. The authorized check signers reconcile bank accounts.

agree

3. The purchasing department manager and assistant manager are the authorized check signers.

agree

7. All cash receipts received through the mail are restrictively endorsed when received.

disagree

b. Which of the following correctly identifies a risk facing SSC that might adversely affect cash receipts during the coming years?

Sales to Wingo.

Callouts Determination 1. "...although pass adjustment due to immateriality."

Retain the original text.

Omitting several outstanding checks from the year-end bank reconciliation.

d. Review of the bank cutoff statement.

10. The auditor suspects that a lapping scheme exists because an accounting department employee who has access to cash receipts also maintains the accounts receivable ledger and refuses to take any vacation or sick days. (Select only 2 procedures.)

A, J. ---- A Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date.

7. The entity's cash receipts of the first few days of the subsequent year were properly deposited in its general operating account after the year-end. However, the auditor suspects that the entity recorded the cash receipts in its books during the last week of the year under audit. (Select only 1 procedure.)

A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips.

j. Hall Company had large amounts of funds to invest on a temporary basis. The board of directors decided to purchase securities and derivatives and assigned the future purchase and sale decisions to a responsible financial executive. The best person or persons to make periodic reviews of the investment activity would be:

An investment committee of the board of directors.

9. The details of invoices for equipment repairs were not clearly identified or explained to the accounting department employees. The auditor suspects that the bookkeeper incorrectly recorded the repairs as fixed assets. (Select only 1 procedure.)

B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization.

d. Which of the following correctly identifies a risk facing SSC that might affect its ability to continue as a going concern over the long run?

Competition from several competitors.

8. "Check 2032 appears to result in the cash being recorded in both accounts per books as of year-end and thus overstates total cash by $1,500 at year-end."

Delete entire point 8.

h. The auditors suspect that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditors most likely would compare the:

Details of bank deposit slips with details of credits to customer accounts.

11. The auditor suspects that the entity is inappropriately increasing the cash reported on its balance sheet by drawing a check on one account and not recording it as an outstanding check on that account and simultaneously recording it as a deposit in a second account. (Select only 1 procedure.)

E. Prepare a bank transfer schedule.

The auditor suspects that a kiting scheme exists because an accounting department employee who can issue and record checks seems to be leading an unusually luxurious lifestyle. (Select only 1 procedure.)

E. Prepare a bank transfer schedule.

The entity borrowed funds from a financial institution. Although the transaction was properly recorded, the auditor suspects that the loan created a lien on the entity's real estate that is not disclosed in its financial statements. (Select only 1 procedure.)

H. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment.

The auditor discovered an unusually large receivable from one of the entity's new customers. The auditor suspects that the receivable may be fictitious because the auditor has never heard of the customer and because the auditor's initial attempt to confirm the receivable has been ignored by the customer. (Select only 2 procedures.)

K, L. --- K Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer.

6. The auditor suspects that selected employees of the entity received unauthorized raises from the entity's payroll supervisor, who has access to payroll records. (Select only 1 procedure.)

Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files.

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?

Receive a cutoff statement directly from the client's bank.

4. "The deposit in transit seems properly handled on the bank reconciliation (Exhibit 2) with a debit to cash."

Replace with "The deposit in transit seems to have taken too long to reach the bank; we should investigate this further."selected answer correct

6. "...be deleted from the outstanding check list; no adjusting journal entry seems necessary."

Replace with "be deleted from the check list, with a possible adjusting journal entry proposed debiting cash and crediting a miscellaneous revenue type account."selected answer correct

i. In order to guard against the misappropriation of company-owned marketable securities, which of the following is the best course of action that can be taken by a company with a large portfolio of marketable securities?

Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent.

e. Of the following, the most significant risk factor relating to the risk of misstatement arising from fradulent financial reporting for SSC is that:

The company must refinance a significant portion of its debt.

l. The best way to verify the amounts of dividend revenue received during the year is:

Verification by reference to dividend record books.

8. When a disbursement is made based on paper supporting documents, those supporting documents are canceled by the individual who signs the check.

disagree