Audit Chapter 10 Quiz

Banks may process electronic "substitute checks" in place of customer written hard copy checks due to the: A. Check Clearing for the 21st Century Act. B. Public Company Accounting Oversight Board's Standard Number 2. C. Foreign Corrupt Practices Act. D. Sarbanes-Oxley Act.

A. Check Clearing for the 21st Century Act.

Which of the following has made it difficult to engage in kiting in recent years? A. Electronic processing of checks. B. The use of machine readable account numbers on checks. C. The consolidation of financial institutions. D. The use of payroll processers.

A. Electronic processing of checks.

Kiting would least likely be detected by: A. Analyzing details of large cash deposits around year end. B. Comparing customer remittance advices with recorded disbursements in the cash disbursements journal. C. Preparing a four-column bank reconciliation for all major cash accounts. D. Preparing a schedule of interbank transfers by using the client's records and bank statements around year end.

B. Comparing customer remittance advices with recorded disbursements in the cash disbursements journal.

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? A. Prepare a bank transfer schedule using the client's cash receipts and cash disbursements journal. B. Receive a cutoff bank statement directly from the client's bank. C. Prepare a four column bank reconciliation using the year-end bank statement. D. Confirm the year-end balance using the standard form to confirm account balance information with financial institutions.

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

An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to: A. Verify the cash balance reported on the bank confirmation inquiry form. B. Verify reconciling items on the client's bank reconciliation. C. Detect lapping. D. Detect kiting.

B. Verify reconciling items on the client's bank

An auditor may obtain information on the December 31 month-end balance per bank in which of the following? Dec 31 Bank Stmt Schd of Bank (Cash Transfers) A. Yes Yes B. Yes No C. No No D. No No

B. Yes No

Which of the following statements is not correct? A. Cash is important to the audit process because of its vulnerability to misappropriation, despite the fact that the balance at the balance sheet date may be immaterial. B. Payroll cash account balances kept on an imprest basis are more easily controlled than others not so kept. C. Confirmation of cash should only be performed as of the balance sheet date because the auditor expresses an opinion as of that date. D. Reviewing interbank transfers is important to the auditor because of the possibility that the client may be engaged in kiting.

C. Confirmation of cash should only be performed as of the balance sheet date because the auditor expresses an opinion as of that date.

When the fair market value of a security is obtained from a broker or dealer, the quality of the evidence provided by the quote depends on all of the following factors, except: A. Whether the broker or dealer is a market maker for the particular security. B. Whether there are any restrictions or limitations of the quote. C. Whether the investment is classified as a trading security or not. D. Whether the broker or dealer has a relationship with the client.

C. Whether the investment is classified as a trading security or not.

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? A. Sales are understated. B. Accounts receivable are understated. C. Inventory is overstated. D. Net income is overstated.

D. Net income is overstated.

An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the best evidence on operating effectiveness? A. Select and examine receiving reports and test whether the related canceled checks are dated no earlier than the receiving reports. B. Select and examine receiving reports and test whether the related canceled checks are dated no later than the receiving reports. C. Select and examine canceled checks and test whether the related receiving reports are dated no earlier than the checks. D. Select and examine canceled checks and test whether the related receiving reports are dated no later than the checks.

D. Select and examine canceled checks and test whether the related receiving reports are dated no later than the checks.