Audit Exam #3: Ch. 10, 11, 12, 14

which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees?

a bank lockbox system

By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally not be able to detect:

a second payment of an account payable which had already been paid in full two months earlier.

T/F: accounts receivable that are written-off should not be turned over to a collection agency

false

T/F: confirmation requests should contain a "business reply" envelope addressed to the auditors at the client's address.

false

T/F: confirmations for cash balances should be mailed only to the financial institutions with which the client has a cash balance at year-end.

false

T/F: for investments in securities accounted for by the equity method, the auditors are primarily concerned with verifying the market value of the investments.

false

T/F: lapping of accounts receivable by an employee is not possible when there is adequate segregation of duties with respect to cash disbursements.

false

T/F: mailroom personnel of a company should prepare a control listing of incoming cash receipts and deposit them intact daily.

false

T/F: signed checks should be returned to the cash disbursements clerk for mailing.

false

T/F: the auditors should count small petty cash funds at year-end to make sure that balance is not understate on the financial statements.

false

to gather evidence regarding the balance per bank in a bank reconciliation, an auditor could examine all of the following except:

general ledger

Jones embezzled $10,000 from his company's account in Bank A. At year-end he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the transaction on the books. This is an example of:

kiting

correct about "window dressing" for cash?

many forms of it require no action by the auditors

T/F: a compensating balance agreement generally requires that cash be reclassified as a noncurrent asset.

false

Which of the following cash transfers is most likely to result in a misstatement of cash at December 31, 19X7?

---Disbursement: >recorded in books=1/4/X8 >paid by bank=1/5/X8 ---Receipt: >recorded in books=12/31/X7 >received by bank=1/4/X8

The Parmalat fraud case apparently involved

A fraudulent cash confirmation.

T/F: a proof of cash is an audit procedure that is performed on almost every engagement.

false

Banks may process electronic "substitute checks" in place of customer written hard copy checks due to the:

Check Clearing for the 21st Century Act

Jones was engaged to audit the financial statements of Gamma Corporation for the year ended June 30, 200X. 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 service's record of dividends

an auditor may obtain information on the december 31 month end balance per bank in the following:

December 31 bank statement; not schedule of bank (cash) transfers

T/F: The department approving a sales transaction should be the shipping department.

false

a company's decision to use the fair value option for valuation of marketable securities is most likely to affects which of the following assertions the most?

Presentation and Disclosure

The Standard Form to Confirm Account Balances with Financial Institutions includes information on all the following except:

The principal amount paid on a direct liability

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

to test the existence assertion for recorded receivables, an auditor would select a sample from the

accounts receivable subsidiary ledger

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

By preparing a four-column bank reconciliation ("proof of cash") for the last month of the year, an auditor will generally be able to detect:

an unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation.

By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally be able to detect:

an unrecorded deposit made at the bank at the end of the month

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

canceling supporting documentation after payment

On receiving the bank cutoff statement, the auditor should trace:

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

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

Kiting would least likely be detected by:

comparing customer remittance advices with recorded disbursements in the cash disbursements journal

a practical and effective audit procedure for the detection of lapping is:

comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank

Jones embezzled $10,000 from his company's account in Bank A. At year-end he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the transaction on the books. Which of the following is most likely to be effective in detecting this fraud?

comparison of bank cutoff statement to the cash receipts

which of the following is the best audit procedure for the detection of lapping?

comparison of postings of cash receipts to accounts with the details of cash deposits.

statement not correct

confirmation of cash should only be performed as of the balance statement date because the auditor expresses an opinion as of that date.

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

count of investment securities

When a client engages in transactions involving derivatives, the auditor should

develop an understanding of the economic substance of each derivative

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.

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

examination of paid checks issued in payment of securities purchased.

T/F: CPAs use negative accounts receivable confirmations more frequently than positive accounts receivable confirmations

false

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

the auditors compare information on canceled checks with information contained in the cash disbursement journal. The objective of this test is to determine that:

no discrepancies exist between the data on the checks and the data in the journal

which of the following is not a control that generally is established over cash transactions?

obtaining a receipt for every disbursement

tracing recorded sales transactions in the sales journal to the shipping documents (bills of lading) provides evidence about the:

occurrence of sales transactions

One of the better auditing techniques that might be used by an auditor to detect kiting

prepare a schedule of bank transfers

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

Internal control over marketable securities is enhanced when:

securities are held under joint control of two or more officials

which of the following is not confirmed on the standard form used for cash balances at financial institutions?

securities held for the client by the financial institution

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?

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

In october, three months before year-end, the bookkeeper erroneously recorded the receipt of a one-year bank loan with a debit to cash and a credit to miscellaneous revenue. The most effective method for detecting this type of error:

send a bank confirmation as of year-end

which of the following is not a universal rule for achieving internal control over cash?

separate record keeping from accounting for cash to the extend possible

Properly designed internal control will permit the same employee to:

sign checks, and also cancel supporting documents

an auditor may obtain information on the december 31 month end balance per bank in the following:

standard confirmation form and January 1-10 Cutoff Statement

an auditor would 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

An auditor's analytical procedures have revealed that the accounts receivable of a client have doubled since the end of the prior year. However, the allowance for doubtful accounts, as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor?

the client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

which of the following is not a control that generally is established over cash receipts?

to insure accurate posting, the accounts receivable clerk should post the customers' receipts form customers' checks

Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate:

treasurer

T/F: an aged trial balance of accounts receivable may provide evidence on the adequacy of the allowance for uncollectible accounts

true

T/F: analytical procedures are used by auditors to gain evidence about the adequacy of the allowance for uncollectible accounts

true

T/F: confirmation of accounts receivable by direct communication with the debtor tests the existence of accounts receivable.

true

T/F: confirmation of accounts receivable provides some assurance that no lapping or other manipulation affecting accounts receivable is being carried on

true

T/F: control over the receipt of cash sales is best achieved when two or more employees participate in each transaction.

true

T/F: material accounts receivable from related parties should be stated separately from other receivables.

true

T/F: verification of cash and other liquid assets be verified on the same date may prevent substitution of one form of asset for another.

true

T/F: when it is impossible to confirm accounts receivable, the auditors may be able to satisfy themselves as to the existence of accounts receivable by alternative procedures

true

which of the following manipulations of cash transactions would overstate the cash balance on the financial statements?

understatement of outstanding checks

An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that

unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities