Auditing Chapter 10

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.

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

Treasurer.

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.

The Parmalat fraud case involved:

A fraudulent cash confirmation.

Which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees? A) A bank lockbox system. B) Approval of all disbursements by an individual independent of cash receipts. C) Monthly bank cutoff statements. D) Prenumbered remittance advices.

A) A bank lockbox system.

Which of the following is the best audit procedure for the detection of lapping? A) Comparison of postings of cash receipts to accounts with the details of cash deposits. B) Confirmation of the cash balance. C) Reconciliation of the cash account balances. D) Preparing a proof of cash.

A) Comparison of postings of cash receipts to accounts with the details of cash deposits.

Which of the following is not a universal rule for achieving internal control over cash? A) Separate recordkeeping from accounting for cash to the extent possible. B) Deposit each day's cash receipts intact. C) Separate cash handling from recordkeeping. D) Have monthly bank reconciliations prepared by employees not responsible for the issuance of checks.

A) Separate recordkeeping from accounting for cash to the extent possible.

Which of the following manipulations of cash transactions would overstate the cash balance on the financial statements? A) Understatement of outstanding checks. B) Overstatement of outstanding checks. C) Understatement of deposits in transit. D) Overstatement of bank services charges.

A) Understatement of outstanding checks.

An auditor may obtain information on the December 31 month-end balance per bank in which of the following? Standard Confirmation Form January 1-10 Cutoff Statement A) Yes Yes B) Yes No C) No Yes D) No No

A) Yes Yes

The authorized check signers reconcile bank accounts. Control deficiency? Agree or Disagree

Agree

The purchasing department manager and assistant manager are the authorized check signers. Control deficiency? Agree or Disagree

Agree

Voided checks are torn up and destroyed. Control deficiency? Agree or Disagree

Agree

Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department? A) Comparing the vendor's invoice with the receiving report. B) Canceling supporting documentation after payment. C) Verifying the mathematical accuracy of the vendor's invoice. D) Preparing the check for signature by an authorized person.

B) Canceling supporting documentation after payment.

Which of the following is correct relating to kiting? A) It is ordinarily used to understate cash. B) It is more difficult to accomplish in an electronic environment as contrasted to a non-electronic environment. C) It is a lapping approach performed using receivable accounts. D) It is seldom, if ever, used.

B) It is more difficult to accomplish in an electronic environment as contrasted to a non-electronic environment.

The Standard Form to Confirm Account Balances with Financial Institutions includes information on all of the following except: A) Date due of a direct liability. B) The principal amount paid on a direct liability. C) Description of collateral for a direct liability. D) The interest rate of a direct liability.

B) The principal amount paid on a direct liability.

Which of the following is not a control that generally is established over cash receipts? A) To prevent abstraction of cash, a control listing of cash receipts should be prepared by mailroom personnel. B) To insure accurate posting, the accounts receivable clerk should post the customers' receipts from customers' checks. C) To insure accuracy of the accounts receivable records, the records should be reconciled monthly to the accounts receivable controlling account. D) To prevent theft of cash, receipts should be deposited daily.

B) To insure accurate posting, the accounts receivable clerk should post the customers' receipts from customers' checks.

An auditor may obtain information on the December 31 month-end balance per bank in which of the following? December 31 Bank Statement Schedule of Bank (Cash) Transfers A) Yes Yes B) Yes No C) No Yes 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 statement 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 statement date because the auditor expresses an opinion as of that date.

Which of the following is not a control over cash disbursements? A) Disbursements should be made by check. B) A check protecting machine should be used. C) Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse. D) Voided checks should be defaced and filed with paid checks.

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

Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting? A) Review composition of authenticated deposit slips. B) Review subsequent bank statements and canceled checks received directly from the banks. C) Prepare a schedule of bank transfers. D) Prepare year-end bank reconciliations

C) Prepare a schedule of bank transfers.

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom? A) The cashier prepares the daily deposit. B) The cashier makes the daily deposit at a local bank. C) The cashier posts the receipts to the accounts receivable subsidiary ledger. D) The cashier endorses the checks.

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

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

Check Clearing for the 21st Century Act

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 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? A) Tracing recorded dividend income to cash receipts records and validated deposit slips. B) Utilizing analytical techniques and statistical sampling. C) Comparing recorded dividends with amounts appearing on federal information form 1099s. D) Comparing recorded dividends with a standard financial reporting service's record of dividends.

Comparing recorded dividends with a standard financial reporting service's record of dividends.

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 and disbursements records.

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

Count of investment securities.

In a manufacturing company which one of the following audit procedures would give the least assurance of the existence of the assets in the general ledger balance of investment in stocks and bonds at the audit date? A) Confirmation from the broker. B) Inspection of year-end brokers' statements. C) Vouching all changes during the year to brokers' advises and statements. D) Examination of paid checks issued in payment of securities purchased.

D) Examination of paid checks issued in payment of securities purchased.

Which of the following is correct concerning "window dressing" for cash? A) A segregation of duties within the cash function effectively eliminates its occurrence. B) It generally involves manipulation of inventory. C) It is illegal, and an audit is designed to provide reasonable assurance of its detection. D) Many forms of it require no action by the auditors.

D) Many forms of it require no action by the auditors.

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.

Which of the following is not a control that generally is established over cash transactions? A) Separating cash handling from recordkeeping. B) Centralizing the receipt of cash. C) Depositing each day's receipts intact. D) Obtaining a receipt for every disbursement.

D) Obtaining a receipt for every disbursement.

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? A) Completeness. B) Existence. C) Fairness. D) Presentation and Disclosure

D) Presentation and Disclosure

Which of the following is not confirmed on the standard form used for cash balances at financial institutions? A) Cash checking account balances. B) Cash savings account balances. C) Loans payable. D) Securities held for the client by the financial institution.

D) 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? 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.

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? A) Credit standards were liberalized in the current year. B) Twice as many accounts receivable were written off in the prior year as compared to this year. C) A greater percentage of accounts were currently listed in the "more than 90 days overdue" category than in the prior year. D) The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

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

All cash receipts (checks) received through the mail are prelisted by the two individuals who open the mail. Control deficiency? Agree or Disagree

Disagree

All cash receipts received through the mail are restrictively endorsed when received. Control deficiency? Agree or Disagree

Disagree

No checks are made payable to cash. Control deficiency? Agree or Disagree

Disagree

Separate sequences of prenumbered checks are used for each bank account. Control deficiency? Agree or Disagree

Disagree

When a disbursement is made based on paper supporting documents, those supporting documents are canceled by the individual who signs the check. Control deficiency? Agree or Disagree

Disagree

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

General ledger.

For purposes of an audit of financial statements, electronic confirmation of cash balances:

Is acceptable when properly controlled.

Properly designed internal control will permit the same employee to:

Sign checks, and also cancel supporting documents.

By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally not be able to detect: a) An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation. b) A cash sale which was not recorded on the books and was stolen by a bookkeeper. c) An embezzlement of unrecorded cash receipts on receivables before they had been deposited into the bank. d) A credit sale which has been recorded twice in the sales journal.

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

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 reconciliation.

When a client engages in transactions involving derivatives, the auditor should: a) Review agreements underlying the derivative. b) Confirm with the client's broker whether the derivatives are for trading purposes. c) Notify the audit committee about the risks involved in derivative transactions. d) Add an explanatory paragraph to the auditor's report describing the risks associated with each derivative.

a) Review agreements underlying the derivative.

Which accounts are being tested by the audit of cash? a. Most, if not all accounts b. Cash and expenses c. Revenue d. Fixed assets

a. Most, if not all accounts

Jones embezzled $10,000 from his company's account in Bank X. At year-end he hid the shortage by making a deposit on December 31 in Bank X, drawn on Bank Y. He has not recorded the transaction on the books. This is an example of: a) Lapping. b) Kiting. c) Effective cash management. d) Related party transactions.

b) Kiting.

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 is: a) Foot the cash receipts journal for November. b) Send a bank confirmation as of year-end. c) Prepare a bank reconciliation as of year-end. d) Prepare a bank transfer schedule as of year-end.

b) Send a bank confirmation as of year-end.

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: a) Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year. b) Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities. c) The annual provision for uncollectible accounts expense was inadequate because of worsening economic conditions. d) Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year.

b) Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.

To establish the existence and ownership of a large long-term investment in the common stock of a publicly traded company, the auditors ordinarily perform a security count or: a. Rely on the client's internal controls if the auditors have reasonable assurance that the control procedures are being applied as prescribed. b. Confirm the number of shares owned that are held by an independent custodian. c. Determine the market price per share at the balance sheet date from published quotations. d. Confirm the number of shares owned with the issuing company.

b. Confirm the number of shares owned that are held by an independent custodian.

In which of the following areas are the auditors least likely to use the work of a specialist? a) Determining the value of complex financial instruments. b) Assessing control risk for clients using complex derivatives for hedging. c) Determination of the existence of a complex financial instrument. d) Valuing an equity investment that must be valued using a complex valuation model.

c) Determination of the existence of a complex financial instrument.

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? a) The confirmation request was signed by the treasurer. b) Sending the request was meaningless because the account was closed before the year-end. c) The request was mailed by the assistant treasurer. d) The Certified Public Accountant (CPA) did not sign the confirmation request before it was mailed.

c) The request was mailed by the assistant treasurer.

The auditors should insist that a representative of the client be present during the physical examination of securities in order to: a) Lend authority of the auditor's directives. b) Detect forged securities. c) Coordinate the return of all securities to proper locations. d) Acknowledge the receipt of securities returned.

d) Acknowledge the receipt of securities returned.

Which of the following is correct concerning "window dressing" for cash? a) A segregation of duties within the cash function effectively eliminates its occurrence. b) It generally involves manipulation of inventory. c) It is illegal, and an audit is designed to provide reasonable assurance of its detection. d) It may increase but not falsify cash position.

d) It may increase but not falsify cash position.

The auditors compare information on canceled checks with information contained in the cash disbursement journal. The objective of this test is to determine that: a) Recorded cash disbursement transactions are properly authorized. b) Proper cash purchase discounts have been recorded. c) Cash disbursements are for goods and services actually received. d) No discrepancies exist between the data on the checks and the data in the journal.

d) No discrepancies exist between the data on the checks and the data in the journal

When testing cash, what management assertion is the auditor most interested in?

existence

When testing available for sale securities, what management assertion is the auditor most interested in?

valuation