Chapter 10
Which of the following best describes a fraudulent scheme to overstate cash assets at year-end by recording deposits in transit in both the account from which the cash is withdrawn and the account to which it is transferred? a. Kiting of cash. b. Lapping of cash. c. Embezzlement of cash. d. Restrictive endorsements of cash.
A
A fake cash problem relates to management's cash valuation assertion. a. True b. False
B
Auditor expertise is critically important in evaluating the validity of the valuation of complex financial instruments. a. True b. False
A
Planning analytical procedures for cash balances typically include trend analysis and ratios for comparison with the auditor's expectations. a. True b. False
A
A turnaround document is an effective control because it contains information useful for further processing of a payment received from a customer. a. True b. False
A
An example of a monitoring control in cash would include a review of cash budgets and a comparison of them with actual cash balances, with appropriate follow-up. a. True b. False
A
Assume that an auditor notes a large series of checks that does not clear the bank for an unusually long time after period end. Which of the following would the auditor likely suspect from this observation? a. The presence of held checks at period-end. b. Cash does not exist. c. Vendors are eager to get their payments. d. The reconciliation is accurate.
A
Auditors usually perform relatively limited substantive analytical procedures for cash accounts and instead focus on substantive tests of details. a. True b. False
A
Client management's review of monthly bank reconciliations prepared by employees is an example of a control over the accuracy of cash balances that the auditor might test. a. True b. False
A
Effective internal control over the cash account requires that the person responsible for making the bank deposit does not post the increase to cash in the accounting system. a. True b. False
A
If the auditor observes that the company reports consistent profits over several years while cash inflows are decreasing, the auditor should likely assess a heightened risk of fraud in cash. a. True b. False
A
In assessing fraud risk related to cash, auditors engage in brainstorming to consider incentives, opportunities to commit fraud, and rationalization about risks relating to cash. a. True b. False
A
In auditing cash accounts, auditors typically focus primarily on the existence/occurrence and completeness assertions. a. True b. False
A
Kiting is an example of a technique used to intentionally overstate cash. a. True b. False
A
Money laundering is designed to create the appearance that large sums of cash obtained from criminal activities, such as drug trafficking, originated from legitimate business sources. a. True b. False
A
Testing debt securities and commercial paper would typically include an analysis of interest income. a. True b. False
A
The auditor may discover evidence of kiting by preparing an interbank transfer schedule. a. True b. False
A
The auditor will send a standard bank confirmation to which of the following? a. Financial institutions with which the client has transacted during the year. b. Financial institutions used by significant shareholders. c. Financial institutions for which the client has a balance greater than $0 at the end of the year. d. Financial institutions of customers using the lockbox.
A
The electronic transfer of cash and the automated controls over cash are such that if errors are built into computer programs, they could be repeated on a large volume of transactions. a. True b. False
A
The existence of debt covenants with restrictions related to cash or working capital increase the risks of material misstatement in cash accounts. a. True b. False
A
The existence or occurrence assertion as related to cash is concerned with proper classification on the balance sheet. a. True b. False
A
The first step in performing planning analytical procedures is to develop an expectation of the account balance. Which of the following does not typically represent a likely expected relationship for cash accounts? a. The company reports consistent profits over several years, but operating cash flows are declining. b. No unusual large cash or other liquid asset transactions are found. c. Operating cash flow is not significantly different from that of the prior year. d. Investment income is consistent with the level of and returns expected from the investments. e. All of these represent likely expected relationships.
A
The following is a reasonable test of control over marketable securities: Inquire of management about its process for establishing valuation of marketable securities and review related documentation. a. True b. False
A
The following is an inherent risk that is particularly applicable to owning stock in a company like Genie Energy: Risk of sudden market declines, which would adversely affect the valuation of securities. a. True b. False
A
The relative percentage of substantive analytics that an auditor will use as evidence in the audit of cash will be somewhat limited regardless of the riskiness of the client. a. True b. False
A
Thinly traded securities have a greater inherent risk related to valuation. a. True b. False
A
Under which of the following circumstances would the valuation assertion for cash most likely have an increased level of inherent risk? a. Client has cash holdings in foreign currency in a politically unstable country. b. Client has cash holdings in multiple U.S. financial institutions over a wide geographic area. c. Client holds investments in complex financial instruments. d. All of the above.
A
When auditing cash, the auditor will perform a relatively larger percentage of tests of details for a high-risk client compared to a low-risk client. a. True b. False
A
When auditing financial hedges, the auditor should understand the product, identify relevant risks and controls, and understand the appropriate accounting. a. True b. False
A
When there is a ready market for financial instruments, the audit procedures related to valuation and disclosures are more straightforward than when the instrument is not readily marketable. a. True b. False
A
Which mix of evidence would be most appropriate for the following scenario? This is a client where the auditor has assessed the risk of material misstatement related to the existence and completeness of cash at high. This client has incentives to overstate cash in order to meet debt covenants. Further, the client has relatively weak controls to prevent theft of cash. a. 100% tests of details. b. 70% tests of details, 10% analytics, 20% tests of controls. c. 20% tests of details, 40% analytics, 40% tests of controls. d. 50% tests of details, 10% analytics, 40% tests of controls.
A
Which of the following controls would be most successful in mitigating the theft of customer checks received in the mail? a. Restrictive endorsements placed on checks as soon as they arrive. b. Reconciliation of bank accounts each month. c. Weekly deposits to a secure bank. d. Custody of receipts by the accounts receivable manager.
A
Which of the following describes documents that accompany customer payments to help the clerk identify the payments? a. Turnaround documents such as remittance advices. b. Checks stamped with restrictive endorsements such as customer signatures. c. Receipts such as register tapes. d. Accommodation certificates such as authenticated customer tokens.
A
Which of the following is a cash management technique frequently used by management? a. Cash management agreement with financial institutions. b. Lockboxes. c. Electronic funds transfers. d. All of the above.
A
Which of the following is a risk associated with complex financial instruments? a. Management's objective for entering into such transactions may relate to misstating the financial statements. b. Most of these financial instruments have a high volume of activity and relate to deep capital markets. c. Most management teams today have the necessary sophistication to invest in complex financial instruments with relatively little downside risk. d. All of these are risks.
A
Which of the following is not a common test of controls for marketable securities? a. Review broker's advice for accurate recording of security. b. Inquire of management about its process for reclassifications. c. Review reports of internal audits. d. Review the minutes of the board meetings.
A
Which of the following is not a normal edit test as part of computerized control for checks? a. Cross-references. b. Field checks. c. Self-checking digits. d. Reasonableness tests.
A
Which of the following is not an internal control the auditor would expect to find in place for all cash processing systems? a. Walkthrough. b. Prenumbered cash receipt documents. c. Independent reconciliation. d. Restrictive endorsement of checks.
A
Which of the following is the primary reason the auditor obtains and reviews a cutoff bank statement? a. Verify the reconciling items on the year-end bank reconciliation. b. Foot the cutoff bank statement for completeness. c. Verify the balance of cash per the bank's general ledger at the balance sheet date. d. Test for intentional lapping of bank transfers.
A
Which of the following procedures does the auditor typically perform when testing the existence of cash? a. Sending a standard bank confirmation. b. Tracing the bank reconciliation to the general ledger. c. Counting cash at the depository institution. d. Inquiry of management.
A
Which of the following questions would be relevant for an inherent risk analysis questionnaire related to cash? a. Does the company have significant cash flow problems in meeting its current obligations on a timely basis? b. Are cash transactions properly authorized? c. Are bank reconciliations performed on a timely basis by personnel independent of processing? d. Does the internal audit department conduct timely reviews of the cash management and cash-handling process? e. All of these.
A
Which of the following situations would normally be discovered by testing the bank reconciliation? a. Failure to include a deposit in transit on the bank reconciliation. b. Duplicate payment of a vendor's invoice. c. Failure to bill a customer. d. Payment to an employee for more hours than she worked.
A
Which of the following terms best defines this scenario? The employee steals a payment from Customer X. To cover the theft, the employee applies a payment from Customer Y to Customer X's account. Before Customer Y has time to notice that its account has not been appropriately credited, the employee applies a payment from Customer Z to Customer Y's account. a. Lapping. b. Kiting. c. Skimming. d. Collateralizing.
A
Which one of the following risks is not a risk associated with cash? a. Complex valuation issues. b. Easy to manipulate. c. Importance of meeting debt covenants. d. Large volume of transactions.
A
A risk of fraud is not associated with petty cash funds because of the small amounts of money involved. a. True b. False
B
A typical bank statement prepared at an interim agreed- upon date and sent directly to the auditor is a bank transfer statement. a. True b. False
B
All marketable securities are carried at fair market value on the balance sheet. a. True b. False
B
As cash processing systems become more automated and integrated, which of the following is true about the general concept of segregation of duties? a. Segregation of duties becomes less important. b. The importance of segregation of duties does not change. c. Segregation of duties becomes more important. d. Segregation of duties becomes completely computerized without human involvement.
B
Because a primary concern is that cash will be stolen and thus understated, the auditor is not usually concerned about overstatements of cash. a. True b. False
B
Because cash balances are usually relatively low at year- end, auditing standards encourage auditors to send bank confirmations on a sample basis. a. True b. False
B
Because of the level of inherent risk associated with cash accounts, auditors are required to test the controls over cash accounts. a. True b. False
B
Because substantive audit procedures are largely ineffective for cash accounts, auditors typically focus on tests of controls when the risk of material misstatement is assessed at a high level. a. True b. False
B
Cash and cash equivalents reported on the balance sheet may include debt securities that mature less than six months from the balance sheet date. a. True b. False
B
Controls for completeness of cash are important because they help to provide reasonable assurance that the cash exists. a. True b. False
B
Customer checks received at the client company should be restrictively endorsed within one week of receipt. a. True b. False
B
Electronic funds transfers have controls built into the process and do not require further reconciliation by the client. a. True b. False
B
Gains and losses are not considered by auditors in testing marketable securities, as they do not need to be disclosed. a. True b. False
B
Interbank transfer schedules are used by the auditor to address which of the following concerns? a. Lapping. b. Kiting. c. Embezzlement by omitting outstanding checks on reconciliation. d. All of the above.
B
Many financial instruments offer a potentially higher return for investors along with a reduced level of risk. a. True b. False
B
Periodic bank reconciliations should be performed by the individual who makes the client's bank deposits. a. True b. False
B
Planning analytical procedures for cash balances are highly effective because of the generally stable relationship with past cash levels and the fact that cash is a managed account. a. True b. False
B
Refer to Exhibit 10.15. Which of the following assertions is relevant to whether the marketable securities balances include all securities transactions that have taken place during the period? a. Existence/occurrence. b. Completeness. c. Rights and obligations. d. Valuation or allocation. e. All of these.
B
Refer to Exhibit 10.6. Which of the following represents a reasonable test of controls for cash receipts? a. Document internal controls over cash by completing the internal control questionnaire or by flowcharting the process. b. Segregation of duties between those handling cash and those recording cash transactions. c. Obtain a bank confirmation. d. Obtain a bank cutoff statement. e. All of these.
B
Short selling enables managers to get away with perpetrating fraud undetected and undeterred. a. True b. False
B
Skimming most likely results in a violation of which of the following management assertions? a. Existence. b. Completeness. c. Rights and obligations. d. Valuation. e. All of these.
B
Skimming occurs when an employee purchases merchandise and records the sale at an unauthorized discounted price. a. True b. False
B
The auditor prepares a schedule for marketable securities. Which of the following is not one of the items in the schedule related to the value of the securities? a. Cost. b. Interest and dividends. c. Year-end market value. d. Carrying value for debt instruments.
B
The auditor's performance of an independent reconciliation of the client's bank accounts provides evidence as to the rights and obligations of the year-end cash balances. a. True b. False
B
The cash account is significant to the auditor for which of the following reasons? a. Automated systems do not possess the capability to maintain strong internal controls over cash. b. The cash account balance is the culmination of a large volume of transactions. c. Cash is the only account that provides opportunity for fraud. d. The cash account is not as susceptible to fraud as most other accounts.
B
The cutoff statement is mailed to the client for an agreed-upon date and then copied for the audit files. a. True b. False
B
The reported fair market value of securities held by the client can be verified by the auditor through which of the following procedures? a. Comparing the fair values with the fair values of similar securities. b. Comparing the fair values to credible publications and websites. c. Comparing the values to those securities held by the auditing firm. d. Confirming the fair values with the client as of the close of the year.
B
The standard bank confirmation should be sent to all banks used by the client during the year except those banks holding client accounts with a zero balance at year-end. a. True b. False
B
The volume of activity in cash accounts makes cash accounts less susceptible to error than most other accounts. a. True b. False
B
What form of evidence is used by the auditor to verify bank reconciliation items? a. General ledger. b. Cutoff statement. c. Cash counting observation. d. Bank confirmation
B
Which assertion related to investments is tested when the auditor examines the documents for any restrictions? a. Existence. b. Rights. c. Valuation. d. Completeness.
B
Which of the following would not be included as part of the documentation related to the substantive procedures for marketable securities? a. Reports of any outside valuation experts. b. Policies over purchase or sale of marketable securities. c. A schedule of marketable securities prepared by the client. d. Calculation of any potential impairments.
B
Which of the following would not be used as part of analytical procedures for marketable securities? a. Develop expectations about the level of amounts in ending balances. b. Verify ending balances prior to calculating the percent change. c. Develop expectations about the relationship between the balances. d. Review changes in the balances, risk composition, and classification types.
B
A bank confirmation contains which of the following two parts? A part that seeks information on the client's deposit balances, the existence of loans, due dates of the loans, interest rates, dates through which interest has been paid, and collateral for loans outstanding. A part that contains a listing of the last checks issued near year-end. A part that seeks information about any loan guarantees. A part that lists all transfers between the company's bank accounts for a short period of time before and after year-end. a. 2 & 4. b. 2 & 3. c. 1 & 3. d. 3 & 4. e. 1 & 2.
C
During the testing of a year-end bank reconciliation, an auditor noticed that the majority of checks listed as outstanding at year-end did not clear the bank until the middle of the subsequent month. Which of the following is a likely explanation? a. The year-end cash disbursements records had been closed prior to year-end. b. A high probability of lapping. c. Checks were issued before year-end but not mailed until the subsequent period. d. A high probability of kiting.
C
Electronic authorization privileges for cash transactions may be best assigned to individuals based on which of the following? a. The principle of "absolute knowledge." b. Identification cards with picture identification. c. Roles and activities falling within appropriate segregation of duties. d. Encrypted passwords memorized by employees.
C
Refer to Exhibit 10.15. Which of the following assertions is relevant to the audit procedure for marketable securities that requires the auditor to examine selected documents to identify any restrictions on the securities? a. Existence/occurrence. b. Completeness. c. Rights and obligations. d. Valuation or allocation. e. All of these.
C
The cutoff bank statement is used by the auditor to address which of the following concerns? a. Lapping. b. Kiting. c. Omitting outstanding checks on reconciliations. d. All of the above.
C
The emphasis in verifying petty cash is normally on which of the following? a. Year-end balance. b. Balance sheet classification. c. Controls over petty cash. d. Transactions for the period.
C
The standard bank confirmation includes a designated place for the financial institution to report which of the following? a. A reconciliation of the lockbox. b. Maturity dates for certificates of deposit. c. Loans and collateral. d. Cash held on consignment.
C
When testing cash balances at the balance sheet date, the auditor foots the bank reconciliation and traces its reported book balance to the trial balance and its bank balance to the standard confirmation. Which of the following assertions is being tested with these procedures? a. Rights. b. Valuation. c. All of the above. d. Existence.
C
Which mix of evidence would be most appropriate for the following scenario? This is a client where the auditor has assessed the risk of material misstatement related to the existence and completeness of cash as low, and believes that the client has implemented effective controls in this area. a. 20% tests of details, 40% analytics, 40% tests of controls. b. 100% tests of details. c. 50% tests of details, 10% analytics, 40% tests of controls. d. 70% tests of details, 10% analytics, 20% tests of controls.
C
Which of the following assertions is relevant to whether the company owns the cash accounts as of the balance sheet date? a. Existence/occurrence. b. Completeness. c. Rights and obligations. d. Valuation or allocation. e. All of these.
C
Which of the following controls over cash would an auditor expect to observe? a. Reconciliation of the general ledger to the subsidiary ledger. b. Internal audits of marketable securities held in the company's lockbox. c. Checks permanently marked "for deposit only" with the proper routing information. d. Authorization privileges given only to those employees using the accounting system.
C
Which of the following is a risk associated with complex financial instruments? a. Management and/or those charged with corporate governance may lack experience with complex financial instruments. b. Management may enter into such transactions without proper oversight from those charged with corporate governance. c. All of the above are risks. d. Management's objectives in entering into such transactions may relate to misstating the financial statements.
C
Which of the following is not a type of common control over cash? a. Segregation of duties. b. Restrictive endorsements of customer checks. c. Bank reconciliations by employees who handle cash. d. Prenumbered cash receipt documents and turnaround documents. e. Any two of these narrative answers given.
C
Which of the following is the most relevant assertion with regards to the audit of cash? a. Rights and obligations. b. Presentation and disclosure. c. Existence d. Valuation and allocation.
C
Which of the following represents a typical substantive audit procedure for cash balances? a. Review cash confirmations received by the client from the bank. b. Perform kiting techniques to transfer cash between two client accounts. c. Verify material deposits in transit to subsequent statements. d. Foot cutoff bank statements provided by the financial institutions.
C
Which of the following would be used by the auditor to address the possibility of kiting? a. Bank confirmations of loan guarantees. b. Bank confirmations of account balances. c. Interbank transfer schedules. d. Cut-off bank reconciliations.
C
Which of the following would the auditor use to test the existence of investments? a. Reviewing a schedule of investments sold during the year. b. Recomputing interest and/or gains and losses. c. Confirming or examining recorded investments. d. Footing the schedule of recorded investments.
C
An audit client has invested heavily in new equity and debt securities. Which of the following would not constitute an appropriate role for the organization's board of directors or others charged with governance? a. Receive and review periodic reports by the internal audit function on compliance with the organization's investment policies and procedures. b. Periodically review the risks inherent in the portfolio of marketable securities to determine whether the risk is within parameters deemed acceptable by the board. c. Review and approve written policies and guidelines for investments in marketable securities. d. Approve all new investments prior to reviewing their risks.
D
How will the auditor most likely utilize the bank reconciliation as evidence in the audit of cash? a. The auditor sends the reconciliation to the bank for independent verification. b. The auditor traces the book balance of the reconciliation to the cutoff bank statement. c. The auditor performs the reconciliation for the client to record the proper cash balance. d. The auditor tests deposits in transit and outstanding items to other corroborating evidence.
D
Investments in securities are classified as which of the following? a. Held-to-maturity. b. Trading securities. c. Available-for-sale securities. d. All of the above.
D
The ease with which cash can be stolen is most related to which of the following risks? a. Control risk. b. Detection risk. c. Liquidity risk. d. Inherent risk.
D
Which of the following assertions is relevant to whether the cash balances reflect the true underlying economic value of those assets? a. Existence/occurrence. b. Completeness. c. Rights and obligations. d. Valuation or allocation. e. All of these.
D
Which of the following best describes kiting? a. Manipulation of financial reporting by increasing both cash and debt by the same amount. b. Theft of cash for personal use and cover-up using the bank statement. c. Colluding to steal cash by wiring money to a fictional vendor and concealing it with customer payments. d. A fraudulent scheme to overstate cash at year-end by manipulating year-end transfers between bank accounts.
D
Which of the following items would not normally appear on bank reconciliations? a. Balance per bank. b. Balance per books. c. Outstanding checks list. d. Outstanding deposits list.
D
Which of the following represents a control related to cash that an auditor might test? a. Reviews of reconciliations of reported cash receipts with remittances prepared by independent parties. b. Reviews of cash budgets and comparison of them with actual cash balances. c. Reviews of discrepancies in cash balances. d. All of these.
D
Which of the following statements regarding reperformance of bank reconciliations is true? a. The auditor's reperformance of a reconciliation of the client's bank accounts provides evidence as to the accuracy of the year-end cash balance. b. The process reconciles the balance per the bank statements with the balance per the books. c. Reperformance of the bank reconciliation is ineffective in detecting major errors, such as those that might be covered up by omitting or underfooting outstanding checks. d. Two of the statements are true. e. All of the statements are true.
D
Which of the following types of financial instruments is a contract between a buyer and a seller in which the buyer has the right (but not the obligation) to buy an agreed quantity of a specified commodity or financial instrument at a certain time for a certain price. a. Hedge. b. Collateralized purchase option. c. Put option. d. Call option.
D
Which of the following types of securities is valued at amortized cost, subject to an impairment test? a. Cash equivalent securities. b. Trading securities. c. Available-for-sale securities. d. Held-to-maturity securities.
D
Which of these is a common example of trend analysis of accounts and ratios that the auditor might consider for cash accounts? a. Compare monthly cash balances with past years and budgets. b. Identify unexpected spikes or lows in cash during the year. c. Compute trends in interest returns on investments. d. All of these.
D
Which one of the following is not a fundamental internal control the auditor would expect to find in place for a cash processing system? a. Periodic internal audits. b. Authorization of transactions. c. Segregation of duties. d. Electronic payments.
D
Affirmative answers to which of the following questions would lead the auditor to assess fraud risk at a higher level for cash? a. Is an individual with access to cash or its recording experiencing financial or personal distress? b. Is an individual with access to cash or its recording being compensated at an amount that he or she might consider low? c. Is the company in potential violation of its debt covenants? d. Two of the three narrative answered choices given. e. All of these.
E
Inherent risk for cash is usually assessed as high for which of the following reasons? a. The volume of transactions flowing through cash accounts throughout the year makes the account more susceptible to error. b. The cash account is more susceptible to fraud because cash is liquid and easily transferable. c. The electronic transfer of cash and the automated controls over cash are such that if errors are built into computer programs, they will be repeated on a large volume of transactions. d. Cash can be easily manipulated. e. All of these.
E
When auditing marketable securities, the auditor will do which of the following? a. Examine broker's advices evidencing purchase of securities. b. Recompute income. c. Foot schedule. d. Both A and B. e. All of the above.
E
