Chapter 10 - Smartbook
Dividends that should have been received and recorded can be computed by referring to ______ published by investment advisory services.
dividend record books
The auditors prepare a list of all the client's cash accounts and related information. This information is traced and reconciled to the
general ledger
Checks payable to officers should be carefully reviewed by the auditors to determine whether the transactions were properly ______.
recorded disclosed authorized
As auditors verify their understanding of the cash receipts and disbursements cycles, they will observe whether there is appropriate
segregation of duties
The best substantive procedure to verify cutoff is to ______.
send confirmations to holders and counterparties
Employees that use business credit cards for expenses on behalf of the company ______.
should provide explanations for the expenditures should maintain receipts to support the expenditures
After auditors reassess the level of control risk for each financial statement assertion regarding cash, they must decide what modifications, if any, are necessary to the planned _____ procedures for cash transactions and balances.
substantive
A large payment to an officer of the business should be verified to ensure it was ______.
supported by adequate vouchers charged to the proper account
True or false: To determine that the client's accounting procedures are operating efficiently, the auditors perform tests of the accuracy of the client's journals and ledgers.
false
Most of the processes related to cash handling are the responsibility of the ______ department.
finance
To verify the client is not overstating cash balances, auditors should analyze bank transfers for the ______.
first week in the year following the audit last week of the audit year
One type of kiting occurs when a business that lacks short-term funds to meet payroll writes a check from one bank and deposits it in their payroll account in another bank which is an example of using the _____ period to meet short-term cash needs.
float
Auditors may make independent computations of interest earned on investments in order to verify ______.
the client owns the investments investment income has not been embezzled
Many companies require employees to submit _____ _____ with receipts and explanations for their business expenditures.
expense report
The Check 21 Act ______.
makes it almost impossible for a client to kite checks eliminates the availability of original checks
An auditor procedure that reconciles the bank's record of cash activity with the client's accounting records for a test period is called a ______.
proof of cash
The cash account should be debited and a liability account should be credited for ______.
significant checks outstanding for long periods of time
Which of the following affect precision of management review controls?
The consistency of performance The level of aggregation of the data
The petty cash funds and change funds may be counted at any time before or after the
balance sheet date
An example of a test of controls would be to compare the details of a sample of recorded disbursements in the ______ journal to accounts payable postings, purchase orders, receiving reports, invoices, and paid checks.
cash disbursements
The review of investment committee minutes and reports is a substantive procedure to verify ______.
completeness
In order to be classified as a cash equivalent, an item must be ______.
convertible to cash on short notice
Auditing procedures for cash and marketable securities should be ______.
coordinated to detect possible fraud
Under FASB ASC 815, all derivative instruments are valued at their fair values and the treatment of unrealized gains or losses depend on whether or not the derivative is ______.
a hedge
Advantage of requiring disbursement by check include ______.
a permanent record of disbursements centralization of disbursement authority obtaining evidence of receipt from the payee in the form of an endorsement
In an IT system, management reviews may be performed with
data analytics software
Auditors confirm cash balances directly with financial institutions in order to substantiate the ______ of the amount of cash shown on the balance sheet.
existence
The auditors' objectives in the examination of financial investments include ______.
obtaining an understanding of internal control over investments using the understanding of the client and its environment to assess inherent risks including fraud
A bank deposit that is restricted in use should be included ______.
as a separate line item
A financial instrument whose value depends upon another financial instrument is a ______.
derivative
Auditors send a confirmation request to investment brokers to confirm _____, ownership and, if appropriate, market value.
existence
Auditors focus on auditing cash because ______ risk is high for liquid assets.
inherent
When dates of recording a cash transfer per the books (from the cash disbursements and cash receipts journal, respectively) are from different financial statement periods, that suggests that
kiting has occured
A cash shortage may be concealed by ______.
omitting a check from the outstanding check list a deliberate error in reconciliation addition hiding cells in a spreadsheet schedule
A form designed to provide corroborating evidence about the client's account balances and outstanding loans is a(n)
standard confirmation form
True or false: Data analytics may be used to examine 100% of cash receipts and disbursements that auditors may consider unusual.
true
Auditors will prepare a schedule that lists all of the client's cash accounts, including ______.
year-end balance per books account number bank name
Which of the following is not a major element of adequate internal control over financial investments?
Formal investment policies that extend the nature of investments in securities and other financial instruments
Auditors working papers for cash typically include ______.
a flowchart or written description of controls assessment of risk for the financial statement assertions about cash summarized test of controls for cash transactions
Internal control over petty cash funds is achieved when ______.
another individual reviews the support for completeness and authenticity prior to reimbursement of the fund the custodian of the fund reviews support from employees seeking reimbursements
When considering the risk that year-end cash is correct, but should be higher, the auditors should focus on confirming that ______.
cash payments were properly authorized and for a legitimate business purpose the client's records reflect all cash transactions that took place during the year
Unreasonable delays in the presentation for payment of checks listed as outstanding at year end implies ______.
checks were not mailed until after year end
The major elements of adequate internal control over financial investments include ______.
complete detailed records of all securities and derivative instruments owned an investment committee that authorizes and reviews financial investment activities
A financial instrument whose value is dependent upon another investment or asset is called a(n)
derivative
Reviewing investment committee minutes and reports is especially important if the client uses
derivatives
Once auditors gain an understanding of the client's internal control over cash receipts and disbursements, they will ______.
determine their planned assessed level of the risk of material misstatement for assertions about cash perform further audit procedures for tests of controls and substantive procedures
If checks remain outstanding for long periods ______.
employees may have an opportunity to steal cash on hand internal control over cash disbursements is weakened
Incoming customer checks are opened by mailroom employees who ______.
endorse the checks "for deposit only" send the remittance advices and a copy of the control listing to the employee responsible for the customers' accounts
A primary advantage of requiring disbursement by check is obtaining evidence of receipt from the payee in the form of ______.
endorsement on the check
Examples of fraud related to cash include ______.
interception of cash receipts before record is made duplicate payments fictitious checks
A company erroneously fails to record derivative agreements that are embedded in other agreements. This error could have been prevented by ______.
monitoring by internal auditors
Proper disclosure of related party transactions should include ______
nature of the relationship dollar amount of the transaction description of the transaction
The detection of fraud in relation to the audit of cash is ______.
only relevant to the overall fairness of the client's financial statements if material in amounts
The auditors should review cutoff bank statements for any paid checks issued on or before the balance sheet date but not listed as outstanding on the client's year-end bank reconciliation, in order to determine that the amount of cash shown on the balance sheet date was not ______.
overstated
After the auditors have performed an adequate test of controls over financial investments, they will most likely.
perform substantive procedures
When internal control over the recording of cash receipts and disbursements is considered weak, the auditors may prepare a ______, which reconciles cash transactions occurring during a specific period.
proof of cash
In many retail establishments, dishonesty is discouraged by ______.
proper use of cash registers
To document auditors understanding of internal controls over cash, auditors often use a flowchart or internal control
questionnaire
An example of a test of controls is to compare the details of a sample of cash ______ listings to the cash receipts journal, accounts receivable postings, and authenticated deposit slips.
receipts
When auditors encounter evidence of small-scale employee fraud that could not have a material effect upon the financial statements the auditors should ______.
review the situation with management and the audit committee before preceding
Electronic point-of-sale systems decrease the risk of ______.
the salesperson recording sales at erroneous prices
Joint control for financial investments means ______.
the two company custodians must be together to access securities
Electronic funds transfer systems ______.
transmit and processes funds related cash disbursement and receipt transactions
Cash equivalents include ______.
money market funds certificates of deposit savings certificates
Auditors verify deposits in transit as shown on the year-end bank reconciliation appear as credits on the bank statement on the first business day of the new year to verify proper ______ of cash receipts.
cutoff
The act of kiting, or manipulating cash to appear in the balance of two or more bank accounts prior to the balance sheet date, can ______.
meet short-term cash needs conceal a cash shortage
The auditors may ask the financial institutions for cutoff bank statements in order to ______.
test the accuracy of the year-end reconciliation
When petty cash funds are kept in the form of a separate bank account, the bank should be instructed to only cash checks made payable to ______
the bank the custodian
Intentional misstatements of the value of closely held investments may be prevented by ______.
an effective audit committee
Auditors can review bank accounts for kiting by preparing a schedule of bank transfers for a few days ______.
before the balance sheet date after the balance sheet date
Checks received through the mail should be opened by the ______.
mailroom employees
It is important for management to monitor cash. A key to identifying cash receipts and disbursements that potentially may be misstated are management
management review controls
The audit of very complex financial instruments is often considered a(n) _____ _____ matter that must be communicated in the audit report of a public company.
critical audit
Most of the processes relating to cash handling are the responsibility of the _____ department, which is under the direction of the _____.
finance, treasurer
In order to account for a derivative instrument as a hedge, management must establish at inception the ______.
measurement approach method to be used to assess its effectiveness intent to hedge
Confirming accounts on deposit and obtaining or preparing reconciliations between bank statements and the accounting records is a direct approach to testing the ______ objective.
existence
Auditors working papers for cash typically include ______.
bank confirmations cash count sheets a lead schedule
Ideally, to ensure adequate handling and recording of cash receipts, disbursements, and balances, the ______.
functions of the finance and accounting departments should be integrated
A company can strengthen internal control of cash receipts by using a(n) _____, which is a post office box controlled by a company's bank at which cash remittances from customers are received.
lockbox
Which of the following statements is correct?
Auditors may use a client prepared year-end bank reconciliation but must examine it in detail.
In the context of testing the accuracy of clients' journals and ledgers, which of the following is true of using a manual system?
Information on source documents is entered first in a journal.
Auditors gain an understanding of internal controls over cash by ______.
completing an internal control questionnaire preparing a flowchart to describe internal control
Agreements to maintain compensating balances should be Blank______ in the financial statements.
disclosed
To help provide assurance that all cash that should have been received was received, recorded accurately, and deposited promptly and that cash balances are adequate, but not excessing, the functions of the finance and accounting department should be ______,
integrated
If a company has not adopted the fair value option for valuation, the auditors should determine that ______.
investments are separated into short-term and long-term portfolios
A check that is not negotiable (null), usually resulting from an error in preparing the check, is called a(n)
voided
Violet Co. uses a lockbox at 1st Bank, which means that when customer checks are received ______.
1st Bank employees sends the remittance advices to Violet Co. Violet Co. employees record the payments to customer accounts
Which of the following are good cash handling practices?
Encourage customers to obtain receipts and observe cash register totals Centralize receiving of cash to the extent practical. Use software to identify unusual cash transactions.
Auditors inspect the client's securities by ______.
confirming securities are registered in the company's name checking serial numbers against prior years working papers
After performing test of controls, auditors should reassess the level of ______ risk for each financial statement assertion regarding cash.
control
A bank statement covering a specified number of business days (usually 7 to 10) after the client's balance sheet date is a(n) ______ bank statement.
cutoff
Which of the following accounts is NOT normally included in cash?
investments
Manipulations causing an amount of cash to be included simultaneously in the balance of two or more bank accounts is called ______.
kiting
When an amount of cash is included in the balance of two or more bank accounts at the same time to conceal a cash shortage or meet short-term cash needs, a fraudulent act called _____ has occurred.
kiting
A type of fraud that involves concealment of a cash shortage by delaying the recording of cash receipts is called
lapping
Reconciliation of monthly bank statements is important to adequate internal control over receipts and disbursements. The best person to perform the reconciliation is the employee who has ______.
no authorization, accounting, or cash handling functions
Before verifying the client's cash on hand, auditors must establish control over ______.
notes receivable securities and other investments cash funds
A client may conceal an ______ of cash by omitting an outstanding check from the year-end bank reconciliation.
overstatement
In a computerized purchasing system, vendor invoice information is entered by the accounting department and matched by the computer with purchase order and receiving information entered by other departments. If the information matches, ______.
the computer will approve the payment and record the voucher as a payable
Electronic point-of-sale systems often may be programmed to perform numerous other control functions, including ______.
updating accounts receivable and perpetual inventory records providing special printouts accumulating sales data by product line, salesperson, etc. verification of the credit status of charge account customers
A check that is written incorrectly and therefore defaced to eliminate the possibility of further use is called a ______ check.
voided
When auditing complex financial statements, auditors may use specialists ______ the firm.
either within or outside
Account balances are often verified with financial institutions using a(n) _____ _____ form that addresses only the client's deposits and loan balances.
standard confirmation
Segregation of the functions of custody and record keeping of financial investments may be achieved by using an independent safekeeping agent such as a(n) ______.
stockbroker
After the auditors identify and assess risks of material misstatement for the assertions about cash, they can plan appropriate _____ procedures that address them.
substantive
Important internal controls over cash disbursements include ______.
using prenumbered checks and accounting for all the numbers in the series using computers to print checks and maintain item counts and control totals
The auditor's objectives in the audit of cash and cash transactions include ______.
verifying the cutoff of cash transactions determining the accuracy of cash transactions establishing the completeness of recorded cash
Transactions can be recorded in a ______ (which normally replaces a purchases journal) by an entry debiting the appropriate asset, liability, or expense account and crediting vouchers payable.
voucher register
The act of tracing a transaction through each step of the system to determine that transactions are being processed in the manner indicated by the flowchart is called a ______.
walk-through
Action taken by the client shortly before the balance sheet date to improve the financial picture presented in the financial statements is called
window dressing
Auditors should be aware of possible ______ related to cash transactions, or actions taken by the client shortly before the balance sheet date to improve the financial picture presented in the financial statements.
window dressing