SB HW Ch Auditing Cash & Investments

True or false: Most firms do not have adequate segregation of duties for investment activities.

True Correct. Only entities that engage in a significant number of investment activities are likely to have adequate segregation of duties.

When the model used by management is complex, the markets for the assets or liabilities are not currently active, or a high degree of estimation uncertainty exists, the auditor often engages a(n) ______ ______ to help obtain audit evidence regarding fair value.

valuation specialist

FASB ASC Topic 820 provides a hierarchy of levels that distinguish the types of inputs used to value different types of assets and liabilities are their appropriate fair values. A valuation based on directly or indirectly observable market data for similar or comparable assets or liabilities best describes Level ______. 1 3 2

2

True or false: Because the potential for fraud is high, external auditors must perform substantive procedures on the petty cash fund. True False

False

True or false: A proof of cash is often referred to as a two-column proof of cash.

False Reason: It's often referred to as a four-column proof of cash.

Which of the following statements are correct? Internal auditors often document and perform tests of controls over petty cash. External auditors seldom perform substantive procedures on the petty cash fund. Because the balance in the petty cash fund is not material, there is almost no potential for fraud.

Internal auditors often document and perform tests of controls over petty cash. External auditors seldom perform substantive procedures on the petty cash fund.

True or false: If an auditor suspects cash was stolen without being recorded in the entity's books, a proof of cash will not be useful. True False

True

FASB ASC Topic 820 provides a hierarchy of levels that distinguish the types of inputs used to value different types of assets and liabilities are their appropriate fair values. Which of the following best describes Level 1? Valuations are based on management's best judgment and involve management's assumptions. Valuations are based on quoted prices in active markets for identical assets or liabilities. Valuations are based on directly or indirectly observable market data for similar or comparable assets or liabilities.

Valuations are based on quoted prices in active markets for identical assets or liabilities.

A valuation specialist is often engaged to help obtain audit evidence when ______. a high degree of estimation uncertainty exists the valuation model used by management is complex the markets for the assets or liabilities are not currently active the extent to which the entity relies on a service organization to provide fair value measurements is unknown

a high degree of estimation uncertainty exists the valuation model used by management is complex the markets for the assets or liabilities are not currently active

If an auditor is inspecting securities held by an entity, the auditor should insist that a representative of the entity be present during the physical examination in order to ______. validate the auditor's access to the securities confirm that all securities the entity owns are present and accounted for acknowledge that all securities inspected are returned confirm that all counterparties have sent the appropriate securities to the entity

acknowledge that all securities inspected are returned

Examples of disclosure issues for cash include ______ interbank transfer schedules minutes of board of directors' meetings an accounting policy for defining cash and cash equivalents cash balances restricted by foreign exchange contracts letters of credit

an accounting policy for defining cash and cash equivalents cash balances restricted by foreign exchange contracts letters of credit

To detect fraudulent activities in the cash accounts, auditors might prepare a(n) ______ of cash or test for ______ activities.

blank 1: proof blank 2: kiting

An auditor can gain an understanding of the entity's process for determining fair value measurements and disclosures by considering the ______. accounting and auditing framework associated with fair value measurements extent to which the entity's process relies on a service organization to provide fair value measurements nature and extent of documentation supporting management's assumptions markets for the assets or liabilities that are not currently active and require a high degree of estimation

extent to which the entity's process relies on a service organization to provide fair value measurements nature and extent of documentation supporting management's assumptions

Indicators that the value decline of an investment may not be temporary include ______. fair value that is significantly below cost dividends have been reduced or eliminated downgrade of a debt security by a rating agency decline in value not attributable to specific adverse conditions

fair value that is significantly below cost dividends have been reduced or eliminated downgrade of a debt security by a rating agency

A proof of cash cannot detect ______. if all cash receipts in the entity's cash receipts journal were deposited in the entity's bank account bank transactions that have been omitted from the entity's accounting records if all cash disbursements recorded in the entity's cash disbursements journal have cleared the entity's bank account if there was a theft of cash before it was recorded in the entity's books

if there was a theft of cash before it was recorded in the entity's books

A proof of cash cannot detect ______. if all cash receipts in the entity's cash receipts journal were deposited in the entity's bank account if all cash disbursements recorded in the entity's cash disbursements journal have cleared the entity's bank account if there was a theft of cash before it was recorded in the entity's books bank transactions that have been omitted from the entity's accounting records

if there was a theft of cash before it was recorded in the entity's books

After obtaining sufficient appropriate evidence through substantive tests, the auditor then evaluates whether management's measures and disclosures are ______. unbiased all at Level 1 on the ASC Topic 820 valuation model in accordance with GAAP

in accordance with GAAP

When an employee tries to cover a cash shortage by transferring money from one bank account to another and recording the transaction improperly on the entity's books, the employee is engaged in ______. skimming lapping kiting proving cash

kiting

Covering a cash shortage by transferring money between bank accounts and recording the transfer improperly on the books is a practice known as ______

kitting

When considering important financial statement disclosures for cash, primary documents an auditor might review include ______. loan agreements minutes of board of directors' meetings cash balances restricted by foreign exchange contracts sinking fund requirements line-of-credit arrangements

loan agreements minutes of board of directors' meetings line-of-credit arrangements

Adequate segregation of duties for all investment activities is generally found ______. only in entities subject to FASB ASC Topic 320 only in entities with significant investment activities only in entities that are not privately held in all public entities, regardless of size

only in entities with significant investment activities

Adequate segregation of duties for all investment activities is generally found ______. only in entities with significant investment activities only in entities that are not privately held only in entities subject to FASB ASC Topic 320 in all public entities, regardless of size

only in entities with significant investment activities

Extended audit procedures that auditors typically use to detect fraudulent activities in the cash account include ______. tracing remittance advices to cash receipts journal standard bank confirmation proof of cash extended bank reconciliation procedures tests for kiting

proof of cash extended bank reconciliation procedures tests for kiting

Occurrence and authorization controls for investments include ______. proper approval of the commitment of resources to investment activities adequate documentation of proper initiation and approval of purchases and sales maintenance of a securities ledger that records all securities owned by the entity general policies to guide the entity's investment activities established by the board of directors

proper approval of the commitment of resources to investment activities adequate documentation of proper initiation and approval of purchases and sales general policies to guide the entity's investment activities established by the board of directors

Auditing standards state that the auditor should perform certain procedures when gathering evidence for existence including ______. examining broker invoices or similar documents reading executed partnership agreements recomputing current year interest income using face amount of security, interest rate, and time period held confirmation with the counterparty confirmation of unsettled transactions with the broker-dealer

reading executed partnership agreements confirmation with the counterparty confirmation of unsettled transactions with the broker-dealer

For an entity with a large investment portfolio, the auditor is likely to follow a(n) ______ strategy in which internal control is formally evaluated and tests of controls are performed.

reliance

To audit a payroll or branch bank account, the auditor uses a(n) ______. standard bank confirmation interbank transfer schedule bank reconciliation cutoff bank statement review of irregular entries to the cash accounts

standard bank confirmation bank reconciliation cutoff bank statement

After obtaining sufficient appropriate evidence through ______ tests, the auditor then evaluates whether management's measures and disclosures are in accordance with GAAP.

substantive

For entities that do not require an audit of internal controls over financial reporting, it is more efficient for the auditor to follow a(n) ______ strategy for auditing investment securities at year-end.

substantive

Recomputing current year interest income using face amount of security, interest rate, and time period held is an example of a(n) ______ ______ procedure

substantive analytical

Comparing current year interest and dividend income with the reported income for prior years and with the expected return on investment is a ______. test of details of balances test of controls substantive analytical procedure

substantive analytical procedure

When an auditor examines the disposition of the reconciling items included on the prior month's reconciliations and the reconciling items included in the current bank reconciliation, the auditor most likely ______. has not received a sufficient number of standard bank confirmation forms is testing for bank reconciliation errors suspects fraud and is performing extended bank reconciliation procedures

suspects fraud and is performing extended bank reconciliation procedures

Substantive audit procedures for Level 2 or Level 3 valuations, such as complicated derivatives, include ______. testing management's assumptions for bias determining the extent to which the entity's process relies on a service organization to provide fair value measurements testing whether management's rationale for the method selected is reasonable performing sensitivity analysis to determine the effects of changes in the assumptions on the fair value estimate

testing management's assumptions for bias testing whether management's rationale for the method selected is reasonable performing sensitivity analysis to determine the effects of changes in the assumptions on the fair value estimate

Substantive audit procedures for Level 2 or Level 3 valuations, such as complicated derivatives, include ______. verifying market prices with corroborating evidence from sources such as The Wall Street Journal testing that the underlying data used in the model are accurate, complete, and relevant testing whether the assumptions appropriately reflect observable market assumptions developing an independent point estimate or range for corroborative purposes

testing that the underlying data used in the model are accurate, complete, and relevant testing whether the assumptions appropriately reflect observable market assumptions developing an independent point estimate or range for corroborative purposes

Occurrence and authorization controls for investments help ensure ______. the purchase of an investment is properly initiated by appropriate individuals that all securities are properly classified and appropriate prices are used to accurately value investments for financial statement purposes that all investment transactions are recorded

the purchase of an investment is properly initiated by appropriate individuals

Reasons the audit testing of a payroll or branch account is less extensive than testing for the general account include ______. the types of disbursements from the account are homogeneous all cash disbursements have been recorded in the entity's cash disbursements journal these types of accounts generally contain a minimal balance

the types of disbursements from the account are homogeneous these types of accounts generally contain a minimal balance

An auditor can gain an understanding of the entity's process for determining fair value measurements and disclosures by considering the ______. way that management assigns Level 1, 2, or 3 to the valuation of the asset type of accounts or transactions requiring fair value measurements controls related to the review and approval of accounting estimates way management considered the nature of the asset or liability being valued

type of accounts or transactions requiring fair value measurements controls related to the review and approval of accounting estimates way management considered the nature of the asset or liability being valued

The auditor needs to determine if there have been any changes to the fair value of the investment security because if the investment ______. does not have a fair value that can be readily obtained from market data it should be written down value is determined to be a temporary impairment, the security is written down and a new carrying value established value is determined to be other than temporarily impaired, the security is written down and a new carrying value is established

value is determined to be other than temporarily impaired, the security is written down and a new carrying value is established