Audit Chapter 10

Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting?

Prepare a schedule of bank transfers.

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.

Verification of cash and other liquid assets on the same date may prevent substitution of one form of asset for another.

True

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.

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.

The purchasing department manager and assistant manager are the authorized check signers.

Agree. Since the purchasing department employees approve purchases they should not also sign checks.

The authorized check signers reconcile bank accounts.

Agree. The authorized signers disburse funds and effective oversight of those disbursements

Voided checks are torn up and destroyed.

Agree. Voided checks should be so marked (defaced) and retained so as to allow one to know that they have been voided and are not outstanding.

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 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.

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 and disbursements records.

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.

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

Count of investment securities.

All cash receipts received through the mail are restrictively endorsed when received.

Disagree. A policy of restrictively endorsing such receipts (e.g., endorsing the checks as "pay only to Bemco") is a control, not a control deficiency.

All cash receipts (checks) received through the mail are prelisted by the two individuals who open the mail.

Disagree. Cash receipts should be so prelisted.

No checks are made payable to cash.

Disagree. Checks should not be made payable to cash as they may be cashed by anyone—properly or improperly.

Separate sequences of prenumbered checks are used for each bank account.

Disagree. One expects separate sequences of numbers of the various accounts, as one overall sequence for various bank accounts is, at best, unwieldy; establishing control over each sequence is generally adequate.

When a disbursement is made based on paper supporting documents, those supporting documents are canceled by the individual who signs the check.

Disagree. The person signing the check should be the person who perforates (defaces) the checks so as to eliminate the possibility of that support being used again to improperly support another disbursement.

A compensating balance agreement always requires that cash be reclassified as a noncurrent asset.

False

A proof of cash is an audit procedure that is performed on almost every engagement.

False

Confirmations for cash balances should be mailed only to the financial institutions with which the client has a cash balance at year-end.

False

Lapping of accounts receivable by an employee is not possible when there is adequate segregation of duties with respect to cash disbursements.

False

Mailroom personnel of a company should prepare a control listing of incoming cash receipts and deposit them intact daily.

False

Signed checks should be returned to the cash disbursements clerk for mailing.

False

The auditors should count small petty cash funds at year-end to make sure that balance is not understated on the financial statements.

False

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.

Which of the following is correct concerning "window dressing" for cash?

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?

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 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 confirmation 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 is:

Send a bank confirmation as of year-end.

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

Separate recordkeeping from accounting for cash to the extent possible.

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 from customers' checks.

Control over the receipt of cash sales is best achieved when two or more employees participate in each transaction.

True

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

Understatement of outstanding checks.