Chapter 10 Auditing MC

Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client's employees? (1) A bank lockbox system. (2) Prenumbered remittance advices. (3) Monthly bank reconciliations. (4) Daily deposit of cash receipts.

(1) A bank lockbox system.

j. Hall Company had large amounts of funds to invest on a temporary basis. The board of directors decided to purchase securities and derivatives and assigned the future purchase and sale decisions to a responsible financial executive. The best person or persons to make periodic reviews of the investment activity would be: (1) An investment committee of the board of directors. (2) The chief operating officer. (3) The corporate controller. (4) The treasurer.

(1) An investment committee of the board of directors.

The auditors suspect that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embez- zlement scheme, the auditors most likely would compare the: (1) Details of bank deposit slips with details of credits to customer accounts. (2) Daily cash summaries with the sums of the cash receipts journal entries. (3) Individual bank deposit slips with the details of the monthly bank statements. (4) Dates uncollectible accounts are authorized to be written off with the dates the write- offs are actually recorded.

(1) Details of bank deposit slips with details of credits to customer accounts.

Which of the following procedures would the auditors most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet?(1) Observe the consistency of the employees' use of cash registers and tapes. (2) Inquire about employees' access to recorded but undeposited cash. (3) Trace deposits in the cash receipts journal to the cash balance in the general ledger. (4) Compare the cash balance in the general ledger with the bank confirmation request.

(1) Observe the consistency of the employees' use of cash registers and tapes.

Reconciliation of the bank account should not be performed by an individual who also: (1) Processes cash disbursements. (2) Has custody of securities. (3) Prepares the cash budget. (4) Reviews inventory reports.

(1) Processes cash disbursements.

To provide assurance that each voucher is submitted and paid only once, the auditors most likely would examine a sample of paid vouchers and determine whether each voucher is: (1) Supported by a vendor's invoice. (2) Stamped "paid" by the check signer.(3) Prenumbered and accounted for. (4) Approved for authorized purchases.

(2) Stamped "paid" by the check signer.

The best way to verify the amounts of dividend revenue received during the year is: (1) Recomputation. (2) Verification by reference to dividend record books. (3) Confirmation with dividend-paying companies. (4) Examination of cash disbursements records.

(2) Verification by reference to dividend record books.

The auditors who physically examine securities should insist that a client representative be present in order to: (1) Detect fraudulent securities. (2) Lend authority to the auditors' directives. (3) Acknowledge the receipt of securities returned. (4) Coordinate the return of securities to the proper locations.

(3) Acknowledge the receipt of securities returned.

You have been assigned to the year-end audit of a financial institution and are planning the timing of audit procedures relating to cash. You decide that it would be preferable to: (1) Count the cash in advance of the balance sheet date in order to disclose any kiting operations at year-end. (2) Coordinate the count of cash with the cutoff of accounts payable. (3) Coordinate the count of cash with the count of marketable securities and other nego- tiable assets. (4) Count the cash immediately upon the return of the confirmation letters from the finan- cial institution.

(3) Coordinate the count of cash with the count of marketable securities and other nego- tiable assets.

To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except: (1) Cutoff bank statement. (2) Year-end bank statement. (3) Bank confirmation. (4) General ledger.

(4) General ledger.

In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also: (1) Reviews the monthly bank reconciliation. (2) Returns the checks to accounts payable. (3) Is denied access to the supporting documents. (4) Is responsible for mailing the checks.

(4) Is responsible for mailing the checks.

In order to guard against the misappropriation of company-owned marketable securities, which of the following is the best course of action that can be taken by a company with a large portfolio of marketable securities? (1) Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept. (2) Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access. (3) Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis. (4) Require that the safekeeping function for securities be assigned to a bank or stock broker that will act as a custodial agent.

(4) Require that the safekeeping function for securities be assigned to a bank or stockbro- ker that will act as a custodial agent.