Chapter 10: Cash and Financial Investments

Auditors working papers for cash typically include ______. -aged trial balance -bank confirmations -cash count sheets -petty cash reconciliations -a lead schedule

-bank confirmations -cash count sheets -a lead schedule

The review of investment committee minutes and reports is a substantive procedure to verify ______. -rights -completeness -presentation

-completeness

Auditing procedures for cash and marketable securities should be ______. -performed separately to allow for potential fraud comparisons -coordinated to detect possible fraud

-coordinated to detect possible fraud

Auditors focus on auditing cash because ______ risk is high for liquid assets. -audit -control -inherent

-inherent

A client may conceal an ______ of cash by omitting an outstanding check from the year-end bank reconciliation. -overstatement -understatement

-overstatement

In many retail establishments, dishonesty is discouraged by ______. -proper use of cash registers -a centralized cashier that processes all sales transactions -ensuring that at least two employees are involved in making over the counter sales and recording the transactions

-proper use of cash registers

An employee with access to securities fraudulently converts them for personal use. This act could have been prevented by ______. -competent personnel -segregation of duties -formal investment policies

-segregation of duties

Risks of material misstatement arise jointly from __________(1) risk and __________(2) risk. (Enter only one word per blank.)

(1) inherent (2) control

True or false: The liquid nature of financial investments that are marketable makes the potential for fraud high. -True -False

-True

Payroll and petty cash are normally maintained at a _____ balance. -high -moderate -low

-low

Before auditors assess the risk of material misstatement, they will typically ______. -obtain an understanding of internal control -perform tests of controls -perform substantive procedures

-obtain an understanding of internal control

A financial instrument whose value is dependent upon another investment or asset is called a(n) __________(1). (Enter only one word per blank.)

(1) derivative

Auditors must obtain an understanding of __________(1) __________(2) over investments, such as separation of duties. (Enter only one word per blank.)

(1) internal (2) control

Intentional misstatements of the value of closely held investments may be prevented by ______. -formal investment policies -appropriate segregation of duties -an effective audit committee

-an effective audit committee

To document auditors understanding of internal controls over cash, auditors often use a flowchart or internal control __________(1). (Enter only one word per blank.)

(1) questionnaire

Auditors examine financial investments to gain an understanding of the client and its environment, and to assess ______ risks including the risk of fraud. -audit -inherent -business

-inherent

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 -responsibility to record cash transactions -responsibility to handle cash receipts and disbursements -responsibility to authorize payments

-no authorization, accounting, or cash handling functions

General guidelines to good cash handling include depositing cash receipts ______. -weekly -biweekly -daily

-daily

Internal control over cash sales is strongest when ______ participate(s) in each transaction with a customer. -only one employee -two or more employees

-two or more employees

Auditors gain an understanding of internal controls over cash by ______. -counting all cash on hand at the balance sheet date -preparing a flowchart to describe internal control -confirming cash balances with financial institutions -completing an internal control questionnaire

-preparing a flowchart to describe internal control -completing an internal control questionnaire

A financial instrument whose value depends upon another financial instrument is a ______. -contract -derivative -dependent investment

-derivative

The best substantive procedure to verify cutoff is to ______. -evaluate the method of accounting for investments -make independent computations of revenue -send confirmations to holders and counterparties

-send confirmations to holders and counterparties

Examples of fraud related to cash include ______. -duplicate payments -interception of cash receipts before record is made -long outstanding receivables -fictitious checks

-duplicate payments -interception of cash receipts before record is made -fictitious checks

Auditors working papers for cash typically include ______. -summarized test of controls for cash transactions -a flowchart or written description of controls -copies of employee paychecks -copies of significant payables and receivables and any exceptions reports -assessment of risk for the financial statement assertions about cash

-summarized test of controls for cash transactions -a flowchart or written description of controls -assessment of risk for the financial statement assertions about cash

The auditors' objectives in the audit of cash and cash transactions are to ______. -obtain an understanding of internal control over cash -ascertain there are no misstatements of cash -consider inherent risks, including fraud risks, related to cash -analyze business risks related to the company's cash

-obtain an understanding of internal control over cash -consider inherent risks, including fraud risks, related to cash

Under the terms of a bank loan agreement, the company may be required to keep the general cash account at a minimum amount, which is referred to as a(n) __________ __________. (Enter only one word per blank.)

(1) compensating (2) balance

Auditors focus on cash because ______. -cash is the most liquid of assets, and therefore inherent risk is high -cash is typically among the largest line item on the balance sheet -auditors may substantiate other items that flow through cash -a company with poor internal controls over cash may be concealing fraud

-cash is the most liquid of assets, and therefore inherent risk is high -auditors may substantiate other items that flow through cash -a company with poor internal controls over cash may be concealing fraud

The auditor's objectives in the audit of cash and cash transactions include ______. -establishing the completeness of recorded cash -determining the accuracy of cash transactions -verifying the cutoff of cash transactions -reviewing all cash transactions that occurred

-establishing the completeness of recorded cash -determining the accuracy of cash transactions -verifying the cutoff of cash transactions

Which of the following is not a major element of adequate internal control over financial investments? -Separation of duties between the executive authorizing purchases and sales of securities and derivative instruments, the custodian of the securities, and the person maintaining the records of investments -Complete detailed records of all securities and derivative instruments owned and the related provisions and terms -An investment committee of the board of directors that authorizes and reviews financial investment activities for compliance with investment policies -Formal investment policies that extend the nature of investments in securities and other financial instruments

-Formal investment policies that extend the nature of investments in securities and other financial instruments

Which of the following are good cash handling practices? -Use software to identify unusual cash transactions. -Permit one trusted employee to handle specific transactions from beginning to end -Encourage customers to obtain receipts and observe cash register totals -Have monthly bank reconciliations prepared by employees responsible for custody of cash -Centralize receiving of cash to the extent practical.

-Use software to identify unusual cash transactions. -Encourage customers to obtain receipts and observe cash register totals -Centralize receiving of cash to the extent practical.

The major elements of adequate internal control over financial investments include ______. -an investment committee that authorizes and reviews financial investment activities -regular review by the company's board of directors -authorization for all investment transactions by internal audit personnel -complete detailed records of all securities and derivative instruments owned

-an investment committee that authorizes and reviews financial investment activities -complete detailed records of all securities and derivative instruments owned

Important internal controls over cash disbursements include ______. -using computers to print checks and maintain item counts and control totals -use of a voucher system assembled by the mailroom employees -reconciliation of monthly bank statements by the employee who signs checks -using prenumbered checks and accounting for all the numbers in the series

-using computers to print checks and maintain item counts and control totals -using prenumbered checks and accounting for all the numbers in the series

Place the steps of the audit of financial investments in order from first step to last step completed. -Obtain an understanding of internal control -Assess the risk of material misstatement and design further audit procedures -Perform substantive procedures for investment transactions -Perform test of controls for investment transactions

-Obtain an understanding of internal control -Assess the risk of material misstatement and design further audit procedures -Perform test of controls for investment transactions -Perform substantive procedures for investment transactions

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 -sales on account are recorded in the correct period based on shipping information

-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