Chapter 10

Marketable equity securities should be valued at cost. T/F

False

The auditor suspects that the entity is inappropriately increasing the cash reported on its balance sheet by drawing a check on one account and not recording it as an outstanding check on that account and simultaneously recording it as a deposit in a second account.

Prepare a bank transfer schedule.

The details of invoices for equipment repairs were not clearly identified or explained to the accounting department employees. The auditor suspects that the bookkeeper incorrectly recorded the repairs as fixed assets.

Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization.

A salesperson who uses a cash register to record over the counter sales should, at the end of each workday, turn over to a supervisor the cash register tape and a corresponding amount of cash. T/F

True

Which of the following is a frequent control over cash disbursements? a. Checks should be sent directly to the payee by the employee who prepares documents that authorize check preparation. b. Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations. c. Checks and supporting documents should be marked "Paid" immediately after the check is returned with the bank statement. d. Checks should be signed by the controller and at least one other employee of the company.

b. Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations.

The entity borrowed funds from a financial institution. Although the transaction was properly recorded, the auditor suspects that the loan created a lien on the entity's real estate that is not disclosed in its financial statements.

Confirm the terms of borrowing arrangements with the lender.

The auditor suspects that a kiting scheme exists because an accounting department employee who can issue and record checks seems to be leading an unusually luxurious lifestyle.

Prepare a bank transfer schedule.

The auditor suspects that selected employees of the entity received unauthorized raises from the entity's payroll supervisor, who has access to payroll records.

Vouch data in the payroll register to documented authorized pay rates in the human resources department's files.

The entity's cash receipts of the first few days of the subsequent year were properly deposited in its general operating account after the year-end. However, the auditor suspects that the entity recorded the cash receipts in its books during the last week of the year under audit.

Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips.

The auditor suspects that a lapping scheme exists because an accounting department employee who has access to cash receipts also maintains the accounts receivable ledger and refuses to take any vacation or sick days.

Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. & Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date.

The auditor suspects that vouchers were prepared and processed by an accounting department employee for merchandise that was neither ordered nor received by the entity.

Examine the supporting purchase orders and receiving reports for selected paid vouchers.

A client has $100,000 on deposit at year-end and owes the bank $250,000 on a note payable. The borrowing agreement calls for the client to maintain a minimum (compensating) balance of $40,000 on deposit during the life of the bank loan. On the balance sheet, the asset cash should be stated at $60,000, the excess of the deposit over the compensating balance. T/F

False

The auditor suspects that fictitious employees have been placed on the payroll by the entity's payroll supervisor, who has access to payroll records and to the paychecks.

Observe payroll check distribution on a surprise basis.

An auditor suspects that the controller wrote several checks and recorded the cash disbursements just before year-end but did not mail the checks until after the first week of the subsequent year.

Obtain the cutoff bank statement and compare the cleared checks to the year-end bank reconciliation.

The auditor discovered an unusually large receivable from one of the entity's new customers. The auditor suspects that the receivable may be fictitious because the auditor has never heard of the customer and because the auditor's initial attempt to confirm the receivable has been ignored by the customer.

Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. & Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer.

The auditor suspects that the entity's controller has overstated sales and accounts receivable by recording fictitious sales to regular customers in the entity's books.

Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. & Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer.

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

a) A bank lockbox system.

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: a) An investment committee of the board of directors. b) The chief operating officer. c) The corporate controller. d) The treasurer.

a) 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 embezzlement scheme, the auditors most likely would compare the: a) Details of bank deposit slips with details of credits to customer accounts. b) Daily cash summaries with the sums of the cash receipts journal entries. c) Individual bank deposit slips with the details of the monthly bank statements. d) Dates uncollectible accounts are authorized to be written off with the dates the writeoffs are actually recorded.

a) 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? a) Observe the consistency of the employees' use of cash registers and tapes. b) Inquire about employees' access to recorded but undeposited cash. c) Trace deposits in the cash receipts journal to the cash balance in the general ledger. d) Compare the cash balance in the general ledger with the bank confirmation request.

a) 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: a) Processes cash disbursements. b) Has custody of securities. c) Prepares the cash budget. d) Reviews inventory reports.

a) 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: a) Supported by a vendor's invoice. b) Stamped "paid" by the check signer. c) Prenumbered and accounted for. d) Approved for authorized purchases.

b) Stamped "paid" by the check signer.

The best way to verify the amounts of dividend revenue received during the year is: a) Recomputation. b) Verification by reference to dividend record books. c) Confirmation with dividend-paying companies. d) Examination of cash disbursements records.

b) Verification by reference to dividend record books.

Internal control over cash receipts is weakened when an employee who receives customer mail receipts also: a. prepares bank deposit slips for all mail receipts. b. records credits to individual accounts receivable. c. prepares initial cash receipts records. d. maintains a petty cash fund.

b. records credits to individual accounts receivable.

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

c) 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: a) Count the cash in advance of the balance sheet date in order to disclose any kiting operations at year-end. b) Coordinate the count of cash with the cutoff of accounts payable. c) Coordinate the count of cash with the count of marketable securities and other negotiable assets. d) Count the cash immediately upon the return of the confirmation letters from the financial institution.

c) Coordinate the count of cash with the count of marketable securities and other negotiable assets.

Which of the following audit procedures is the most appropriate when internal control over cash is weak or when a client requests an investigation of cash transactions? a. Evaluation of ratio of cash to current liabilities. b. Bank reconciliation. c. Proof of cash. d. Cash confirmation.

c. Proof of cash.

As compared to manual processing, electronic processing of cash transactions generally makes kiting: a. neither easier, nor more difficult to accomplish. b. easier to accomplish. c. more difficult to accomplish. d. impossible to accomplish.

c. more difficult to accomplish.

Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: a. board of directors. b. executive committee. c. treasurer. d. controller.

c. treasurer.

To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except: a) Cutoff bank statement. b) Year-end bank statement. c) Bank confirmation. d) General ledger.

d) General ledger.

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

d) 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? a) Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept. b) Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access. c) Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis. d) Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent.

d) Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent.

The financial management of a company should take steps to see that company's investment securities are protected. Which of the following is not a step that is designed to protect investment securities? a. Access to securities should be vested in more than one person. b. Securities should be registered in the name of the owner. c. Securities should be properly controlled physically in order to prevent unauthorized usage. d. Custody of securities should be assigned to persons who have the accounting responsibility for securities.

d. Custody of securities should be assigned to persons who have the accounting responsibility for securities.

The auditors who are engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to: a. verify the cash balance reported on the standard financial institution confirmation form. b. detect kiting. c. detect lapping. d. verify reconciling items on the client's bank reconciliation.

d. verify reconciling items on the client's bank reconciliation