Chapter 10 - Questions

A ___________ allows auditors to examine checks listed as outstanding and the details of deposits in transit on the company's reconciliation a. Cutoff bank statement b. Bank reconciliation c. Statement of cash flows d. None of the above

A

Auditors inspect the client's securities by: (Select all that apply) a. checking serial numbers against prior years working papers b. counting securities held by the client at the end of the fieldwork c. confirming securities are registered in the company's name d. reviewing statements provided by the client's managements

A, C

Cash confirmations need to be mailed under the control of the __________.

Auditor

(E) 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 - comparing revenue with books

The petty cash funds and change funds may be counted at any time before or after the __________ date.

Balance sheet

(E) Auditor should insist representative of client be present during physical exam of securities in order to: a. Lend authority of auditors directives b. Detect forged securities c. Acknowledge the receipt of the securities returned

C

(E) What is the answer to question #39?

C

A financial instrument whose value is dependent upon another investment or asset is called a(n) ____________.

Derivative

Cash reconciliations can be tested via __________. a. counting b. disclosure c. observation d. physical inventory e. reperformance

E

To document auditors understanding of internal controls over cash, auditors often use a flowchart or internal control __________.

Questionnaire

Rank the following audit of cash steps in order from first to last step completed. 1. perform further audit procedures - test of controls 2. obtain understanding of internal control over cash 3. assess risks of material misstatement and design further audit procedures 4. perform further audit procedures - substantive procedures

2, 3, 1, 4

A check that is written incorrectly and therefore defaced to eliminate the possibility of further use is called a ____________ check. a. voided b. canceled c. reconciled

A

After performing test of controls, auditors should reassess the level of __________ for each financial statement assertion regarding cash. a. control risk b. business risk c. audit risk

A

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

Most misstatements of assets involve: a. Overstatement b. Understatement

A

To verify cutoff of financial investments, auditors will review: a. transactions for 2 weeks after the balance sheet date b. transactions for 2 weeks prior to the balance sheet date c. transactions during the audit fieldwork d. a sample of transactions during the year

A

Trace several transactions for purchases and sales of investments through the accounting system is an example of: a. Ensure transactions are recorded and classified properly b. Ensure policies written are being followed c. Verify that internal auditors' observations are consistent with those of external auditors d. Ensure reports tie to client activity

A

When internal control over the recording of cash receipts and disbursements is considered weak, the auditors may prepare a ___________, which reconciles cash transactions occurring during a specific period. a. proof of cash b. bank cutoff statement c. standard confirmation form

A

Which of the following correctly identifies a risk facing SSC that might adversely affect sales during the coming years? a. A general slowdown in the economy. b. Sales to many smaller customers other than Wingo Corporation. c. Increased attention to developing new products. d. A board of directors dominated by management.

A

Which of the following correctly identifies a risk facing SSC that might affect its ability to continue as a going concern over the long run? a. Competition from several competitors. b. Your CPA firm's decision to issue standard unmodified audit reports not mentioning the goingconcern status during the past five years. c. Obsolescence of all products due to rapid changes in technology in the industry. d. The nature of inventory items—small in size, high in value.

A

FASB ASC 320 divides securities into three portfolios including: (Select all that apply) a. trading securities b. held-to-maturity securities c. available-for-sale securities d. liquid securities

A, B, C

Auditors working papers for cash typically include: (Select all that apply) a. lead schedule b. bank confirmations c. aged trial balance d. cash count sheets e. petty cash reconciliations

A, B, D

Auditors design test of controls and substantive procedures that: (Select all that apply) a. verify the cutoff of cash transactions b. test all internal controls related to cash transactions c. determine the accuracy of cash transactions d. review all cash transactions

A, C

Incoming customer checks are opened by mailroom employees who: (Select all that apply) a. send the remittance advices and a copy of the control listing to the employee responsible for the customer's accounts b. send a copy of the control listing and the cash receipts to the controller c. endorse the checks "for deposit only"

A, C

Auditors can use __________ procedures to test the reasonableness of the amounts of recorded dividend and interest income.

Analytical

Concerning overstated cash, a shortage may have been concealed by the insertion of a(n) ____ in the cash on have at year-end, or by the omission of a(n)____ from the year-end bank reconciliation a. outstanding check, fictitious check b. fictitious check, outstanding check

B

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

B

Of the following, the most significant risk factor relating to the risk of misstatement arising from fradulent financial reporting for SSC is that: a. Company officers serve on the board of directors. b. The company must refinance a significant portion of its debt. c. The company operates in the Bisbee, Arizona, area. d. The company paid no dividend this year.

B

Payroll, petty cash, and savings accounts are all classified as __________ accounts. a. LT assets b. Cash c. Investment

B

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

B

To verify the client is not overstating cash balances, auditors should analyze bank transfers for the: (Select all that apply) a. the fieldwork period b. first week in the year following the audit c. last week of the audit year d. entire period being audited

B, C

When considering the risk that YE cash is correct, but should be higher, the auditors should focus on confirming that: (Select all that apply) a. sales on account are recorded in correct period based on shipping information b. cash payments were properly authorized and for a legitimate business purpose c. the client's records reflect all cash transactions that took place during the year

B, C

Important internal controls over cash disbursements include: (Select all that apply) a. reconciliation of monthly banks statements by the employee who signs checks b. using computers to print checks and maintain item counts and control totals c. use of voucher system assembled by mailroom employees d. using prenumbered checks and accounting for all numbers in the series

B, D

(E) 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

(E) Which of following not correct? a. Cash important to audit process bc vulnerability to misappropriate b. Payroll cash account balances on impress basis are more easily controlled than others not so kept c. Confirmation of cash only performed as of BS date bc auditor express opinion as of that date

C

A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and submission of coupons for periodic interest collections probably should be delegated to the: a. cashier. b. chief accountant. c. treasurer. d. internal auditors.

C

In a restaurant setting, control over cash sales are best handled when: a. the sales ticket is prepared by an employee who also receives cash from the customer and deposits cash to bank daily b. the sales ticket is prepared by an employee who also receives cash from the customer c. the sales ticket is prepared by a separate employee and cash is received from a centrally located cashier

C

The auditors objectives in the audit of cash and cash transactions are to: (Select all that apply) a. ascertain there are no misstatements of cash b. analyze business risks related to the company's cash c. obtain an understanding of internal control over cash d. consider inherent risks, including fraud risks, related to cash

C, D

(E) Which of the following are not confirmed on standard bank confirmation form used for cash balances at financial institutions? a. Checking account balances b. Savings balance c. Loans payable d. Securities held for client by financial institution

D

(E) Your client left cash receipts journal open at YE for extra day and included 1/1 cash receipts in december totals. Cash sales. What likely happened? a. Sales understated b. A/R understated c. Inventory overstated d. Net income overstated

D

After testing internal controls related to investments, it may be necessary to ______the risk of material misstatement. a. delete b. erase c. ignore d. modify e. skip

D

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

D

In order to avoid the misappropriation of company-owned financial investments, which of the following is the best course of action that can be taken by the management of a company with a large portfolio of financial investments? 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 securities broker who will act as a custodial agent.

D

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 at as a custodial agent

D

The least crucial element of internal control over cash is: a. separation of cash record keeping from custody of cash. b. preparation of the monthly bank reconciliation. c. canceling the supporting documents for disbursements. d. separation of cash receipts from preparing deposits.

D

Which of the following correctly identifies a risk facing SSC that might adversely affect cash receipts during the coming years? a. Establishment of the audit committee. b. Increase in the popularity of home swimming pools. c. Sales to many different customers. d. Sales to Wingo.

D

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 - not returned to accounting department

A sample internal control questionnaire question may ask about _________ inherent in the investment policy. a. clients b. dollars c. money d. people e. risk

E

An investment committee is a standing committee of _______. a. development staff b. employees c. executives d. human resources e. the board of directors

E

Many companies require employees to submit ___________ with receipts and explanations for their business expenditures.

Expense reports

T or F: 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.

False

T or F: Auditors normally verify the amount of dividends earned on the client's security investments by writing directly to the companies that paid the dividends.

False

T or F: Marketable equity securities should be valued at cost.

False - FV

The auditors prepare a list of all the client's cash accounts and related information. This information is traced and reconciled to the ___________.

General ledger

Internal control over financial investments should require that securities are ____________ in the name of the company.

Registered

After the auditors identify and assess risks of material misstatement for the assertions about cash, they can plan appropriate __________ procedures that address them.

Substantive

T or F: A cutoff bank statement addresses whether checks outstanding at year‑end were included in the list of outstanding checks in the year‑end bank reconciliation.

True

T or F: The omission of an outstanding check may be indicative of either an error or fraud.

True

T or F: The practice of "kiting" as a means of overstating cash is possible only if the client maintains two or more bank accounts.

True

T or F: When the confirmation process is not performed electronically, confirmation requests should be mailed by the auditors in envelopes bearing the auditors' return address.

True

An example of a test of controls would be to compare the details of a sample of recorded disbursements in the __________ journal to accounts payable postings, purchase orders, receiving reports, invoices, and paid checks. a. cash disbursements b. cash receipts c. sales

A

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

A

The auditors suspect that a client's cashier is misappropriating cash receipts for personal use by lapping customer check 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 write-offs are actually recorded

A

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 reconciling items on the client's bank reconciliation. b. detect kiting. c. verify the cash balance reported on the standard financial institution confirmation form. d. detect lapping.

A

When reviewing of client's client prepared bank reconciliations, auditors should directly confirm ___________ with the financial institution. a. bank balances b. book balances c. reconciling items

A

Which of the following is not one of the auditors' primary objectives in an examination of investments in securities? a. To determine whether all securities are in proper, secure, files at year-end. b. To determine whether securities are properly classified on the balance sheet. c. To determine whether securities actually exist. d. To determine whether securities are the property of the client.

A

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 - or receipts

The major elements of adequate internal control over financial investments include which of the following? (Select all that apply) a. regular review by the company's BOD b. an investment committee that authorizes and reviews financial investment activities c. authorization by internal audit personnel for all investment transactions d. complete detailed records of all securities and derivative instruments owned

B, D

A statement covering a specified number of business days following the end of the client's fiscal year is a a. Financial statement b. Bank reconciliation c. Cutoff bank statement d. None of the above

C

After auditing cash, it is important to evaluate proper financial statement presentation and __________ of cash. a. adjusting b. counting c. disclosure d. inventory e. misstatement

C

Sometimes auditors may ______securities on hand. a. consider b. disallow c. inspect d. purchase e. sell

C

The internal control weakness that allowed a bookkeeper to embezzle cash receipts from customers and write off the related receivables, is which of the following? a. inadequate controls for reconciling bank accounts b. inadequate controls for reconciling cash register tapes and accounting records c. lack of segregation of duties

C

Auditors are often concerned with the _______of cash, as this is where most misstatements occur. a. disclosure b. existence c. inventory d. overstatement e. understatement

D

Select the audit procedure with the error or fraud that the procedure is likely to detect. a. Preparing and verifying a schedule of bank transfers. b. Tracing remittance advices to postings in the accounts receivable records. c. Comparing the serial numbers of securities on hand to numbers recorded in the prior year's audit working papers. d. Review of the bank cutoff statement. e. Preparing a "proof of cash" for the entire audit period. Understating the outstanding checks on the year-end bank reconciliation.

D

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. Securities should be properly controlled physically in order to prevent unauthorized usage. b. Securities should be registered in the name of the owner. c. Access to securities should be vested in more than one person. d. Custody of securities should be assigned to persons who have the accounting responsibility for securities.

D

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

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. Cash confirmation. c. Bank reconciliation. d. Proof of cash.

D

T or F: Auditors must be present to perform a count of securities and cash on the balance sheet dates.

False - not always possible to count on BS date

T or F: The audit working paper known as a "proof of cash" is a means of proving that checks paid by the bank during the test period were not in excess of authorized cash receipts during that same test period.

False - reconciles bank and client activity

Auditors confirm cash balances directly with financial institutions in order to substantiate the __________ of the amount of cash shown on the balance sheet. a. existence b. cutoff c. completeness

A

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

A

Auditors verify deposits in transit as shown on the YE bank reconciliation appear as credits on the bank statement on the first business day of the new year to verify proper ___________ of cash receipts. a. cutoff b. valuation c. rights

A

After the auditors have performed an adequate test of controls over financial investments, they will most likely: a. assess the risk of material misstatement b. consider inherent risks, including fraud risks c. perform substantive procedures

C

T or F: The standard financial institution confirmation request used by the auditors is a means of obtaining documentary evidence about both assets and liabilities.

True - deposits and loans

T or F: Auditors should never count a cash fund with the custodian present because the custodian might be able to influence the count.

False

T or F: Good internal control over financial investments requires that the treasurer obtain certificates for all securities and keep them in the company safe.

False

T or F: The inspection of securities on hand should be coordinated with the verification of inventories because both involve counting and inspection and can conveniently be combined.

False

T or F: An improper bank reconciliation designed to conceal a cash shortage is more likely to overstate than understate the amount of outstanding checks.

False (outstanding checks = liability)

T or F: Cash should be deposited weekly so it can be counted several times before being sent to the bank.

False - daily

Cutoff bank statements include activity for the period _______the period being audited. a. after b. before c. disclosing d. inclusive of e. overlapping

A

In addition to the risk factor identified in the preceding question, another risk factor relating to misstatements arising from fraudulent financial reporting is: a. Earnings this year are lower than management had hoped. b. Accounts payable are limited to commercial suppliers. c. Sales are made to residential, commercial, and governmental purchasers. d. The industry faces great technological changes in almost all of its products.

A

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. 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. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. The entity's cash receipts of the first few days of the subsequent year were properly deposited in its general operating account after the yearend. However, the auditor suspects that the entity recorded the cash receipts in its books during the last week of the year under audit. (Select only 1 procedure.)

A

Checks payable to officers should be carefully reviewed by the auditors to determine whether the transactions were properly: (Select all that apply) a. authorized b. confirmed c. calculated d. disclosed e. recorded

A, D, E

A bookkeeper prepares a check to herself and records it as having been issued to a major supplier is an example of which type of misstatement? a. unrecorded disbursements b. inaccurate recording of a disbursement c. duplicate payment of purchases

B

Agreements to maintain compensating balances should be ___________ in the financial statements. a. recorded b. disclosed c. adjusted

B

Analyzing bank transfers at the end of the period being audited and the beginning of the next period helps detect ____________. a. confirmation b. kiting c. modification d. reconciliation e. transfers

B

Identify good cash handling practices. a. permit one trusted employee to handle specific transactions from beginning to end b. encourage customers to obtain receipts and observe cash register totals c. have monthly bank reconciliations prepared by employees responsible for custody of cash

B

Which of the following represents a correct statement concerning the risk of misappropriation of cash for SSC? a. This is not a major concern since sales are made on credit. b. Deposit of cash into a lockbox system decreases the risk of misappropriation. c. Misappropriation of cash is not a significant problem in a commercial company. d. The success of QSand increases the risk that cash will be misappropriated.

B

Auditors will prepare a schedule that lists all of the client's cash accounts, including: (Select all that apply) a. YE balance per bank b. bank name c. YE balance per books d. account number

B, C, D

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

C

An important step in testing investments is to ensure all persons with access to investments are properly ______. a. adjusted b. audited c. bonded d. measured e. observed

C

Inspect reports by internal auditors on their review of securities and derivatives is an example of: a. Ensure transactions are recorded and classified properly b. Ensure policies written are being followed c. Verify that internal auditors' observations are consistent with those of external auditors d. Ensure reports tie to client activity

C

Cash analyses need to be _______ to the general ledger. a. closed b. confirmed c. counted d. reconciled e. transferred

D

The clients' financial institution can handle incoming cash receipts including: (Select all that apply) a. petty cash requests and reconciliations b. voucher authorization sheets c. credit cards and debit cards d. lockbox systems e. electronic transfer of funds by customers

C, D, E

It is necessary to ______ the client's cutoff of cash transactions. a. modify b. observe c. perform d. recreate e. verify

E

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. 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. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. 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. (Select only 1 procedure.)

E

Auditors send a confirmation request to investment brokers to confirm __________ and ownership.

Existence

T or F: An official of the client company took securities from the safe deposit box and sold them to obtain cash to meet a personal financial crisis. Even with proper internal control, if the official purchased identical securities before the year-end and placed them in the safe deposit box, this improper "borrowing" would probably go undetected during the annual audit.

False

T or F: In relation to its materiality, the audit of cash requires little audit time.

False

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. 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. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. 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. (Select only 1 procedure.)

H

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. 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. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. 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. (Select only 2 procedures.)

K, L

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. 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. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. The auditor suspects that selected employees of the entity received unauthorized raises from the entity's payroll supervisor, who has access to payroll records. (Select only 1 procedure.)

Q

T or F: A derivative is a financial instrument that derives its value from another financial instrument, an underlying asset, or indices.

True

T or F: 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.

True

T or F: An employee who prepares checks and submits them with supporting documents to the official authorized to sign checks should not be responsible for mailing the signed checks.

True

T or F: Designating the cashier to be custodian of the petty cash fund is more acceptable from the standpoint of internal control than making the cashier responsible for maintenance of accounts receivable records.

True

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. 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. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. 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. (Select only 1 procedure.)

U

Select the audit procedure with the error or fraud that the procedure is likely to detect. a. Preparing and verifying a schedule of bank transfers. b. Tracing remittance advices to postings in the accounts receivable records. c. Comparing the serial numbers of securities on hand to numbers recorded in the prior year's audit working papers. d. Review of the bank cutoff statement. e. Preparing a "proof of cash" for the entire audit period. "Kiting" of cash.

A

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

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

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. 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. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. 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. (Select only 2 procedures.)

A, J

Under which of the following circumstances would an auditor be most likely to intensify an examination of a $500 imprest petty cash fund? a. The custodian occasionally uses the cash fund to cash employee checks. b. Reimbursement occurs twice each week. c. The custodian endorses reimbursement checks. d. Reimbursement vouchers are not prenumbered.

B

When reviewing financial investments, auditors need to review: a. only purchases and sales of investments b. beginning and ending balances, and changes c. only ending balances of investments

B

Which of the following is a frequent control over cash disbursements? a. 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. c. Checks should be sent directly to the payee by the employee who prepares documents that authorize check preparation. d. Checks and supporting documents should be marked "Paid" immediately after the check is returned with the bank statement.

B

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. 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. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. 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. ( Select only 1 procedure.)

B

Intentional misstatements of the value of closely held investments could have been prevented by which of the following internal controls? a. segregation of duties b. effective audit committee c. formal investment policies

B

It is important to verify ______ of both cash receipts and cash disbursements. a. consideration b. cutoff c. deviation d. disclosure e. existence

B

Review and test reports of investment activity for the investment committee is an example of: a. Ensure transactions are recorded and classified properly b. Ensure policies written are being followed c. Verify that internal auditors' observations are consistent with those of external auditors d. Ensure reports tie to client activity

B

Select the audit procedure with the error or fraud that the procedure is likely to detect. a. Preparing and verifying a schedule of bank transfers. b. Tracing remittance advices to postings in the accounts receivable records. c. Comparing the serial numbers of securities on hand to numbers recorded in the prior year's audit working papers. d. Review of the bank cutoff statement. e. Preparing a "proof of cash" for the entire audit period. "Lapping" of accounts receivable.

B

The auditors should review cutoff bank statements for any paid checks issued on or before the BS date but not listed as outstanding on the client's YE bank reconciliation, in order to determine that the amount of cash shown on the BS date was not ____________. a. understated b. overstated

B

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

Select the audit procedure with the error or fraud that the procedure is likely to detect. a. Preparing and verifying a schedule of bank transfers. b. Tracing remittance advices to postings in the accounts receivable records. c. Comparing the serial numbers of securities on hand to numbers recorded in the prior year's audit working papers. d. Review of the bank cutoff statement. e. Preparing a "proof of cash" for the entire audit period. Using the company's securities during the year and replacing them.

C

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 case 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 case 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

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. 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. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. An auditor suspects that the controller wrote several checks and recorded the cash disbursements just before yearend but did not mail the checks until after the first week of the subsequent year. (Select only 1 procedure.)

D

Inspect monthly brokerage reports on securities owned, purchased, and sold is an example of: a. Ensure transactions are recorded and classified properly b. Ensure policies written are being followed c. Verify that internal auditors' observations are consistent with those of external auditors d. Ensure reports tie to client activity

D

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. 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. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. 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. (Select only 1 procedure.)

E

Select the audit procedure with the error or fraud that the procedure is likely to detect. a. Preparing and verifying a schedule of bank transfers. b. Tracing remittance advices to postings in the accounts receivable records. c. Comparing the serial numbers of securities on hand to numbers recorded in the prior year's audit working papers. d. Review of the bank cutoff statement. e. Preparing a "proof of cash" for the entire audit period. Recording fictitious cash sales.

E

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. 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. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. 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. (Select only 2 procedures.)

J, L

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. 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. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. 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. (Select only 1 procedure.)

P

T or F: The "lapping" of cash receipts is most likely to occur when one person has both responsibility for recordkeeping for cash receipts and custody of cash.

True