Chapter 10 Study questions

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

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

False

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

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: 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

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

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. A bank lockbox is a post office box controlled by a company's bank at which cash remittances from customers are received. With such a system the bank collects the remittances, immediately credits the cash to the company's bank account, and forwards the remittance advices to the company. Use of a bank lockbox system makes it extremely difficult for employees to divert cash receipts since those cash receipts are sent directly to the post office box controlled by the bank.

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 write-offs are actually recorded.

a) Details of bank deposit slips with details of credits to customer accounts. Lapping will result in a delay in the recording of specific remittance credits in the financial records, but the checks will be deposited in the bank as they are received. Therefore, a comparison of the checks deposited to the credits to customer accounts will likely uncover the scheme.

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. The use of cash registers and tapes helps assure that all sales of a retail store are recorded. Answer (Inquire about employees' access to recorded but undeposited cash.) is incorrect because the cash has already been recorded. Answer (Trace deposits in the cash receipts journal to the cash balance in the general ledger.) is incorrect because the procedure only deals with recorded deposits and, therefore, the completeness assertion is not addressed as directly as in answer (Observe the consistency of the employees' use of cash registers and tapes.). Answer (Compare the cash balance in the general ledger with the bank confirmation request.) is incorrect because one would not expect the cash balance in the general ledger to agree with the bank confirmation request due to items in transit and checks outstanding.

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) Proof of cash. b) Bank reconciliation. c) Cash confirmation. d) Evaluation of ratio of cash to current liabilities.

a) Proof of cash.

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 and supporting documents should be marked "Paid" immediately after the check is returned with the bank statement. d) 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.

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

b) Reimbursement occurs twice each week.

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 auditors will determine whether each voucher is stamped "paid" by the check signer to avoid a situation in which supporting documents are used a second time to elicit a second payment.

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) records credits to individual accounts receivable

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

b) treasurer.

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) separation of cash receipts from preparing deposits.