ACC 450 - Chapter 10

Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting? Answer Prepare year-end bank reconciliations. Review subsequent bank statements and canceled checks received directly from the banks. Prepare a schedule of bank transfers. Review composition of authenticated deposit slips.

Prepare a schedule of bank transfers.

A company's decision to use the fair value option for valuation of marketable securities is most likely to affects which of the following assertions the most? Answer Presentation and Disclosure Completeness. Fairness. Existence.

Presentation and Disclosure

Which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees? Answer Monthly bank cutoff statements. Prenumbered remittance advices. A bank lockbox system. Approval of all disbursements by an individual independent of cash receipts.

A bank lockbox system.

The Parmalat fraud case involved Answer Kiting of funds between banks in India and banks in Pakistan. Major unrecorded disbursements for equipment. A fraudulent cash confirmation. A bank reconciliation performed by the client that systematically understated cash.

A fraudulent cash confirmation.

The auditors should insist that a representative of the client be present during the physical examination of securities in order to: Lend authority of the auditor's directives. Detect forged securities. Acknowledge the receipt of securities returned. Coordinate the return of all securities to proper locations.

Acknowledge the receipt of securities returned.

By preparing a four-column bank reconciliation ("proof of cash") for the last month of the year, an auditor will generally be able to detect: Answer A cash sale which was not recorded on the books and was stolen by a bookkeeper. An embezzlement of unrecorded cash receipts on receivables before they had been deposited into the bank. A credit sale which has been recorded twice in the sales journal. An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation.

An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation.

Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department? Answer Preparing the check for signature by an authorized person. Verifying the mathematical accuracy of the vendor's invoice. Canceling supporting documentation after payment. Comparing the vendor's invoice with the receiving report.

Canceling supporting documentation after payment.

Banks may process electronic "substitute checks" in place of customer written hard copy checks due to the: Answer Check Clearing for the 21st Century Act Foreign Corrupt Practices Act. Public Company Accounting Oversight Board's Standard No. 2. Sarbanes-Oxley Act

Check Clearing for the 21st Century Act

On receiving the bank cutoff statement, the auditor should trace: Answer Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal. Checks dated subsequent to year end to the outstanding checks listed on the year-end bank reconciliation. Checks dated prior to year end to the outstanding checks listed on the year-end bank reconciliation. Deposits listed on the cutoff statement to deposits in the cash receipts journal.

Checks dated prior to year end to the outstanding checks listed on the year-end bank reconciliation.

Kiting would least likely be detected by: Comparing customer remittance advices with recorded disbursements in the cash disbursements journal. Analyzing details of large cash deposits around year end. Preparing a four-column bank reconciliation for all major cash accounts. Preparing a schedule of interbank transfers by using the client's records and bank statements around year end.

Comparing customer remittance advices with recorded disbursements in the cash disbursements journal.

A practical and effective audit procedure for the detection of lapping is: Answer Preparing an interbank transfer schedule. Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank. Preparing a proof of cash. Tracing recorded cash receipts to postings in customers' ledger cards.

Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank.

Jones was engaged to audit the financial statements of Gamma Corporation for the year ended June 30, 200X. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income? Answer Comparing recorded dividends with amounts appearing on federal information form 1099s. Tracing recorded dividend income to cash receipts records and validated deposit slips. Comparing recorded dividends with a standard financial reporting service's record of dividends. Utilizing analytical techniques and statistical sampling.

Comparing recorded dividends with a standard financial reporting service's record of dividends.

Jones embezzled $10,000 from his company's account in Bank A. At year-end he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the transaction on the books. Which of the following is most likely to be effective in detecting this fraud? Answer Comparison of bank cutoff statement to the cash receipts and disbursements records. Bank transfer schedule prepared using only the cash receipts and cash disbursements journals. Receivable confirmation. Bank confirmation.

Comparison of bank cutoff statement to the cash receipts and disbursements records.

Which of the following is the best audit procedure for the detection of lapping? Comparison of postings of cash receipts to accounts with the details of cash deposits. Reconciliation of the cash account balances. Preparing a proof of cash. Confirmation of the cash balance.

Comparison of postings of cash receipts to accounts with the details of cash deposits.

Which of the following statements is not correct? Answer Payroll cash account balances kept on an imprest basis are more easily controlled than others not so kept. Confirmation of cash should only be performed as of the balance statement date because the auditor expresses an opinion as of that date. Reviewing interbank transfers is important to the auditor because of the possibility that the client may be engaged in kiting. Cash is important to the audit process because of its vulnerability to misappropriation, despite the fact that the balance at the balance sheet date may be immaterial.

Confirmation of cash should only be performed as of the balance statement date because the auditor expresses an opinion as of that date.

The auditors' count of the client's cash should be coordinated to coincide with the: Answer Consideration of the internal controls with respect to cash. Count of inventories. Count of investment securities. Close of business on the balance sheet date.

Count of investment securities

When a client engages in transactions involving derivatives, the auditor should Answer Notify the audit committee about the risks involved in derivative transactions. Confirm with the client's broker whether the derivatives are for trading purposes. Develop an understanding of the economic substance of each derivative. Add an explanatory paragraph to the auditor's report describing the risks associated with each derivative.

Develop an understanding of the economic substance of each derivative.

Which of the following is not a control over cash disbursements? Answer Voided checks should be defaced and filed with paid checks. A check protecting machine should be used. Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse. Disbursements should be made by check.

Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse.

n a manufacturing company which one of the following audit procedures would give the least assurance of the existence of the assets in the general ledger balance of investment in stocks and bonds at the audit date? Answer Confirmation from the broker. Inspection of year-end brokers' statements. Vouching all changes during the year to brokers' advises and statements. Examination of paid checks issued in payment of securities purchased.

Examination of paid checks issued in payment of securities purchased

Which of the following is correct relating to kiting? Answer It is ordinarily used to understate cash. It is more difficult to accomplish in an electronic environment as contrasted to a non-electronic environment. It is a lapping approach performed using receivable accounts. It is seldom, if ever, used.

It is more difficult to accomplish in an electronic environment as contrasted to a non-electronic environment.

Jones embezzled $10,000 from his company's account in Bank A. At year-end he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the transaction on the books. This is an example of: Answer Lapping. Related party transactions. Kiting. Effective cash management.

Kiting

Which of the following is correct concerning "window dressing" for cash? Answer It generally involves manipulation of inventory. It is illegal, and an audit is designed to provide reasonable assurance of its detection. A segregation of duties within the cash function effectively eliminates its occurrence. Many forms of it require no action by the auditors.

Many forms of it require no action by the auditors.

Your client left the cash receipts journal open after year-end for an extra day and included January 1 cash receipts in the 12/31/XX totals. All of those cash receipts were due to cash sales. Assuming the client uses a periodic inventory system with a 12/31/XX count of the physical inventory, which of the following is most likely to be true relating to the year XX financial statements? Answer Sales are understated. Inventory is overstated. Accounts receivable are understated. Net income is overstated.

Net income is overstated.

The auditors compare information on canceled checks with information contained in the cash disbursement journal. The objective of this test is to determine that: Answer No discrepancies exist between the data on the checks and the data in the journal. Proper cash purchase discounts have been recorded. Recorded cash disbursement transactions are properly authorized. Cash disbursements are for goods and services actually received. `

No discrepancies exist between the data on the checks and the data in the journal.

Tracing recorded sales transactions in the sales journal to the shipping documents (bills of lading) provides evidence about the: Completeness of recording of sales transactions. Presentation of payables. Billing of all sales transactions. Occurrence of sales transactions.

Occurrence of sales transactions.

Which procedure is an auditor most likely to use to detect a check outstanding at year-end that was not recorded as outstanding on the year-end bank reconciliation? Answer Prepare a four column bank reconciliation using the year-end bank statement. Prepare a bank transfer schedule using the client's cash receipts and cash disbursements journal. Receive a cutoff statement directly from the client's bank. Confirm the year end balance using the standard form to confirm account balance information with financial institutions.

Receive a cutoff statement directly from the client's bank.

Which of the following is not confirmed on the standard form used for cash balances at financial institutions? Answer Cash savings account balances. Securities held for the client by the financial institution. Cash checking account balances. Loans payable.

Securities held for the client by the financial institution.

Which of the following is not confirmed on the standard form used for cash balances at financial institutions? Answer Loans payable. Cash savings account balances. Securities held for the client by the financial institution. Cash checking account balances.

Securities held for the client by the financial institution.

In October, three months before year-end, the bookkeeper erroneously recorded the receipt of a one year bank loan with a debit to cash and a credit to miscellaneous revenue. Select the most effective method for detecting this type of error. Answer Send a bank confirmation as of year-end. Foot the cash receipts journal for October. Prepare a bank reconciliation as of year-end. Prepare a bank transfer schedule as of year-end.

Send a bank confirmation as of year-end.

Properly designed internal control will permit the same employee to: Answer Sign checks, and also cancel supporting documents. Reconcile the bank statements, and also receive and deposit cash. Receive and deposit checks, and also approve write-offs of customer accounts. Approve vouchers for payment, and also receive and deposit cash.

Sign checks, and also cancel supporting documents.

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom? Answer The cashier posts the receipts to the accounts receivable subsidiary ledger. The cashier makes the daily deposit at a local bank. The cashier prepares the daily deposit. The cashier endorses the checks.

The cashier posts the receipts to the accounts receivable subsidiary ledger.

The Standard Form to Confirm Account Balances with Financial Institutions includes information on all of the following except: Answer Date due of a direct liability. The principal amount paid on a direct liability. The interest rate of a direct liability. Description of collateral for a direct liability.

The principal amount paid on a direct liability

As one of the year-end audit procedures, the auditor instructed the client's personnel to prepare a confirmation request for a bank account that had been closed during the year. After the client's treasurer has signed the request, it was mailed by the assistant treasurer. What is the major flaw in this audit procedure? Answer Sending the request was meaningless because the account was closed before the year end. The request was mailed by the assistant treasurer. The confirmation request was signed by the treasurer. The CPA did not sign the confirmation request before it was mailed.

The request was mailed by the assistant treasurer.

Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: Answer Treasurer. Controller. Executive Committee. Board of Directors.

Treasurer

Which of the following manipulations of cash transactions would overstate the cash balance on the financial statements? Answer Overstatement of outstanding checks. Understatement of outstanding checks. Overstatement of bank services charges. Understatement of deposits in transit.

Understatement of outstanding checks.

An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that Answer Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year. Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year. The annual provision for uncollectible accounts expense was inadequate because of worsening economic conditions. Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.

Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.