ACCT 402 CH 10 HW

10-7) State one broad general objective of internal control over each of the following: cash receipts, cash disbursements, and cash balances.

(1) All cash which should have been received was in fact received and recorded promptly and accurately. (2) Cash disbursements are made only for authorized purposes and are recorded properly. (3) Cash balances are maintained at adequate but not excessive levels by forecasting expected cash receipts and payments related to normal operations. The need for obtaining loans or for investing excess cash is thus made known on a timely basis.

10-38 j) 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: 1) An investment committee of the board of directors 2) The chief operating officer 3) The corporate controller 4) The treasurer

1) An investment committee of the board of directors

10-38 h) 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: 1) Details of bank deposit slips with details of credits to customer accounts 2) Daily cash summaries with the sums of cash receipts journal entries 3) Individual bank deposit slips with the details of the monthly bank statements 4) Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually recorded

1) Details of bank deposit slips with details of credits to customer accounts

10-38 f) 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? 1) Observe the consistency of the employees' use of cash registers and tapes 2) Inquire about employees' access to recorded but undeposited cash 3) Trace deposits in the cash receipts journal to the cash balance in the general ledger 4) Compare the cash balance in the general ledger with the bank confirmation request

1) Observe the consistency of the employees' use of cash registers and tapes

10-38 g) Reconciliation of the bank account should not be performed by an individual who also: 1) Processes cash disbursements 2) Has custody of securities 3) Prepares the cash budget 4) Reviews inventory reports

1) Processes cash disbursements

10-38 a) Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client's employees? 1) A bank lockbox system 2) Prenumbered remittance advices 3) Monthly bank reconciliations 4) Daily deposit of cash receipts

1) A bank lockbox system

10-38 k) The auditors who physically examine securities should insist that a client representative be present in order to: 1) Detect fraudulent securities 2) Lend authority to the auditors' directives 3) Acknowledge the receipt of securities returned 4) Coordinate the return of securities to the proper locations

3) Acknowledge the receipt of securities returned

10-38 l) The best way to verify the amounts of dividend revenue received during the year is: 1) Recomputation 2) Verification by reference to dividend record books 3) Confirmation with dividend-paying companies 4) Examination of cash disbursements records

2) Verification by reference to dividend record books

10-38 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: 1) Supported by a vendor's invoice 2) Stamped "paid" by the check signer 3) Prenumbered and accounted for 4) Approved for authorized purchases

2) Stamped "paid" by the check signer

10-38 e) 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: 1) Count the cash in advance to the balance sheet date in order to disclose any kiting operations at year-end 2) Coordinate the count of cash with the cutoff of accounts payable 3) Coordinate the count of cash with the count of marketable securities and other negotiable assets 4) Count the cash immediately upon the return of the confirmation letters from the financial institution

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

10-38 d) To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except: 1) Cutoff bank statement 2) Year-end bank statement 3) Bank confirmation 4) General ledger

4) General ledger

10-38 c) In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also: 1) Reviews the monthly bank reconciliation 2) Returns the checks to accounts payable 3) Is denied access to the supporting documents 4) Is responsible for mailing the checks

4) Is responsible for mailing the checks

10-38 i) 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? 1) Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept 2) Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access 3) Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis 4) Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent

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

10-5) Explain how a lockbox system contributes to internal control over cash receipts.

A lockbox system is one in which a post office box is controlled by a company's bank at which cash remittances from customers are received. The bank receives the remittances, immediately credits the cash to the company's bank account, and forwards the remittance advices to the company.

10-14) How can auditors corroborate compensating balance arrangements?

Compensating balance arrangements can be confirmed on a separate letter directed to an official at the financial institution that is knowledgeable of the arrangements (usually, the client's loan officer).

10-25) If a security or derivative is not marketable, how do the auditors typically obtain evidence about the fair value of the instrument?

If a security or derivative is not marketable (has no active market); management may obtain an appraisal of fair value from a securities valuation firm (a specialist). In such cases, the auditors should refer to AICPA AU-C 620 (PCAOB AS 2502) which requires that they consider the professional qualifications and reputation of the appraiser and obtain an understanding of the methods and assumptions used. When a valuation model, such as an option-pricing model, is used, the auditors should assess the reasonableness and appropriateness of the model and evaluate the reasonableness of the underlying assumptions. The auditors should make sure that the model considers all aspects of risk, such as counterparty credit risk, risk of adverse changes in market factors, and risk of losses from legal or regulatory action. In addition, the auditors should evaluate the relevance, completeness, and accuracy of any significant information provided to the specialist by the client to be used in appraising the options.

10-9) Describe the audit implications of the Check Clearing for the 21st Century Act.

The Check Clearing Act for the 21st Century allows financial institutions to destroy physical copies of checks and use an electronic (substitute) copy for check clearing purposes. The audit implications are: 1. Auditors may have to rely on electronic (substitute) copies of checks for audit evidence. 2. Kiting becomes virtually impossible when the client's financial institutions use electronic processing, because it takes hours (or less) rather than days to clear a check.

10-13) What information do CPAs request from a financial institution on the standard confirmation form?

The Standard Form to Confirm Account Balance Information with Financial Institutions requests the financial institution to confirm amounts on deposit, whether accounts are interest-bearing and/or subject to withdrawal, and direct liabilities (loans) of the client from the financial institution.

10-23) In what ways can the audit of financial investments present special risks requiring specialized skill and knowledge?

The audit of financial investments can be very complex and present special risks requiring specialized skill or knowledge in performing audit tasks such as: · Identifying controls at service organizations that provide financial services and are part of the client's information system. · Obtaining an understanding of information systems for securities and derivatives that are highly dependent on computer technology. · Applying complex accounting principles to various types of financial investments. · Understanding the methods of determining the fair values of financial investments, especially those that must be valued using complex valuation models. · Assessing inherent and control risk for assertions about derivatives used in hedging activities. Therefore, the auditors may decide that the assistance of specialists either within or outside the firm is needed to assist in the audit of complex financial investments.

10-10) During your audit of a small manufacturing firm, you find numerous checks for large amounts drawn payable to the treasurer and charged to the Miscellaneous Expense account. Does this require any action by the auditor? Explain.

The discovery of large checks drawn payable to the treasurer and charged to Miscellaneous Expense suggests the possibility that the funds went to the treasurer personally and were not expended for business purposes. The auditors should ascertain whether there is adequate documentary evidence supporting the charge to Miscellaneous Expense, such as purchase orders, invoices, receipts, receiving reports, etc. The auditors should also determine whether the disbursement was specifically approved by the president or other officer besides the treasurer before issuance of the checks. When fraud has been detected, the auditor should assure himself/herself that the audit committee of the board of directors is adequately informed.

10-1) Describe circumstances that might cause the auditors to identify understatement of assets as a significant audit risk.

The following circumstances might cause a client to understate assets: (1) Management of a privately held company may be motivated to understate assets so as to minimize income taxes. (2) Bank accounts may not be recorded so as to make possible unrecorded, illegal payments. (3) Management may wish to "manage" earnings by "deferring" income until a subsequent year.

10-20) A well-financed audit client of your CPA firm invests large amounts in marketable securities. As part of its internal control, the company uses a monthly report of securities transactions. The report is prepared by the controller and presented to the investment committee of the board of directors. What information should this report contain?

The monthly report relating to securities transactions should show: (1) Securities owned at the beginning of the month. (2) Purchases, sales, gains, and losses during the month. (3) Dividends and interest received. (4) Securities owned at the end of the month.

10-17) Explain two procedures by which auditors may verify the client's cutoff of cash receipts.

To verify the client's cutoff of cash receipts, the auditors may either (1) be on hand to count the undeposited cash receipts on the last business day of the period, or (2) examine the cutoff bank statement to determine that deposits reported as being in transit at year-end were received by the bank on the following business day. When a client has numerous branches, the auditors usually employ a combination of these procedures in verifying the cutoff at the various locations.