ACNT 2331- Chap 10

In addition to the risk factor identified in the preceding question, another risk factor relating to misstatements arising from fraudulent financial reporting is:

Earnings this year are lower than management had hoped. current earnings, which are low as compared to the past, may have created pressure on management to at least exceed the previous year's net income.

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

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

To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except:

General ledger. The general ledger will not have information on the balance per bank. The cutoff bank statement, year-end bank statement and bank confirmation will all include information on the balance per bank.

Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client's employees?

A bank lockbox system.

Which of the following correctly identifies a risk facing SSC that might adversely affect sales during the coming years?

A general slowdown in the economy. Answer (A general slowdown in the economy.) is correct because the simulation emphasizes the fact that sales are dependent upon economic growth.

The auditors who physically examine securities should insist that a client representative be present in order to:

Acknowledge the receipt of securities returned. Because of the liquidity of many securities, the auditor should insist that a client representative be present in order to acknowledge the receipt of securities returned. In the event of subsequent "disappearance" of a security the auditor will not be a suspect.

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:

An investment committee of the board of directors. The investment committee of the board of directors is not involved in the routine of making buy and sell decisions and can therefore review the transactions objectively. On the other hand, the chief operating officer, the controller, and the treasurer may be closely associated on a daily basis with the financial executive responsible for the investment decisions.

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

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

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

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

5. Using the company's securities during the year and replacing them prior to year-end.

Comparing the serial numbers of securities on hand to numbers recorded in the prior year's audit working papers.

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?

Competition from several competitors. Answer (Competition from several competitors.) is correct because the competition that has led to decreased sales prices may ultimately create a difficult situation for CCS.

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

Confirm the terms of borrowing arrangements with the lender

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:

Coordinate the count of cash with the count of marketable securities and other negotiable assets. Unless all negotiable assets are verified at one time, an opportunity exists for a dishonest officer or employee to conceal a shortage by transferring it from one asset category to another a step ahead of the auditors. For example, marketable securities could be pledged as collateral for a loan. The cash thus obtained could be included with other cash being counted by the auditors. After the cash count, the cash derived from the securities could be removed and used to redeem the pledged securities which would then be available for counting by the auditors. Of course, this type of manipulation could hardly be carried on unless there were weaknesses in internal control. Answer (Count the cash in advance of the balance sheet date in order to disclose any kiting operations at year-end.) is incorrect because counting cash in advance of the balance sheet date does not relate to kiting. Answer (Coordinate the count of cash with the cutoff of accounts payable.) is not persuasive because accounts payable can not be substituted for cash as can negotiable assets. Answer (Count the cash immediately upon the return of the confirmation letters from the financial institution.) is not correct because there is no particular significance to the amount of cash on hand on the day the bank confirmation letters happen to be returned.

Which of the following represents a correct statement concerning the risk of misappropriation of cash for SSC?

Deposit of cash into a lockbox system decreases the risk of misappropriation. Answer (Deposit of cash into a lockbox system decreases the risk of misappropriation.) is correct because use of a lock box system decreases the risk of asset misappropriation by having customer payments deposited directly into 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:

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.

In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also:

Is responsible for mailing the checks. When checks are signed they should not be returned to the accounting department. This control is used so as to avoid a situation in which the accounts payable department fabricates documents, and then collects the checks. Not returning the checks makes it more difficult for this sort of fraud in that the perpetrator must also establish a "safe" address for the check to be mailed to. Answer (Reviews the monthly bank reconciliation.) is incorrect because control is stronger if individuals who are otherwise independent of the cash function prepare and review the monthly bank reconciliation. Answer (Returns the checks to accounts payable.) is incorrect because, as discussed, the checks should not be returned to accounts payable. Answer (Is denied access to the supporting documents.) is incorrect because the individual signing the checks needs access to the supporting documents so he or she can determine whether the expenditure is proper.

Kiting

Kiting involves manipulations causing an amount of cash to be included simultaneously in the balance of two or more bank accounts. Kiting schemes are based on the float period—the time necessary for a check deposited in one bank to clear the bank on which it was drawn. To detect kiting, a bank transfer schedule is prepared to determine whether cash is improperly included in two accounts.

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

Observe payroll check distribution on a surprise basis

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

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

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

Prepare a bank transfer schedule.

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

Prepare a bank transfer schedule.

Recording fictitious cash sales throughout the year.

Preparing a "proof of cash" for the entire audit period.

4. "Kiting" of cash.

Preparing and verifying a schedule of bank transfers.

Reconciliation of the bank account should not be performed by an individual who also:

Processes cash disbursements. The individual who reconciles the bank account should not be involved in the processing of cash receipts or disbursements. Therefore, answer (Processes cash disbursements.) is correct. All of the other functions are compatible with reconciliation responsibilities.

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?

Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent. Having the securities held in safekeeping by a bank or stockbroker provides strong internal control because they are not available to employees responsible for maintaining the accounting records of the securities. Thus the separation of the custody of securities from the accounting function is complete.

Omitting several outstanding checks from the year-end bank reconciliation.

Review of the bank cutoff statement.

Which of the following correctly identifies a risk facing SSC that might adversely affect cash receipts during the coming years?

Sales to Wingo. Answer (Sales to Wingo.) is correct because reliance upon Wingo Corporation represents a risk since Wingo may find either a substitute product to replace SSC's QSand product or develop its own such product.

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

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

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

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

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

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

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:

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.

Of the following, the most significant risk factor relating to the risk of misstatement arising from fradulent financial reporting for SSC is that:

The company must refinance a significant portion of its debt. because the pressure to obtain the refinancing creates pressure on management.

2. "Lapping" of accounts receivable.

Tracing remittance advices to postings in the accounts receivable records.

The best way to verify the amounts of dividend revenue received during the year is:

Verification by reference to dividend record books. Comparing the recorded amount of dividend revenue with dividend record books (published by investment advisory services) provides evidence of the amount of dividend revenue that should have been received during the year. It is virtually impossible to confirm the receipt of dividends with the company paying those dividends.

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

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

Control over cash sales is increased if a centrally located ___________ participates in each transaction.

cashierselected answer correct

A ___________ is a required minimum account balance that may be required by a bank when making a loan to a customer.

compensating balance

Verification of dividend revenue can be achieved by independent computation using ___________ published by investment advisory services.

dividend records

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. Answer (Prenumbered remittance advices.) is incorrect because remittance advices may be prenumbered, but since they come from various customers, they do not have one overall sequence for the client. Answers (Monthly bank reconciliations.) and (Daily deposit of cash receipts.), are incorrect because bank reconciliations, and daily deposit of cash receipts, are controls, but controls that ordinarily are not as effective at preventing the diversion of customer receipts.

Checks in payment of a company's payables should be prepared by one person and _______________ by another.

signed

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?

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.