Audit Ch 17

11) Bank reconciliations are normally verified on a 100-percent basis. Testing the reasonableness of the cash balance is therefore A) less important than for most other audit areas. B) more important than for other audit areas. C) equally as important as other audit areas. D) less important than for the audit of other assets but more important than the audit of liabilities.

A

13) Disbursements on the bank transfer schedule should be correctly included in or excluded from year-end bank reconciliations as outstanding cheques. Understating outstanding cheques on the bank reconciliation indicates A) the possibility of kiting. B) a cutoff error in the bank account. C) an understatement of the bank balance. D) an increase in inherent risks associated with cash.

A

14) What audit objective is associated with the comparison of disbursement and receipt information on a bank transfer schedule to the cash disbursements and cash receipts journals? A) accuracy B) classification C) occurrence D) completeness

A

23) When examining the bank reconciliation for the imprest payroll account, it is normal for the only reconciling item to be A) outstanding cheques. B) direct deposits from customers. C) outstanding deposits. D) corrections to payroll amounts.

A

24) After testing the bank reconciliation and inspecting the cutoff bank statement received from the bank, the auditor has determined that there are two outstanding cheques from the list on the bank reconciliation that have still not cleared the bank. The auditor's next step should be to A) trace the details of the two cheques to the cash disbursements journal. B) trace the details of the two cheques to their associated expense accounts. C) reperform the calculations in the bank reconciliation. D) compare the total of the bank reconciliation to the bank confirmation.

A

3) Sandra is analyzing the cash cycle of her audit client. Which of the following could indicate a liquidity problem? A) obsolete inventory B) high level of inventory C) inventory on consignment D) backordered inventory

A

3) The most important internal control for petty cash is A) the use of an imprest fund that is the responsibility of one individual. B) keeping it in a safe or locked drawer. C) keeping the amount of cash to a minimum. D) accessibility so that cheques won't have to be written for small amounts.

A

3) What is the purpose of an extended test of the bank reconciliation? A) to verify whether all transactions included in the journals for the last month of the year were correctly allocated to the bank reconciliation B) to compensate for material weaknesses in internal control with respect to segregation of duties C) to increase detection risk for the audit of cash D) to verify whether specific transactions that flowed through the cash account were correctly recorded

A

4) Certain types of misstatements that affect cash may be detected in the audit of tests of controls. Which of the following misstatements would be detected in the audit of the sales and collection cycle? A) a defalcation of cash hidden by an unauthorized write-off of a bad debt B) accidental duplicate payment of a vendor's invoice C) payment for raw materials that were not received D) payment to an employee at an incorrect wage rate

A

4) Which of the following audit tests pertains to the accuracy assertion? A) prepare proof of cash B) test a cutoff bank statement C) examine minutes and loan agreements D) read the notes to the financial statements

A

4) Which of the following statements best describes the position of cash on the balance sheet at most organizations that utilize effective cash management practices? A) Cash is usually immaterial. B) Cash is usually highly material. C) Cash is usually dispersed among many different accounts. D) Cash is usually affected by many different capital asset accounts.

A

5) Because cash is the most desirable asset for people to steal, it has a higher A) inherent risk. B) control risk. C) detection risk. D) materiality.

A

5) Under what circumstances would an auditor prepare a proof of cash? A) When the client has material internal control weaknesses in cash. B) When control risk is set at minimum. C) When inherent risk in cash is considered to be low. D) When an enterprise resource system is in use for processing of cash transactions.

A

8) What is the best way to prevent potential alteration, deletion, or addition of cancelled cheques, duplicate deposit slips, or other documents provided with the bank statement? A) Have the bank statements be provided unopened to an independent reconciler. B) Have the person responsible for recording cash receipts do the bank reconciliation. C) Have the signing officer(s) review the bank reconciliation. D) Have the bank statements provided to the accounts payable supervisor.

A

9) Which of the following situations would indicate a susceptibility to fraud that pertains to theft of cash? A) lack of segregation of duties between the handling of cash and the recording of cash B) cash disbursement cheques requiring only one authorizing signature C) payroll rates being approved by the corporate controller D) customer master file changes being handled by the controller's executive assistant

A

10) Testing to ensure that bank transfers are recorded in both the receiving and disbursing banks helps to detect evidence A) that would reduce inherent risk to a minimum. B) associated with an attempt to conceal a theft of cash. C) that increases reliability with respect to the accuracy of the transfer schedule. D) that would warrant decreasing control risk to a minimum.

B

12) The starting point for the verification of the balance in the general bank account is to obtain A) the client's December bank statement and reconcile it. B) a bank reconciliation from the client. C) a cutoff bank statement directly from the bank. D) the client's cash account balance from the general ledger.

B

15) The reason for testing the client's bank reconciliation is to verify whether the client's recorded bank balance is the same amount as the actual cash in the bank, except for deposits in transit, cheques outstanding, and other reconciling items. The information needed to complete the tests of the reconciliation are provided by the A) client's journals and ledgers for the year under audit. B) cutoff bank statement. C) client's journals and ledgers for the subsequent year. D) cancelled cheques for the year under audit.

B

16) An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to A) verify the cash balance reported on the bank confirmation inquiry form. B) verify reconciling items on the client's bank reconciliation. C) detect lapping. D) detect kiting.

B

2) Electronic data interchange (EDI) represents the electronic transfer of A) funds. B) business documents. C) data between accounting systems of the company's entities. D) information between the bank and the company.

B

2) Toasted Tomato is a restaurant in Ottawa. You walk by this restaurant frequently and noticed it is usually empty. When you came in to do the audit, you were surprised to see that they had a large cash balance and high sales. Toasted Tomato might A) have a going concern issue. B) be engaging in money laundering. C) have lower business risk than initially anticipated. D) have weak internal controls.

B

22) The auditor has determined exchange rates used by the client to present cash in foreign currencies and has recalculated the amounts. Which audit assertion is associated with this audit procedure? A) existence B) valuation C) allocation D) classification

B

4) When are short-term investments that are readily converted to cash included in the cash account in the financial statements? A) if they are held in local currency (i.e., Canadian dollars) B) when there is little risk of change in value C) when they are under the control of the treasury department D) if interest has been paid up to the year end date

B

5) There is a greater risk of defalcation for cash than for other types of assets because A) it is easier to steal. B) most other assets must be converted to cash to make them usable. C) companies usually have weak internal controls surrounding cash. D) most employees have access to cash.

B

7) The auditor uses a proof of cash to determine whether A) internal controls over cash have been functioning effectively in the period under audit. B) all recorded cash receipts were deposited and whether all recorded cash disbursements were paid by the bank. C) accounts receivable was properly recorded and whether cash receipts transactions were properly recorded. D) accounts payable was properly recorded and whether cash disbursement transactions were properly recorded.

B

1) During the audit of cash, the focus of the audit is to A) do substantive tests of payments for supplies. B) conduct control tests of sales transactions. C) verify the bank reconciliation. D) conduct control tests over payments.

C

1) Stella is auditing the electronic receipts and payments. The extent of her audit work conducted on the bank reconciliation will A) be less extensive than if the company did not engage in electronic receipts and payments. B) be more extensive than if the company did not engage in electronic receipts and payments. C) depend on the assessed quality of internal controls. D) be significantly diminished if Stella can determine that the receipts and payments come from a reputable bank with proper internal controls.

C

1) The auditor has examined the financial statements, particularly the cash flow statement, and the notes to the financial statements to determine that all relevant information is presented clearly. Which audit assertion is associated with this audit test? A) classification B) allocation C) understandability D) valuation

C

1) The general cash account is considered significant in almost all audits A) where the ending balance is material. B) where either the beginning or ending balance is material. C) even when the ending balance is immaterial. D) except those of not-for-profit organizations.

C

10) Which of the following is a common analytical procedure that may detect misstatements in cash? A) calculation of inventory turnover and gross profit B) review of amounts included in the earnings-per-share calculations C) comparison of outstanding cheques and deposits in transit with the prior year bank reconciliation D) comparison of gross sales on a month by month basis with the prior year

C

11) On a bank transfer schedule, if a cash disbursement was recorded in the current fiscal year and the receipt in the subsequent fiscal year, this might be A) the best way to record this type of transaction. B) an indication of increased inherent risk with respect to cash. C) an attempt to cover a cash shortage. D) an indication of an error in recording information by the bank.

C

14) A partial-period bank statement and the related cancelled cheques, duplicate deposit slips, and other documents included in bank statements, mailed by the bank directly to the public accounting firm's office, is called a A) four-column proof of cash. B) bank statement. C) cutoff bank statement. D) short-period bank statement.

C

15) In addition to the possibility of kiting, inaccurate handling of bank transfers could result in A) a misclassification between cash and accounts receivable. B) an incorrect balance in the accounts receivable account. C) a misclassification between cash and accounts payable. D) an incorrect balance in the bank loan account.

C

17) In an effort to satisfy the completeness objective, the auditor could perform which of the following test of details of balance procedures? A) Trace the book balance on the reconciliation to the general ledger. B) Trace outstanding cheques to subsequent period bank statements. C) Obtain and test a cutoff bank statement. D) Review financial statements to make sure that material savings accounts and certificates of deposit are disclosed separately.

C

2) Jane works for Middle Co. She is responsible for opening the mail and preparing the bank deposit for cheques received, which she then gives to the owner. After the owner has deposited the cash, he gives Jane the stamped bank deposit slip, which she uses to record the cash received in the accounts receivable records. How does this allocation of responsibilities affect the audit process? A) The auditor should increase control testing with respect to the accuracy assertion. B) The auditor should do substantive tests (compare the deposit slips to the accounts receivable records). C) The auditor should consider the possibility of material fraud. D) The auditor should increase control testing with respect to the completeness assertion.

C

2) Which of the following misstatements could be detected as part of the tests of a bank reconciliation? A) payment of interest to a related party at an incorrect rate B) exclusion of mortgage interest receivable from the balance sheet C) deposits recorded as cash receipts at the end of year, but included as outstanding deposits (deposits in transit) D) a defalcation of cash by interception of collections before they are recorded

C

21) During his examination of a January 19, 2015 cutoff bank statement, an auditor noticed that the majority of cheques listed as outstanding at December 31, 2014 had not cleared the bank. This would indicate A) a high probability of lapping. B) a high probability of kiting. C) that the cash disbursements journal had been held open past December 31, 2014. D) that the cash disbursements journal had been closed prior to December 31, 2014.

C

5) Certain types of misstatements that affect cash may be detected in the audit of tests of controls. Which of the following misstatements would be detected in the audit of the acquisition and payment cycle? A) failure to bill a customer for goods shipped B) billing a customer at the incorrect price C) improper reimbursement of an officers' personal expenses D) paying an employee at the incorrect wage rate

C

7) What is an important benefit of independent preparation of bank reconciliations? A) an opportunity to independently check that cheques have two signatures B) the client being able to check that the bank is processing transactions correctly C) the ability to internally verify cash receipt and disbursement transactions D) the best time to carefully account for cheques issued

C

8) What type of audit test is a proof of cash? A) test of control B) test of details C) dual-purpose D) analytical review

C

9) The process of transferring money from one bank account to another and improperly recording the transaction in both accounts is called A) lapping. B) embezzling. C) kiting. D) a scam.

C

1) A major consideration in the audit of the general cash balance is the possibility of fraud. The auditor must extend his or her procedures in the audit of year-end cash to determine the possibility of a material fraud when there are A) large cash balances at the end of the year. B) large cash receipts and disbursements during the year. C) no imprest accounts used for payroll. D) material internal control weaknesses.

D

12) On the last day of the fiscal year, the cash disbursements clerk drew a company cheque on bank A and deposited the cheque in the company account in bank B to cover a previous theft of cash. The disbursement had not been recorded. The auditor will best detect this form of kiting by A) comparing the detail of cash receipts as shown by the cash receipts records with the detail on the confirmed duplicate deposit tickets for three days prior to and subsequent to year-end. B) preparing from the cash disbursements book a summary of bank transfers for one week prior to and subsequent to year-end. C) examining the composition of deposits in both bank A and B subsequent to year-end. D) examining paid cheques returned with the bank statement of the next account period after year-end.

D

13) After the bank confirmation has been received by the auditor, the auditor should A) recalculate the bank reconciliation in its entirety. B) verify that cash cutoff was correct for that bank account. C) trace the general ledger cash account balance to the amount confirmed. D) trace the bank reconciliation cash amount to the amount confirmed.

D

18) If the auditor does not obtain a cutoff statement directly from the bank for testing, an alternative procedure that the auditor can use is to A) account for a continuity of cheques that covers the year end. B) reconcile cash paid to the cash disbursements journal for the last month of the year. C) reconcile cash received to the cash receipts journal for the last month of the year. D) prove the bank statement for the period after the year end.

D

19) The test of balances procedure that requires the auditor to trace the unadjusted book balance on the reconciliation to the general ledger is an attempt to satisfy the audit objective of A) detail tie-in. B) existence. C) completeness. D) accuracy.

D

2) From an audit perspective, an imprest bank account at a client can A) require less time for the audit of general cash. B) increase audit risk. C) result in an increase in control risk. D) improve client internal controls.

D

20) The audit procedure that requires the auditor to record the last cheque number used on the last day of the year and subsequently trace to the outstanding cheques and the cash disbursements journal is performed to satisfy the audit objective of A) detail tie-in. B) existence. C) completeness. D) allocation.

D

3) A significant part of the total audit that relates to cash is the audit of A) physical inventory on hand using an inventory count. B) assessment of the accounting policies in use. C) substantive testing of the ending accounts payable balance. D) sales and collections, payables payments, and payroll payments.

D

4) Petty cash tests can ordinarily be performed at any time during the year, but as a matter of convenience they are typically done A) on the balance sheet date. B) near the end of the field work. C) at the same time as the observation of inventory, since both auditor and client must be present at that time. D) on any interim date.

D

6) A four-column proof of cash can be performed for A) one or more interim months. B) the entire year. C) the last month of the year. D) any specified time period for which bank statements are available and which the auditor chooses to designate.

D

6) Which of the following is an essential internal control in the cash cycle? A) use of two signatures on payroll cheques and payables cheques B) independent receipt of the bank statement from the bank C) careful accounting of the continuity of cheques returned from the bank D) independent preparation of bank reconciliations

D

6) Which of the following misstatements in the payroll cycle could be detected during the audit of payroll transactions (but would not be discovered as part of the audit of the bank reconciliation)? A) failure to include outstanding payroll cheques on the outstanding cheque list B) overpayment of Receiver General payments received after the year end but recorded as cash receipts in the current year C) unclaimed payroll cheques recorded as a deposit near the end of the year, but reconciled as deposits in transit D) payment to fictitious employees that had been set up by the payroll supervisor

D