auditing ch 7 exam review/ ch 10 cash and financial investments

A. Separate recordkeeping from accounting for cash to the extent possible. B. Deposit each day's cash receipts intact. C. Separate cash handling from recordkeeping. D. Have monthly bank reconciliations prepared by employees not responsible for the issuance of checks.

a

A. Understatement of outstanding checks. B. Overstatement of outstanding checks. C. Understatement of deposits in transit. D. Overstatement of bank services charges.

a

a. List three audit tasks related to the audit of financial investments that may require specialized skill or knowledge.

a. Audit tasks requiring specialized skill or knowledge (only three required): • Identifying controls at service organizations that provide financial services for the client. • Obtaining an understanding of information systems for securities and derivatives that are highly dependent on computer technology. • Applying complex accounting principles. • Understanding the methods of determining fair values of financial investments' • Assessing inherent risk and control risk for assertions about derivatives used for hedging.

19. An auditor may obtain information on the December 31 month end balance per bank in which of the following?

Dec. 31 bank statement/ schedule of bank (cash) transfers a. yes yes b. yes no c. no yes d. no no

A. A bank lockbox system. B. Approval of all disbursements by an individual independent of cash receipts. C. Monthly bank cutoff statements. D. Prenumbered remittance advices.

a

A. A fraudulent cash confirmation. B. Kiting of funds between banks in India and banks in Pakistan. C. A bank reconciliation performed by the client that systematically understated cash. D. Major unrecorded disbursements for equipment.

a

A. An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation. B. A cash sale which was not recorded on the books and was stolen by a bookkeeper. C. An embezzlement of unrecorded cash receipts on receivables before they had been deposited into the bank. D. A credit sale which has been recorded twice in the sales journal.

a

A. An unrecorded deposit made at the bank at the end of the month. B. A second payment of an account payable which had already been paid in full two months earlier. C. An embezzlement of cash receipts not recorded in the cash receipts journal before they had been deposited into the bank. D. A receivable collected that had previously been written off as uncollectible.

a

A. Check Clearing for the 21stCentury Act B. Public Company Accounting Oversight Board's Standard No. 2. C. Foreign Corrupt Practices Act. D. Sarbanes-Oxley Act

a

A. Comparison of postings of cash receipts to accounts with the details of cash deposits. B. Confirmation of the cash balance. C. Reconciliation of the cash account balances. D. Preparing a proof of cash.

a

A. Develop an understanding of the economic substance of each derivative. B. Confirm with the client's broker whether the derivatives are for trading purposes. C. Notify the audit committee about the risks involved in derivative transactions. D. Add an explanatory paragraph to the auditor's report describing the risks associated with each derivative.

a

A. Option A B. Option B C. Option C D. Option D

a

a. Define lapping and describe an audit procedure that might detect lapping.

a. Lapping is the concealment of a cash shortage by delaying the recording of cash receipts. It involves posting receipts to the wrong account. Procedures for detecting lapping include (only one required): • Details of cash receipts may be compared to postings to the accounts receivable subsidiary records, preferably on a surprise basis. • Confirmation of accounts receivable.

a. Describe the functions that should be segregated to provide good internal control over financial investments.

a. The functions that should be segregated with respect to financial investments are: 1. Authorization of purchases and sales, 2. Custody of the securities, and 3. Maintaining records of investments.

A. An unrecorded deposit made at the bank at the end of the month. B. A second payment of an account payable which had already been paid in full two months earlier. C. An unrecorded check cashed during that month. D. A bank charge during the month not recorded on the books.

b

A. Analyzing details of large cash deposits around year end. B. Comparing customer remittance advices with recorded disbursements in the cash disbursements journal. C. Preparing a four-column bank reconciliation for all major cash accounts. D. Preparing a schedule of interbank transfers by using the client's records and bank statements around year end.

b

A. Board of Directors. B. Treasurer. C. Controller. D. Executive Committee.

b

A. Comparing the vendor's invoice with the receiving report. B. Canceling supporting documentation after payment. C. Verifying the mathematical accuracy of the vendor's invoice. D. Preparing the check for signature by an authorized person.

b

A. Completeness of recording of sales transactions. B. Occurrence of sales transactions. C. Billing of all sales transactions. D. Presentation of payables.

b

A. Date due of a direct liability. B. The principal amount paid on a direct liability. C. Description of collateral for a direct liability. D. The interest rate of a direct liability.

b

A. Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal. B. Checks dated prior to year end to the outstanding checks listed on the year-end bank reconciliation. C. Deposits listed on the cutoff statement to deposits in the cash receipts journal. D. Checks dated subsequent to year end to the outstanding checks listed on the year-end bank reconciliation.

b

A. Deposits in transit on the year-end cash general ledger account to deposits in the cash receipts journal. B. Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation. C. Deposits listed on the cutoff statement to disbursements in the cash disbursements journal. D. Checks dated subsequent to year-end to the outstanding checks listed on the year-end bank statement.

b

A. Foot the cash receipts journal for October. B. Send a bank confirmation as of year-end. C. Prepare a bank reconciliation as of year-end. D. Prepare a bank transfer schedule as of year-end.

b

A. Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year. B. Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities. C. The annual provision for uncollectible accounts expense was inadequate because of worsening economic conditions. D. Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year.

b

A. Lapping. B. Kiting. C. Effective cash management. D. Related party transactions.

b

A. Option A B. Option B C. Option C D. Option D

b

A. Prepare a bank transfer schedule using the client's cash receipts and cash disbursements journal. B. Receive a cutoff statement directly from the client's bank. C. Prepare a four column bank reconciliation using the year-end bank statement. D. Confirm the year end balance using the standard form to confirm account balance information with financial institutions.

b

A. Preparing an interbank transfer schedule. B. Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank. C. Tracing recorded cash receipts to postings in customers' ledger cards. D. Preparing a proof of cash.

b

A. To prevent abstraction of cash, a control listing of cash receipts should be prepared by mailroom personnel. B. To insure accurate posting, the accounts receivable clerk should post the customers' receipts from customers' checks. C. To insure accuracy of the accounts receivable records, the records should be reconciled monthly to the accounts receivable controlling account. D. To prevent theft of cash, receipts should be deposited daily.

b

A. Transfer A B. Transfer B C. Transfer C D. Transfer D

b

b. Define the term "financial derivative."

b. Derivatives are financial instruments that "derive" their value form other financial instruments, underlying assets, or indices.

b. Define kiting and describe an audit procedure that might detect kiting.

b. Kiting is manipulation causing an amount of cash to be included simultaneously in the balance of two or more bank accounts. To detect kiting the auditors prepare and verify a schedule of bank transfers.

b. Describe two other internal control policies that should be established for financial investments.

b. Other internal controls include (only two required): • Establishing formal investment policies. • Maintaining a complete detailed record of investments and revenue from investments. • Registration of securities in the name of the company. • Periodic physical inspection. • Joint control over securities, or use of an independent custodian. • Preparation of a budget of investment revenue. • Determination of appropriate accounting by competent personnel.

60. Listed below are four interbank cash transfers, indicated by the letters a, b, c and d, of a client for late December 20X1, and early January 20X2. Your answer choice for the next two questions should be selected from this list.

bank acct 1 bank acct 2 disbursing date receiving date per bank/ per book per bank/ per book a. 1-02 / 12/30 12/31 /12/30 b. 1/04 /12/31 1/02 / 12/31 c. 1/03 / 12/31 1/02 / 1/02 d. 1/02 / 1/02 12/31 / 1/02

49. Which of the following cash transfers is most likely to result in a misstatement of cash at December 31, 19X7?

bank transfer schedule disbursing receipt recorded/ paid recorded/ paid book by bank book by bank a.12/31/x7 / 1/4/x8 12/31/x7 / 12/31/x7 b. 1/04/x8 / 1/5/x8 12/31/x7 / 1/4/x8 c. 12/31/x7 / 1/5/x8 12/31/x7 / 1/4/x8 d.1/4/x8 / 1/11/x8 1/4/x8 / 1/4/x8

A. Bank confirmation. B. Bank transfer schedule prepared using only the cash receipts and cash disbursements journals. C. Comparison of bank cutoff statement to the cash receipts and disbursements records. D. Receivable confirmation.

c

A. 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. B. Payroll cash account balances kept on an imprest basis are more easily controlled than others not so kept. C. Confirmation of cash should only be performed as of the balance statement date because the auditor expresses an opinion as of that date. D. Reviewing interbank transfers is important to the auditor because of the possibility that the client may be engaged in kiting.

c

A. Consideration of the internal controls with respect to cash. B. Close of business on the balance sheet date. C. Count of investment securities. D. Count of inventories.

c

A. Disbursements should be made by check. B. A check protecting machine should be used. C. Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse. D. Voided checks should be defaced and filed with paid checks.

c

A. Review composition of authenticated deposit slips. B. Review subsequent bank statements and canceled checks received directly from the banks. C. Prepare a schedule of bank transfers. D. Prepare year-end bank reconciliations.

c

A. The cashier prepares the daily deposit. B. The cashier makes the daily deposit at a local bank. C. The cashier posts the receipts to the accounts receivable subsidiary ledger. D. The cashier endorses the checks.

c

A. The confirmation request was signed by the treasurer. B. Sending the request was meaningless because the account was closed before the year end. C. The request was mailed by the assistant treasurer. D. The CPA did not sign the confirmation request before it was mailed.

c

c. List the two general purposes that a client might acquire a financial derivative.

c. Clients engage in financial derivative transactions for two major purposes: • Hedging--to hedge changes in value of an existing asset or liability or of a prospective future transaction. • Speculating--to bet on the change in value of another financial instrument, an asset, or an index.

A. A segregation of duties within the cash function effectively eliminates its occurrence. B. It generally involves manipulation of inventory. C. It is illegal, and an audit is designed to provide reasonable assurance of its detection. D. Many forms of it require no action by the auditors.

d

A. Cash checking account balances. B. Cash savings account balances. C. Loans payable. D. Securities held for the client by the financial institution.

d

A. Completeness. B. Existence. C. Fairness. D. Presentation and Disclosure

d

A. Credit standards were liberalized in the current year. B. Twice as many accounts receivable were written off in the prior year as compared to this year. C. A greater percentage of accounts were currently listed in the "more than 90 days overdue" category than in the prior year. D. The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

d

A. Cutoff bank statement. B. Year-end bank statement. C. Bank confirmation. D. General ledger.

d

A. Lend authority of the auditor's directives. B. Detect forged securities. C. Coordinate the return of all securities to proper locations. D. Acknowledge the receipt of securities returned.

d

A. Receive and deposit checks, and also approve write-offs of customer accounts. B. Approve vouchers for payment, and also receive and deposit cash. C. Reconcile the bank statements, and also receive and deposit cash. D. Sign checks, and also cancel supporting documents.

d

A. Recorded cash disbursement transactions are properly authorized. B. Proper cash purchase discounts have been recorded. C. Cash disbursements are for goods and services actually received. D. No discrepancies exist between the data on the checks and the data in the journal.

d

A. Sales are understated. B. Accounts receivable are understated. C. Inventory is overstated. D. Net income is overstated.

d

A. Securities are held by the cashier. B. Securities are registered in the name of the custodian. C. Detailed records of securities are maintained by the custodian of the securities. D. Securities are held under joint control of two or more officials.

d

A. Select and examine receiving reports and test whether the related canceled checks are dated no earlier than the receiving reports. B. Select and examine receiving reports and test whether the related canceled checks are dated no later than the receiving reports. C. Select and examine canceled checks and test whether the related receiving reports are dated no earlier than the checks. D. Select and examine canceled checks and test whether the related receiving reports are dated no later than the checks.

d

A. Separating cash handling from recordkeeping. B. Centralizing the receipt of cash. C. Depositing each day's receipts intact. D. Obtaining a receipt for every disbursement.

d

A. Tracing recorded dividend income to cash receipts records and validated deposit slips. B. Utilizing analytical techniques and statistical sampling. C. Comparing recorded dividends with amounts appearing on federal information form 1099s. D. Comparing recorded dividends with a standard financial reporting service's record of dividends.

d

A. Confirmation from the broker. B. Inspection of year-end brokers' statements. C. Vouching all changes during the year to brokers' advises and statements. D. Examination of paid checks issued in payment of securities purchased.

dA. Date due of a direct liability. B. The principal amount paid on a direct liability. C. Description of collateral for a direct liability. D. The interest rate of a direct liability.

1. The auditors should count small petty cash funds at year-end to make sure that balance is not understated on the financial statements.

f

10. For investments in securities accounted for by the equity method, the auditors are primarily concerned with verifying the market value of the investments.

f

3. Mailroom personnel of a company should prepare a control listing of incoming cash receipts and deposit them intact daily.

f

4. Signed checks should be returned to the cash disbursements clerk for mailing.

f

5. Lapping of accounts receivable by an employee is not possible when there is adequate segregation of duties with respect to cash disbursements.

f

6. Confirmations for cash balances should be mailed only to the financial institutions with which the client has a cash balance at year-end.

f

7. A proof of cash is an audit procedure that is performed on almost every engagement.

f

8. A compensating balance agreement generally requires that cash be reclassified as a noncurrent asset.

f

18. An auditor may obtain information on the December 31 month end balance per bank in which of the following?

standard confirmation form / jan 1-10 cutoff statement a. yes yes b. yes no c. no yes d. no no

2. Control over the receipt of cash sales is best achieved when two or more employees participate in each transaction.

t

9. Verification of cash and other liquid assets be verified on the same date may prevent substitution of one form of asset for another.

t