Auditing Ch23
4) The majority of financial instruments are valued using A) cost. B) fair value estimates. C) lower of cost or market. D) realizable value.
Answer: B
1) Auditors are likely to prepare a proof of cash when the client has A) material internal control weaknesses in cash. B) material internal control weaknesses in accounts receivable and revenue. C) material internal control weaknesses in accounts payable and inventory. D) material internal control weaknesses in payroll.
Answer: A
10) The starting point for the verification of the balance in the general bank account is to obtain A) a bank reconciliation from the client. B) the client's cash account from the general ledger. C) a cutoff bank statement directly from the bank. D) the client's year-end bank statement.
Answer: A
11) Based on the schedule of interbank transfers above, which of the cash transfers would not appear as an outstanding check on the December 31, 2015 bank reconciliation? A) 1 B) 2 C) 3 D) 4
Answer: A
13) Listing all bank transfers made a few days before and after the balance sheet date and tracing each to the accounting records for proper recording is a useful approach to test for A) kiting. B) lapping. C) income smoothing. D) channel stuffing.
Answer: A
14) The auditor is testing for the balance-related audit objective of detail tie-in when they A) prove the schedule of investment activity as to additions and subtractions. B) perform a physical inspection of the security. C) verify the quoted market prices. D) test management's assumptions related to valuation.
Answer: A
15) Which of the following should be audited on the interbank transfer schedule? A) Receipts on the interbank transfer schedule should be correctly included in or excluded from year-end bank reconciliations as deposits in transit. B) Disbursements on the interbank transfer schedule must always be shown as outstanding checks. C) The interbank transfers cannot be recorded in both the receiving and disbursing banks. D) All transfers that occurred for the month before and the month after the year-end must be included on the interbank transfer schedule.
Answer: A
16) If a bank does not respond to a bank confirmation request, the auditor would most likely A) Perform alternative procedures Send a second request Ask the client to communicate with the bank to ask them to complete and return the confirmation No Yes Yes B) Perform alternative procedures Send a second request Ask the client to communicate with the bank to ask them to complete and return the confirmation No No Yes C) Perform alternative procedures Send a second request Ask the client to communicate with the bank to ask them to complete and return the confirmation Yes No Yes D) Perform alternative procedures Send a second request Ask the client to communicate with the bank to ask them to complete and return the confirmation Yes Yes No
Answer: A
17) An auditor is reviewing the minutes of board meetings to determine whether any securities are pledged as collateral. This test of the detail of balances relates to the audit objective of A) rights. B) cutoff. C) realizable value. D) classification.
Answer: A
19) ________ is an automated fraud detection tool offered by most banks. A) Positive pay B) A bank confirmation C) Fraud buster D) Check matching
Answer: A
2) The auditor uses a proof of cash to determine whether A) All recorded cash disbursements were paid by the bank. All amounts that were paid by the bank were recorded. Yes Yes B) All recorded cash disbursements were paid by the bank. All amounts that were paid by the bank were recorded. No No C) All recorded cash disbursements were paid by the bank. All amounts that were paid by the bank were recorded. Yes No D) All recorded cash disbursements were paid by the bank. All amounts that were paid by the bank were recorded. No Yes
Answer: A
25) When assessing risks affecting cash, A) if a business defers preparing bank reconciliations for long periods, the value of the control is reduced and may affect the auditor's assessment of control risk for cash. B) most companies are likely to have significant client business risks affecting their cash balances. C) there is a low inherent risk for the existence and completeness objectives for cash. D) all of the above are accurate statements.
Answer: A
3) The test of details of balances procedure that requires the auditor to trace the 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.
Answer: A
7) In addition to confirming bank balances of your audit client, a bank confirmation would normally contain A) the client's bank loans with due date, interest rate, and collateral requested. B) the client's credit history as regards to paying back loans. C) the client's managements bank account information. D) the client's business prospects.
Answer: A
7) Prices in an active market for identical assets is a level ________ fair value estimate. A) 1 B) 2 C) 3 D) 4
Answer: A
7) The process of transferring money from one bank account to another and improperly recording the transaction is referred to as A) kiting. B) lapping. C) scamming. D) embezzling.
Answer: A
8) Which of the following balance-related audit objectives typically is assessed as having high inherent risk for cash? A) existence B) cutoff C) detail tie-in D) presentation and disclosure
Answer: A
9) When auditing financial instruments, analytical procedures can be used to A) test the reasonableness of interest and dividend income. B) test the year-end balance. C) determine if the financial instruments were properly valued. D) determine if the gain or loss on the sales were properly computed.
Answer: A
10) Which is not an important objective for financial instruments? A) existence B) cutoff C) accuracy D) realizable value
Answer: B
11) Level ________ estimates use observable inputs other than quoted prices. A) 1 B) 2 C) 3 D) 4
Answer: B
14) 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 bank, except for deposits in transit, checks outstanding, and other reconciling items. The information needed to complete the tests of the reconciliation is provided by the A) client's records and ledgers for the year under audit. B) cutoff bank statement. C) client's records and ledgers for the subsequent year. D) canceled checks for the year under audit.
Answer: B
15) When the auditor sends a confirmation to the broker-dealer, they are testing the balance-related audit objective of A) detail tie-in. B) existence. C) cutoff. D) rights.
Answer: B
16) On the last day of the fiscal year, the cash disbursements clerk drew a company check on bank A and deposited the check in the company account in bank B to cover a previous theft of cash. The disbursement has not been recorded. The auditor will best detect this form of kiting by A) examining the composition of deposits in both bank A and bank B subsequent to year-end. B) examining paid checks returned with the bank statement of the next account period after year-end. C) preparing, from the cash disbursements records, a summary of bank transfers for one week prior to and subsequent to year-end. D) comparing the detail of cash receipts as shown by the client's cash receipts records with the detail on the confirmed duplicate deposit tickets for three days prior to and subsequent to year-end.
Answer: B
18) Determining if the financial instruments included in the schedule of investment activity at year-end are stated at appropriate amounts in accordance with accounting standards is the balance-related audit objective of A) materiality. B) realizable value. C) consistency. D) classification.
Answer: B
18) The bank reconciliation A) must be done on a daily basis if the client uses electronic banking. B) should be performed by someone independent of the handling or recording of cash receipts. C) should be performed by someone who handles cash disbursements. D) ensures that no cash has been embezzled.
Answer: B
2) An imprest petty cash fund would least likely be used to pay for which of the following items? A) minor office supplies B) monthly interest expense C) stamps for small mailings D) small contributions to a local charity
Answer: B
22) The auditors test the client's monthly bank reconciliation to verify whether the client's recorded bank balance is the same amount as the actual cash in the bank. Which of the following would not explain a difference between the company's cash balance and the bank's balance for the client? A) deposits in transit B) Checks are written by the client in the same month the checks clear the bank. C) other reconciling items D) outstanding checks
Answer: B
3) Which of the following would normally be discovered as part of the audit of the bank reconciliation? A) failure to bill a customer B) failure to include a deposit in transit on the bank reconciliation C) duplicate payment of a vendor's invoice D) payment to an employee for more hours than she worked
Answer: B
4) Financial instruments A) include debt securities and money market funds. B) such as derivatives can be used as a way of hedging. C) must be classified as held-to-maturity securities. D) All of the above are correct.
Answer: B
4) The general cash account is considered a significant account in almost all audits A) where the ending balance is material. B) even when the ending balance is immaterial. C) except those of not-for-profit organizations. D) where either the beginning or ending balance is material.
Answer: B
5) The audit and accounting concern addressed in a monthly proof of cash is with A) adjusting account balances. B) reconciling the amounts recorded in the books with the amounts included in the bank statement. C) determining the month-end balance. D) identifying cash transfers.
Answer: B
6) As part of their internal control procedures, management needs to have procedures in place to properly classify financial instruments as trading, available-for-sale, or held-to-maturity, based on A) cost. B) intent. C) maturity. D) probable future gain or loss.
Answer: B
6) Which of the following cycles does not affect cash in bank? A) capital acquisitions cycle B) inventory and warehousing C) payroll and personnel cycle D) acquisitions and disbursements
Answer: B
9) Because cash is the most desirable asset for people to steal, it has a higher A) control risk. B) inherent risk. C) detection risk. D) liquidity risk.
Answer: B
1) The test of details of balances procedure that requires the auditor to foot the outstanding check and electronic payment list and deposits in transit is an attempt to satisfy which audit objective? A) cutoff B) presentation and disclosure C) detail tie-in D) completeness
Answer: C
1) Which of the following is not a correct statement regarding business risk and financial instruments? A) Business risks associated with financial instruments will vary depending of the aggressiveness of a company's investing activity. B) Business risk will be higher for companies investing in less liquid securities. C) Financial services firms are exposed to very little risk with their financial instruments. D) Business risk for a company will be higher when investments represent a greater proportion of total assets.
Answer: C
1) Which of the following misstatements is most likely to be uncovered during an audit of a client's bank reconciliation? A) duplicate payment of a vendor's invoice B) billing a customer at a lower price than indicated by company policy C) failure to record a collection of a note receivable by the bank on the client's behalf D) payment to an employee for more than the hours actually worked
Answer: C
11) 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 checks to subsequent period bank statements. C) Perform a four-column proof of cash. D) Review financial statements to make sure that material savings accounts and certificates of deposit are disclosed separately.
Answer: C
13) The direct receipt of a confirmation from every bank with which the client does business is A) required by auditing standards for every audit. B) not necessary unless material fraud is suspected. C) recommended but not required by auditing standards. D) necessary for every audit except when there are an unusually large number of active accounts.
Answer: C
14) Procedures that may uncover fraud in the cash receipts area include A) confirmation of accounts payable. B) comparison of purchase orders to invoices. C) tests performed to detect lapping. D) all of the above.
Answer: C
15) Which of the following items would not normally appear on bank reconciliations? A) balance per bank B) list of deposits in transit C) outstanding deposits D) outstanding checks
Answer: C
2) Factors that impact inherent risk of financial instruments do not include A) management's objectives related to investment activity. B) the complexity of the securities. C) the cost of the securities. D) the company's prior experience with certain investments.
Answer: C
2) The audit objective of determining that cash in bank, as stated on the reconciliation, foots correctly and agrees with the general ledger can be tested by which of the following procedures? A) performing tests for kiting B) receiving and testing a cutoff bank statement C) proving the bank reconciliation as to additions and subtractions, including all reconciling items D) examining the minutes of the board of directors for restrictions on the use of cash
Answer: C
2) Which of the following is likely to be detected as part of the audit of the bank reconciliation? A) failure to bill a customer B) duplicate payment of a vendor invoice C) cash received by the client after year-end, but included in cash receipts in the current year D) an embezzlement of cash by intercepting cash receipts from customers before they are recorded
Answer: C
24) Which of the following verifications would generally not be performed by the auditor in the month subsequent to the balance sheet date? A) Foot the lists of all canceled checks, debit memos, deposits, and credit memos. B) Verify the bank statement balances when the footed totals are used. C) Verify the book statement balances tie to the cash receipts and disbursements journals for the year under audit. D) Review the items included in the footings to make sure that they were cancelled by the bank.
Answer: C
3) A proof of cash represents A) a test of controls and substantive test of transactions. B) a substantive test of transactions. C) a substantive test of transactions and test of details of balances. D) a test of details of balances.
Answer: C
3) The use of unobservable inputs such as a pricing model or discounted cash flow is an example of a level ________ estimate. A) 1 B) 2 C) 3 D) 1 and 3
Answer: C
5) A partial-period bank statement and the related copies of or digital access to cancelled checks, duplicate deposit slips, and other documents included in bank statements, mailed by the bank directly to the CPA firm's office, is called A) a four-column proof of cash. B) a year-end bank statement. C) a cutoff bank statement. D) a short-period bank statement.
Answer: C
5) When an audit client uses a service organization to manage their investment activity, A) the auditor can always rely on the internal controls of the service organization. B) the auditor must state in their audit opinion that the client uses a service organization. C) the auditor can rely on the internal controls of the service organization if the service organization's auditor issues a report on their internal control. D) the auditor must rely on the service organization to determine the fair level 1, 2, and 3 estimates.
Answer: C
6) Which of the following statements is correct? A) Bank personnel are responsible for providing reasonable assurance that a response to a bank confirmation is accurate. B) Bank personnel are responsible for providing complete assurance that a bank confirmation is complete. C) Bank personnel are not responsible for searching their records for bank balances or loans beyond those included on the bank confirmation. D) Bank personnel are not responsible for providing information related to interest on the bank confirmation.
Answer: C
8) When auditing financial instruments, A) the auditor usually performs more extensive substantive testing to reduce reliance on controls. B) analytical procedures are critical in assessing the year-end balances for financial instruments. C) the auditor relies on statements and broker's advices from investment managers to test purchases and sales as long as controls were deemed effective. D) tests of transactions are generally not performed.
Answer: C
8) Which of the following is a correct statement? A) The proof of cash receipts is a test of the balance in the cash account at a point in time. B) The proof of cash disbursements is effective for discovering a check written for the incorrect amount for which the dollar amount in cash disbursements is also incorrect. C) It is extremely difficult for an auditor to detect thefts of cash, especially omitted transactions and account balances. D) Segregation of duties is not an important control procedure for cash in a small business.
Answer: C
The following information applies to the questions below: Listed below are four interbank cash transfers, indicated by the numbers 1, 2, 3, and 4, of a client for late December 2015 and early January 2016: Bank Account One Disbursing Date (Month/Day) Per Bank Per Books 1. 12/31 12/30 2. 1/2 12/30 3. 1/3 12/31 4. 1/3 12/31 Bank Account Two Receiving Date (Month/Day) Per Bank Per Books 12/31 12/30 12/31 12/31 1/2 1/2 1/2 12/31 9) Based on the schedule of interbank transfers above, which of the cash transfers indicates an error in cash cutoff at December 31, 2015? A) 1 B) 2 C) 3 D) 4
Answer: C
1) Which of the following is not a "cash equivalent"? A) time deposits B) certificates of deposit C) money market funds D) marketable securities
Answer: D
10) Based on the schedule of interbank transfers above, which of the cash transfers would appear as a deposit in transit on the December 31, 2015 bank reconciliation? A) 1 B) 2 C) 3 D) 4
Answer: D
12) A proof of cash is not an effective procedure for identifying which of the following types of misstatements? A) All recorded disbursements were paid by the bank. B) All recorded cash receipts were deposited. C) All amounts that were paid by the bank were recorded. D) Some checks were written for incorrect amounts.
Answer: D
12) A schedule of investment activity will include all of the following except A) the purchases and sales. B) ending balances. C) the gains and losses. D) the opinion of management as to the suitability of the investment to the company.
Answer: D
12) The audit procedure which requires the auditor to record the last check number used on the last day of the year and subsequently trace to the outstanding checks and the cash disbursements records is performed to satisfy the audit objective of A) detail tie-in. B) existence. C) completeness. D) cutoff.
Answer: D
13) When auditing financial instruments, a confirmation is sent to the broker-dealer A) only if the client has poor internal controls. B) to confirm interest and dividends. C) to provide assurance on realizable value. D) to confirm year-end holdings.
Answer: D
16) When dealing with financial instruments, the most difficult balance-related audit objective to test is A) existence. B) accuracy. C) rights. D) realizable value.
Answer: D
17) The most important balance-related audit objectives in the audit of cash include all except which of the following? A) existence B) accuracy C) completeness D) occurrence
Answer: D
17) When the auditor believes the year-end bank reconciliation may be intentionally misstated, it is appropriate to perform extended tests of the year-end bank reconciliation. Assuming the client has a October 31 year-end, these extended tests would not include A) comparing all September 30 reconciling items with canceled checks and other documents in the October bank statement. B) comparing all canceled checks and deposit slips in the October bank statement with the October cash disbursements and receipts records. C) carrying out all proper procedures subsequent to the end of the year with the use of the bank cutoff statement. D) determining that all outstanding checks had cleared by the date of the bank cutoff statement.
Answer: D
20) Which of the following balance-related objectives applies to auditing the general cash account? A) Rights Classification Realizable value Yes No Yes B) Rights Classification Realizable value No Yes No C) Rights Classification Realizable value Yes Yes Yes D) Rights Classification Realizable value No No No
Answer: D
21) The standard bank confirmation form has been agreed upon by the A) SEC and FASB. B) AICPA and the SEC. C) SEC and the American Bankers' Association. D) AICPA and the American Bankers' Association.
Answer: D
23) If an auditor waits until the subsequent period bank statement is available to verify reconciling items, it is primarily a test for A) errors. B) omissions. C) kiting. D) intentional misstatements.
Answer: D
3) An imprest petty cash fund A) is a bank account. B) is used for large, unusual purchases. C) is usually reimbursed at least once a week for good internal control. D) is being replaced by pre-approved purchase cards in many companies.
Answer: D
4) 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) inadequate internal controls.
Answer: D
4) Which of the following statements is correct? A) Auditors must obtain bank confirmations for audits of nonpublic entities. B) Auditors are required to obtain bank confirmations under international auditing standards. C) Auditing standards do not address specific requirements regarding bank confirmations. D) Auditing standards do not require bank confirmations.
Answer: D
5) Which of the following is an accurate statement regarding cash? A) The amount of cash flowing into and out of the cash account is often larger than that for any other account in the financial statements. B) The susceptibility of cash to embezzlement is greater than that for other types of assets. C) Auditors must verify whether recorded cash in the general ledger correctly reflects all cash transactions that took place during the year. D) All of the above are accurate statements.
Answer: D
6) A proof of cash is effective at identifying which of the following misstatements? A) checks written for an improper amount B) checks issued to invalid vendors C) fraudulent checks D) checks recorded in the books for an amount different from that on the check
Answer: D
