Auditing Chapter 10
The auditor will send a standard bank confirmation to which of the following? a. Financial institutions with which the client has transacted during the year. b. Financial institutions for which the client has a balance greater than $0 at the end of the year. c. Financial institutions of customers using the lockbox. d. Financial institutions used by significant shareholders.
A
The first step in performing planning analytical procedures is to develop an expectation of the account balance. Which of the following does not typically represent a likely expected relationship for cash accounts? a. The company reports consistent profits over several years, but operating cash flows are declining. b. No unusual large cash or other liquid asset transactions are found. c. Operating cash flow is not significantly different from that of the prior year. d. Investment income is consistent with the level of and returns expected from the investments. e. All of these represent likely expected relationships.
A
The first step in performing planning analytical procedures is to develop an expectation of the account balance. Which of the following does not typically represent a likely expected relationship for cash accounts? a. The company reports consistent profits over several years, but operating cash flows are declining. b. No unusual large cash or other liquid asset transactions are found. c. Operating cash flow is not significantly different from that of the prior year. d. Investment income is consistent with the level of and returns expected from the investments. e. All of the above represent likely expected relationships.
A
Under which of the following circumstances would the valuation assertion for cash most likely have an increased level of inherent risk? a. Client has cash holdings in foreign currency in a politically unstable country. b. Client has cash holdings in multiple U.S. financial institutions over a wide geographic area. c. Client holds investments in complex financial instruments. d. All of the above.
A
Which mix of evidence would be most appropriate for the following scenario? This is a client where the auditor has assessed the risk of material misstatement related to the existence and completeness of cash at high. This client has incentives to overstate cash in order to meet debt covenants. Further, the client has relatively weak controls to prevent theft of cash. a. 100% tests of details. b. 70% tests of details, 10% analytics, 20% tests of controls. c. 50% tests of details, 10% analytics, 40% tests of controls. d. 20% tests of details, 40% analytics, 40% tests of controls.
A
Which of the following is a risk associated with complex financial instruments? a. Management's objective for entering into such transactions may relate to misstating the financial statements. b. Most of these financial instruments have a high volume of activity and relate to deep capital markets. c. Most management teams today have the necessary sophistication to invest in complex financial instruments with relatively little downside risk. d. All of the above are risks.
A
Which of the following questions would be relevant for an inherent risk analysis related to cash? a. Does the company have significant cash flow problems in meeting its current obligations on a timely basis? b. Are cash transactions properly authorized? c. Are bank reconciliations performed on a timely basis by personnel independent of processing? d. Does the internal audit department conduct timely reviews of the cash management and cash-handling process? e. All of the above.
A
Which of the following represents a typical substantive audit procedure for cash balances? a. Verify material deposits in transit to subsequent statements. b. Foot cutoff bank statements provided by the financial institutions. c. Perform kiting techniques to transfer cash between two client accounts. d. Review cash confirmations received by the client from the bank.
A
Which one of the following is not a fundamental internal control the auditor would expect to find in place for a cash processing system? a. Electronic payments. b. Authorization of transactions. c. Periodic internal audits. d. Segregation of duties.
A
Cutoff bank statement
A bank statement for a period of time after yearend (usually seven to ten days); sent directly to the auditor, who uses it to verify reconciling items on the client's year-end bank reconciliation.
Turnaround document
A document sent to the customer to be returned with the customer's remittance; may be machine-readable and may contain information to improve the efficiency of receipt processing.
Kiting
A fraudulent cash scheme to overstate cash assets at year-end by showing the same cash in two different bank accounts using an interbank transfer.
Hash total
A method by which organizations attempt to ensure accuracy when using processed data. A hash total includes a summation of numerous data fields from a file, including those not necessarily related to calculations (for example, an account number). Over the course of processing, the hash total is recalculated and any discrepancies with the original value signal an error to be investigated.
Bank confirmation
A standard confirmation sent to all banks with which the client had business during the year to obtain information about the year-end cash balance and additional information about loans outstanding.
Split payments
A tactic by which money launderers strategically divide payments into multiple small transactions to avoid detection by financial institutions
Smurfing
A tactic by which money launderers strategically report transactions just under the $10,000 mandatory reporting requirement to financial institutions.
Interbank transfer schedule
An audit document that lists all transfers between client bank accounts starting a short period before year-end and continuing for a short period after year-end; its purpose is to assure that cash in transit is not recorded twice.
A bank confirmation contains which of the following two parts? 1. A part that seeks information on the client's deposit balances, the existence of loans, due dates of the loans, interest rates, dates through which interest has been paid, and collateral for loans outstanding. 2. A part that contains a listing of the last checks issued near year-end. 3. A part that seeks information about any loan guarantees. 4. A part that lists all transfers between the company's bank accounts for a short period of time before and after year-end. a. 1 & 2. b. 1 & 3. c. 2 & 3. d. 2 & 4. e. 3 & 4.
B
An audit client has invested heavily in new equity and debt securities. Which of the following would not constitute an appropriate role for the organization's board of directors or others charged with governance? a. Receive and review periodic reports by the internal audit function on compliance with the organization's investment policies and procedures. b. Approve all new investments prior to reviewing their risks. c. Review and approve written policies and guidelines for investments in marketable securities. d. Periodically review the risks inherent in the portfolio of marketable securities to determine whether the risk is within parameters deemed acceptable by the board.
B
Refer to Exhibit 10.6. Which of the following represents a reasonable test of controls for cash receipts? a. Document internal controls over cash by completing the internal control questionnaire or by flowcharting the process. b. Segregation of duties between those handling cash and those recording cash transactions. c. Obtain a bank confirmation. d. Obtain a bank cutoff statement. e. All of these.
B
Skimming most likely results in a violation of which of the following management assertions? a. Existence. b. Completeness. c. Rights and obligations. d. Valuation. e. All of the above.
B
What form of evidence is used by the auditor to verify bank reconciliation items? a. Bank confirmation b. Cutoff statement. c. Cash counting observation. d. General ledger.
B
Which of the following assertions is relevant to whether the marketable securities balances include all securities transactions that have taken place during the period? a. Existence/occurrence. b. Completeness. c. Rights and obligations. d. Valuation or allocation. e. All of the above.
B
Which of the following represents a reasonable test of controls for cash receipts? a. Document internal controls over cash by completing the internal control questionnaire or by flowcharting the process. b. Segregation of duties between those handling cash and those recording cash transactions. c. Obtain a bank confirmation. d. Obtain a bank cutoff statement. e. All of the above.
B
Which of the following would the auditor use to test the existence of investments? a. Recomputing interest and/or gains and losses. b. Confirming or examining recorded investments. c. Footing the schedule of recorded investments. d. Reviewing a schedule of investments sold during the year.
B
Electronic authorization privileges for cash transactions may be best assigned to individuals based on which of the following? a. The principle of "absolute knowledge." b. Encrypted passwords memorized by employees. c. Roles and activities falling within appropriate segregation of duties. d. Identification cards with picture identification.
C
Refer to Exhibit 10.15. Which of the following assertions is relevant to the audit procedure for marketable securities that requires the auditor to examine selected documents to identify any restrictions on the securities? a. Existence/occurrence. b. Completeness. c. Rights and obligations. d. Valuation or allocation. e. All of these.
C
Refer to Exhibit 10.15. Which of the following assertions is relevant to the audit procedure for marketable securities that requires the auditor to examine selected documents to identify any restrictions on the securities? a. Existence/occurrence. b. Completeness. c. Rights and obligations. d. Valuation or allocation. e. All of the above.
C
The cutoff bank statement is used by the auditor to address which of the following concerns? a. Lapping. b. Kiting. c. Omitting outstanding checks on reconciliations. d. All of the above.
C
The emphasis in verifying petty cash is normally on which of the following? a. Year-end balance. b. Transactions for the period. c. Controls over petty cash. d. Balance sheet classification.
C
When testing cash balances at the balance sheet date, the auditor foots the bank reconciliation and traces its reported book balance to the trial balance and its bank balance to the standard confirmation. Which of the following assertions is being tested with these procedures? a. Existence. b. Rights. c. All of the above. d. Valuation.
C
When testing cash balances at the balance sheet date, the auditor foots the bank reconciliation and traces its reported book balance to the trial balance and its bank balance to the standard confirmation. Which of the following assertions is being tested with these procedures? a. Rights. b. Valuation. c. All of the above. d. Existence.
C
Which of the following assertions is relevant to whether the company owns the cash accounts as of the balance sheet date? a. Existence/occurrence. b. Completeness. c. Rights and obligations. d. Valuation or allocation. e. All of the above.
C
Which of the following describes documents that accompany customer payments to help the clerk identify the payments? a. Checks stamped with restrictive endorsements such as customer signatures. b. Receipts such as register tapes. c. Turnaround documents such as remittance advices. d. Accommodation certificates such as authenticated customer tokens.
C
Which of the following is not a common test of controls for marketable securities? a. Review the minutes of the board meetings. b. Review reports of internal audits. c. Review broker's advice for accurate recording of security. d. Inquire of management about its process for reclassifications.
C
Which of the following is the primary reason the auditor obtains and reviews a cutoff bank statement? a. Foot the cutoff bank statement for completeness. b. Verify the balance of cash per the bank's general ledger at the balance sheet date. c. Verify the reconciling items on the year-end bank reconciliation. d. Test for intentional lapping of bank transfers.
C
Which of the following would be used by the auditor to address the possibility of kiting? a. Bank confirmations of account balances. b. Bank confirmations of loan guarantees. c. Interbank transfer schedules. d. Cut-off bank reconciliations.
C
As cash processing systems become more automated and integrated, which of the following is true about the general concept of segregation of duties? a. Segregation of duties becomes more important. b. Segregation of duties becomes less important. c. Segregation of duties becomes completely computerized without human involvement. d. The importance of segregation of duties does not change.
D
Investments in securities are classified as which of the following? a. Held-to-maturity. b. Trading securities. c. Available-for-sale securities. d. All of the above.
D
The cash account is significant to the auditor for which of the following reasons? a. The cash account is not as susceptible to fraud as most other accounts. b. Cash is the only account that provides opportunity for fraud. c. Automated systems do not possess the capability to maintain strong internal controls over cash. d. The cash account balance is the culmination of a large volume of transactions.
D
The employee steals a payment from Customer X. To cover the theft, the employee applies a payment from Customer Y to Customer X's account. Before Customer Y has time to notice that its account has not been appropriately credited, the employee applies a payment from Customer Z to Customer Y's account. a. Skimming. b. Kiting. c. Collateralizing. d. Lapping.
D
Which of the following assertions is relevant to whether the cash balances reflect the true underlying economic value of those assets? a. Existence/occurrence. b. Completeness. c. Rights and obligations. d. Valuation or allocation. e. All of these.
D
Which of the following assertions is relevant to whether the cash balances reflect the true underlying economic value of those assets? a. Existence/occurrence. b. Completeness. c. Rights and obligations. d. Valuation or allocation. e. All of the above.
D
Which of the following is not a type of common control over cash? a. Segregation of duties. b. Restrictive endorsements of customer checks. c. Bank reconciliations by employees who handle cash. d. Prenumbered cash receipt documents and turnaround documents.
D
Which of the following is not an internal control the auditor would expect to find in place for all cash processing systems? a. Restrictive endorsement of checks. b. Prenumbered cash receipt documents. c. Independent reconciliation. d. Walkthrough.
D
Which of the following statements regarding reperformance of bank reconciliations is true? a. The auditor's reperformance of a reconciliation of the client's bank accounts provides evidence as to the accuracy of the year-end cash balance. b. The process reconciles the balance per the bank statements with the balance per the books. c. Reperformance of the bank reconciliation is ineffective in detecting major errors, such as those that might be covered up by omitting or underfooting outstanding checks. d. Two of the above (a-c) are true. e. All of the above (a-c) are true.
D
Which of the following would the auditor use to test the existence of investments? a. Footing the schedule of recorded investments. b. Reviewing a schedule of investments sold during the year. c. Recomputing interest and/or gains and losses. d. Confirming or examining recorded investments.
D
Affirmative answers to which of the following questions would lead the auditor to assess fraud risk at a higher level for cash? a. Is an individual with access to cash or its recording experiencing financial or personal distress? b. Is an individual with access to cash or its recording being compensated at an amount that he or she might consider low? c. Is the company in potential violation of its debt covenants? d. Two of the three narrative answered choices given. e. All of these.
E
Affirmative answers to which of the following questions would lead the auditor to assess fraud risk at a higher level for cash? a. Is an individual with access to cash or its recording experiencing financial or personal distress? b. Is an individual with access to cash or its recording being compensated at an amount that he or she might consider low? c. Is the company in potential violation of its debt covenants? d. Two of the above (a-c) e. All of the above (a-c).
E
Inherent risk for cash is usually assessed as high for which of the following reasons? a. The volume of transactions flowing through cash accounts throughout the year makes the account more susceptible to error. b. The cash account is more susceptible to fraud because cash is liquid and easily transferable. c. The electronic transfer of cash and the automated controls over cash are such that if errors are built into computer programs, they will be repeated on a large volume of transactions. d. Cash can be easily manipulated. e. All of the above.
E
Which of the following is a common example of trend analysis of accounts and ratios that the auditor might consider for cash accounts? a. Compare monthly cash balances with past years and budgets. b. Identify unexpected spikes or lows in cash during the year. c. Compute trends in interest returns on investments. d. Two of the above (a-c). e. All of the above (a-c).
E
Which of the following represents a control related to cash that an auditor might test? a. Reviews of reconciliations of reported cash receipts with remittances prepared by independent parties. b. Reviews of cash budgets and comparison of them with actual cash balances. c. Reviews of discrepancies in cash balances. d. Two of the above (a-c). e. All of the above (a-c).
E
A fake cash problem relates to management's cash valuation assertion. (T/F)
F
A fake cash problem relates to management's cash valuation assertion.
F
A typical bank statement prepared at an interim agreed-upon date and sent directly to the auditor is a bank transfer statement.
F
Because a primary concern is that cash will be stolen and thus understated, the auditor is not usually concerned about overstatements of cash.
F
Because cash balances are usually relatively low at year-end, auditing standards encourage auditors to send bank confirmations on a sample basis.
F
Because of the level of inherent risk associated with cash accounts, auditors are required to test the controls over cash accounts.
F
Controls for completeness of cash are important because they help to provide reasonable assurance that the cash exists.
F
Planning analytical procedures for cash balances are highly effective because of the generally stable relationship with past cash levels and the fact that cash is a managed account.
F
Short selling enables managers to get away with perpetrating fraud undetected and undeterred. (T/F)
F
Skimming occurs when an employee purchases merchandise and records the sale at an unauthorized discounted price.
F
The electronic transfer of cash and the automated controls over cash are such that if errors are built into computer programs, they could be repeated on a large volume of transactions. (T/F)
T
The relative percentage of substantive analytics that an auditor will use as evidence in the audit of cash will be somewhat limited regardless of the riskiness of the client.
T
When auditing cash, the auditor will perform a relatively larger percentage of tests of details for a high-risk client compared to a low-risk client.
T
An example of a monitoring control in cash would include a review of cash budgets and a comparison of them with actual cash balances, with appropriate follow-up.
T
Auditor expertise is critically important in evaluating the validity of the valuation of complex financial instruments.
T
If the auditor observes that the company reports consistent profits over several years while cash inflows are decreasing, the auditor should likely assess a heightened risk of fraud in cash.
T
In assessing fraud risk related to cash, auditors engage in brainstorming to consider incentives, opportunities to commit fraud, and rationalization about risks relating to cash.
T
The following is a reasonable test of control over marketable securities: Inquire of management about its process for establishing valuation of marketable securities and review related documentation.
T
The following is an inherent risk that is particularly applicable to owning stock in a company like Genie Energy: Risk of sudden market declines, which would adversely affect the valuation of securities.
T
When there is a ready market for financial instruments, the audit procedures related to valuation and disclosures are more straightforward than when the instrument is not readily marketable.
T
Fake cash problem
This issue exists when a company creates fictitious additions to its cash account in order to validate fictitious additions to revenues; thereby violating the existence assertion for both revenue and cash accounts.
Skimming
This type of fraud occurs when an employee makes a sale but does not record it, and steals the cash.
Lapping
This type of fraud occurs when an employee steals a payment from one customer, and covers it up by using payments from another customer to disguise the theft. For example, the employee steals a payment from Customer X. To cover the theft, the employee applies a payment from Customer Y to Customer X's account. Before Customer Y has time to notice that its account has not been appropriately credited, the employee applies a payment from Customer Z to Customer Y's account.
