Ch 10 - Cash

The auditors who physically examine securities should insist that a client representative be present in order to: - Detect fraudulent securities. - Lend authority to the auditors' directives. - Acknowledge the receipt of securities returned. - Coordinate the return of securities to the proper locations.

Acknowledge the receipt of securities returned.

The auditors use a bank cutoff statement to compare: Deposits in transit on the year-end cash general ledger account to deposits in the cash receipts journal. Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation. Deposits listed on the cutoff statement to disbursements in the cash disbursements journal. Checks dated subsequent to year-end to the outstanding checks listed on the year-end bank statement.

Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.

Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department? Preparing the check for signature by an authorized person. Verifying the mathematical accuracy of the vendor's invoice. Comparing the vendor's invoice with the receiving report. Canceling supporting documentation after payment.

Canceling supporting documentation after payment.

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. - Prenumbered remittance advices. - Monthly bank reconciliations. - Daily deposit of cash receipts.

A bank lockbox system Because this eliminates employee contact with receipt, while daily deposit of cash does not (because they are still in contact with the receipt)

The Parmalat fraud case involved A bank reconciliation performed by the client that systematically understated cash. Kiting of funds between banks in India and banks in Pakistan. A fraudulent cash confirmation. Major unrecorded disbursements for equipment.

A fraudulent cash confirmation.

The Parmalat fraud case involved A fraudulent cash confirmation. Major unrecorded disbursements for equipment. Kiting of funds between banks in India and banks in Pakistan. A bank reconciliation performed by the client that systematically understated cash.

A fraudulent cash confirmation.

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 chief operating officer. - The corporate controller. - The treasurer.

An investment committee of the board of directors.

By preparing a four-column bank reconciliation ("proof of cash") for the last month of the year, an auditor will generally be able to detect: An embezzlement of unrecorded cash receipts on receivables before they had been deposited into the bank. An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation. A credit sale which has been recorded twice in the sales journal. A cash sale which was not recorded on the books and was stolen by a bookkeeper.

An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation. (involves cash and is cashed during the period covered by the reconciliation so would come up on the reconciliation)

By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally be able to detect: An unrecorded deposit made at the bank at the end of the month. A second payment of an account payable which had already been paid in full two months earlier. An embezzlement of cash receipts not recorded in the cash receipts journal before they had been deposited into the bank. A receivable collected that had previously been written off as uncollectible.

An unrecorded deposit made at the bank at the end of the month.

A practical and effective audit procedure for the detection of lapping is: Tracing recorded cash receipts to postings in customers' ledger cards. Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank. Preparing an interbank transfer schedule. Preparing a proof of cash.

Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank. (In lapping, there would already be a posting in the customers' ledger using an older customers' account, so must compare with bank)

Jones was engaged to audit the financial statements of Gamma Corporation for the year ended June 30, 200X. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income? Comparing recorded dividends with a standard financial reporting service's record of dividends. Utilizing analytical techniques and statistical sampling. Comparing recorded dividends with amounts appearing on federal information form 1099s. Tracing recorded dividend income to cash receipts records and validated deposit slips.

Comparing recorded dividends with a standard financial reporting service's record of dividends.

Jones embezzled $10,000 from his company's account in Bank A. At year-end he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the transaction on the books. Which of the following is most likely to be effective in detecting this fraud? Bank confirmation. Bank transfer schedule prepared using only the cash receipts and cash disbursements journals. Comparison of bank cutoff statement to the cash receipts and disbursements records. Receivable confirmation.

Comparison of bank cutoff statement to the cash receipts and disbursements records. (Need to use bank cutoff statement because he did not record these transactions in the books, thus a bank transfer schedule using only the cash receipt and cash disbursement journals would be useless)

Which of the following is the best audit procedure for the detection of lapping? Preparing a proof of cash. Confirmation of the cash balance. Comparison of postings of cash receipts to accounts with the details of cash deposits. Reconciliation of the cash account balances.

Comparison of postings of cash receipts to accounts with the details of cash deposits.

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

Confirmation of cash should only be performed as of the balance statement date because the auditor expresses an opinion as of that date.

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: - Count the cash in advance of the balance sheet date in order to disclose any kiting operations at year-end. - Coordinate the count of cash with the cutoff of accounts payable. - Coordinate the count of cash with the count of marketable securities and other negotiable assets. - Count the cash immediately upon the return of the confirmation letters from the financial institution.

Coordinate the count of cash with the count of marketable securities and other negotiable assets.

In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also: - Reviews the monthly bank reconciliation. - Returns the checks to accounts payable. - Is denied access to the supporting documents. - Is responsible for mailing the checks.

Is responsible for mailing the checks.

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. - Daily cash summaries with the sums of the cash receipts journal entries. - Individual bank deposit slips with the details of the monthly bank statements. - Dates uncollectible accounts are authorized to be written off with the dates the writeoffs are actually recorded.

Details of bank deposit slips with details of credits to customer accounts.

When a client engages in transactions involving derivatives, the auditor should Confirm with the client's broker whether the derivatives are for trading purposes. Develop an understanding of the economic substance of each derivative. Add an explanatory paragraph to the auditor's report describing the risks associated with each derivative. Notify the audit committee about the risks involved in derivative transactions.

Develop an understanding of the economic substance of each derivative.

Which of the following is not a control over cash disbursements? A check protecting machine should be used. Voided checks should be defaced and filed with paid checks. Disbursements should be made by check. Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse.

Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse.

In a manufacturing company which one of the following audit procedures would give the least assurance of the existence of the assets in the general ledger balance of investment in stocks and bonds at the audit date? Examination of paid checks issued in payment of securities purchased. Vouching all changes during the year to brokers' advises and statements. Confirmation from the broker. Inspection of year-end brokers' statements.

Examination of paid checks issued in payment of securities purchased. (Not in relation to the broker???)

To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except: - Cutoff bank statement. - Year-end bank statement. - Bank confirmation. - General ledger.

General ledger

Which of the following is correct relating to kiting? It is ordinarily used to understate cash. It is more difficult to accomplish in an electronic environment as contrasted to a non-electronic environment. It is a lapping approach performed using receivable accounts. It is seldom, if ever, used.

It is more difficult to accomplish in an electronic environment as contrasted to a non-electronic environment.

Jones embezzled $10,000 from his company's account in Bank A. At year-end he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the transaction on the books. This is an example of: Related party transactions. Effective cash management. Kiting. Lapping.

Kiting.

Which of the following is correct concerning "window dressing" for cash? A segregation of duties within the cash function effectively eliminates its occurrence. It generally involves manipulation of inventory. It is illegal, and an audit is designed to provide reasonable assurance of its detection. Many forms of it require no action by the auditors.

Many forms of it require no action by the auditors.

Your client left the cash receipts journal open after year-end for an extra day and included January 1 cash receipts in the 12/31/XX totals. All of those cash receipts were due to cash sales. Assuming the client uses a periodic inventory system with a 12/31/XX count of the physical inventory, which of the following is most likely to be true relating to the year XX financial statements? Inventory is overstated. Sales are understated. Net income is overstated. Accounts receivable are understated.

Net income is overstated.

The auditors compare information on canceled checks with information contained in the cash disbursement journal. The objective of this test is to determine that: Recorded cash disbursement transactions are properly authorized. No discrepancies exist between the data on the checks and the data in the journal.

No discrepancies exist between the data on the checks and the data in the journal. (Make sure that the cancelled checks match the books; looking at this info does not prove proper authorization - would have to see if check was stamped)

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. - Inquire about employees' access to recorded but undeposited cash. - Trace deposits in the cash receipts journal to the cash balance in the general ledger. - Compare the cash balance in the general ledger with the bank confirmation request.

Observe the consistency of the employees' use of cash registers and tapes.

Which of the following is not a control that generally is established over cash transactions? Obtaining a receipt for every disbursement. Depositing each day's receipts intact. Separating cash handling from recordkeeping. Centralizing the receipt of cash.

Obtaining a receipt for every disbursement.

Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting? Prepare a schedule of bank transfers. Review subsequent bank statements and canceled checks received directly from the banks. Prepare year-end bank reconciliations. Review composition of authenticated deposit slips.

Prepare a schedule of bank transfers.

A company's decision to use the fair value option for valuation of marketable securities is most likely to affects which of the following assertions the most? Existence. Fairness. Completeness. Presentation and Disclosure

Presentation and Disclosure

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 one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept. - Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access. - Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis. - Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent.

Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent. Because you want a third-party who has not incentive to tamper with the value of marketable securities to be responsible for the marketable securities

Internal control over marketable securities is enhanced when: Securities are held under joint control of two or more officials. Detailed records of securities are maintained by the custodian of the securities. Securities are held by the cashier. Securities are registered in the name of the custodian.

Securities are held under joint control of two or more officials.

In October, three months before year-end, the bookkeeper erroneously recorded the receipt of a one year bank loan with a debit to cash and a credit to miscellaneous revenue. Select the most effective method for detecting this type of error. Prepare a bank transfer schedule as of year-end. Foot the cash receipts journal for October. Prepare a bank reconciliation as of year-end. Send a bank confirmation as of year-end.

Send a bank confirmation as of year-end. (This would detect the inaccurate balance in the liability account because it wouldn't have been recorded in the books as paid off)

Which of the following is not a universal rule for achieving internal control over cash? Separate cash handling from recordkeeping. Deposit each day's cash receipts intact. Separate recordkeeping from accounting for cash to the extent possible. Have monthly bank reconciliations prepared by employees not responsible for the issuance of checks.

Separate recordkeeping from accounting for cash to the extent possible.

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: - Supported by a vendor's invoice. - Stamped "paid" by the check signer. - Prenumbered and accounted for. - Approved for authorized purchases.

Stamped "paid" by the check signer.

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom? The cashier makes the daily deposit at a local bank. The cashier prepares the daily deposit. The cashier posts the receipts to the accounts receivable subsidiary ledger. The cashier endorses the checks.

The cashier posts the receipts to the accounts receivable subsidiary ledger.

As one of the year-end audit procedures, the auditor instructed the client's personnel to prepare a confirmation request for a bank account that had been closed during the year. After the client's treasurer has signed the request, it was mailed by the assistant treasurer. What is the major flaw in this audit procedure? The CPA did not sign the confirmation request before it was mailed. The confirmation request was signed by the treasurer. Sending the request was meaningless because the account was closed before the year end. The request was mailed by the assistant treasurer.

The request was mailed by the assistant treasurer.

Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: Board of Directors. Treasurer. Executive Committee. Controller.

Treasurer.

Which of the following manipulations of cash transactions would overstate the cash balance on the financial statements? Overstatement of outstanding checks. Overstatement of bank services charges. Understatement of deposits in transit. Understatement of outstanding checks

Understatement of outstanding checks

The best way to verify the amounts of dividend revenue received during the year is: - Recomputation. - Verification by reference to dividend record books. - Confirmation with dividend-paying companies. - Examination of cash disbursements records.

Verification by reference to dividend record books.

Banks may process electronic "substitute checks" in place of customer written hard copy checks due to the: Sarbanes-Oxley Act Foreign Corrupt Practices Act. Check Clearing for the 21st Century Act Public Company Accounting Oversight Board's Standard No. 2.

Check Clearing for the 21st Century Act

On receiving the bank cutoff statement, the auditor should trace: Deposits listed on the cutoff statement to deposits in the cash receipts journal. Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal. Checks dated subsequent to year end to the outstanding checks listed on the year-end bank reconciliation. Checks dated prior to year end to the outstanding checks listed on the year-end bank reconciliation.

Checks dated prior to year end to the outstanding checks listed on the year-end bank reconciliation.

The auditors use a bank cutoff statement to compare: Checks dated subsequent to year-end to the outstanding checks listed on the year-end bank statement. Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation. Deposits in transit on the year-end cash general ledger account to deposits in the cash receipts journal. Deposits listed on the cutoff statement to disbursements in the cash disbursements journal.

Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.

Reconciliation of the bank account should not be performed by an individual who also: - Processes cash disbursements. - Has custody of securities. - Prepares the cash budget. - Reviews inventory reports.

Process cash disbursements Because they would be able to exclude these cash disbursements when reconciling the bank account to cover their tracks

Which procedure is an auditor most likely to use to detect a check outstanding at year-end that was not recorded as outstanding on the year-end bank reconciliation? Receive a cutoff statement directly from the client's bank. Prepare a bank transfer schedule using the client's cash receipts and cash disbursements journal. Prepare a four column bank reconciliation using the year-end bank statement. Confirm the year end balance using the standard form to confirm account balance information with financial institutions.

Receive a cutoff statement directly from the client's bank.