CH 10 Quiz Study
Which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees? 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 bank lockbox system.
Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client's employees? A) A bank lockbox system. B) Prenumbered remittance advices. C) Monthly bank reconciliations. D) Daily deposit of cash receipts.
A) A bank lockbox system. A bank lock box is a post office box controlled by a company's bank at which cash remittances from customers are received. With such a system the bank collects the remittances, immediately credits the cash to the company's bank account, and forwards the remittance advices to the company. Use of a bank lockbox system makes it extremely difficult for employees to divert cash receipts since those cash receipts are sent directly to the post office box controlled by the bank. Answer (2) is incorrect because remittance advices may be prenumbered, but since they come from various customers, they do not have one overall sequence for the client. Answers (3) and (4), bank reconciliations, and daily deposit of cash receipts, are controls, but controls that ordinarily are not as effective as a bank lockbox system.
The Parmalat fraud case involved: 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 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: A) An investment committee of the board of directors. B) The chief operating officer. C) The corporate controller. D) The treasurer.
A) An investment committee of the board of directors. The investment committee of the board of directors is not involved in the routine of making buy and sell decisions and can therefore review the transactions objectively. On the other hand, the chief operating officer, the controller, and the treasurer may be closely associated on a daily basis with the financial executive responsible for the investment decisions.
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: 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) An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation.
By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally be able to detect: 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) An unrecorded deposit made at the bank at the end of the month.
Banks may process electronic "substitute checks" in place of customer written hard copy checks due to the: A) Check Clearing for the 21st Century Act. B) Public Company Accounting Oversight Board's Standard No. 2. C) Foreign Corrupt Practices Act. D) Sarbanes-Oxley Act.
A) Check Clearing for the 21st Century Act.
Which of the following is the best audit procedure for the detection of lapping? 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) Comparison of postings of cash receipts to accounts with the details of cash deposits.
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: A) Details of bank deposit slips with details of credits to customer accounts. B) Daily cash summaries with the sums of the cash receipts journal entries. C) Individual bank deposit slips with the details of the monthly bank statements. D) Dates uncollectible accounts are authorized to be written off with the dates the writeoffs are actually recorded.
A) Details of bank deposit slips with details of credits to customer accounts. Lapping will result in a delay in the recording of specific remittance credits in the financial records, but the checks will be deposited in the bank as they are received. Therefore, a comparison of the checks deposited to the credits to customer accounts will likely uncover the scheme.
When a client engages in transactions involving derivatives, the auditor should: 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) Develop an understanding of the economic substance of each derivative.
For purposes of an audit of financial statements, electronic confirmation of cash balances: A) Is acceptable when properly controlled. B) Is acceptable, but only when combined with a non-electronic approach. C) Is only acceptable for immaterial accounts. D) Is not acceptable.
A) Is acceptable when properly controlled.
Which of the following is correct relating to kiting? A) It is ordinarily used to understate cash. B) It is more difficult to accomplish in an electronic environment as contrasted to a non-electronic environment. C) It is a lapping approach performed using receivable accounts. D) It is seldom, if ever, used.
A) It is ordinarily used to understate cash.
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? A) Observe the consistency of the employees' use of cash registers and tapes. B) Inquire about employees' access to recorded but undeposited cash. C) Trace deposits in the cash receipts journal to the cash balance in the general ledger. D) Compare the cash balance in the general ledger with the bank confirmation request.
A) Observe the consistency of the employees' use of cash registers and tapes. The use of cash registers and tapes helps assure that all sales of a retail store are recorded. Answer (2) is incorrect because the cash has already been recorded. Answer (3) is incorrect because the procedure only deals with recorded deposits and, therefore, the completeness assertion is not addressed as directly as in answer (1). Answer (4) is incorrect because one would not expect the cash balance in the general ledger to agree with the bank confirmation request due to items in transit and checks outstanding.
Reconciliation of the bank account should not be performed by an individual who also: A) Processes cash disbursements. B) Has custody of securities. C) Prepares the cash budget. D) Reviews inventory reports.
A) Processes cash disbursements. The individual who reconciles the bank account should not be involved in the processing of cash receipts or disbursements. Therefore, answer (1) is correct. All of the other functions are compatible with reconciliation responsibilities.
Under which of the following circumstances would an auditor be most likely to intensify an examination of a $500 imprest petty cash fund? A) Reimbursement occurs twice each week. B) Reimbursement vouchers are not prenumbered. C) The custodian occasionally uses the cash fund to cash employee checks. D) The custodian endorses reimbursement checks.
A) Reimbursement occurs twice each week.
Which of the following is not a universal rule for achieving internal control over cash? A) Separate recordkeeping from accounting for cash to the extent possible. B) Deposit each day's cash receipts intact. C) Separate cash handling from record keeping. D) Have monthly bank reconciliations prepared by employees not responsible for the issuance of checks.
A) Separate recordkeeping from accounting for cash to the extent possible.
By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally not be able to detect: 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 second payment of an account payable which had already been paid in full two months earlier.
Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department? 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) Canceling supporting documentation after payment.
On receiving the bank cutoff statement, the auditor should trace: 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) 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: 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) Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.
Which of the following is a frequent control over cash disbursements? A) Checks should be signed by the controller and at least one other employee of the company. B) Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations. C) Checks should be sent directly to the payee by the employee who prepares documents that authorize check preparation. D) Checks and supporting documents should be marked "Paid" immediately after the check is returned with the bank statement.
B) Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations.
Kiting would least likely be detected by: 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) Comparing customer remittance advices with recorded disbursements in the cash disbursements journal.
A practical and effective audit procedure for the detection of lapping is: 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) Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank.
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 in the books. This is an example of: A) Lapping. B) Kiting. C) Effective cash management. D) Related party transactions.
B) Kiting.
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) Transfer A) Yes Yes B) Yes No C) No Yes D) Yes No A) Option A B) Option B C) Option C D) Option D
B) Option B
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. 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) Send a bank confirmation as of year-end.
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: A) Supported by a vendor's invoice. B) Stamped "paid" by the check signer. C) Prenumbered and accounted for. D) Approved for authorized purchases.
B) Stamped "paid" by the check signer. The auditors will determine whether each voucher is stamped "paid" by the check signer to avoid a situation in which supporting documents are used a second time to elicit a second payment
The Standard Form to Confirm Account Balances with Financial Institutions includes information on all of the following except: 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) The principal amount paid on a direct liability.
Which of the following is not a control that generally is established over cash receipts? 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) To insure accurate posting, the accounts receivable clerk should post the customers' receipts from customers' checks.
Which of the following cash transfers is most likely to result in a misstatement of cash at December 31, 19X7? Bank Transfer Schedule Disbursement Receipt Recorded Paid by Recorded Paid by in books bank in books bank A) 12/31/X7 1/4/X8 12/31/X7 12/31/X7 B) 1/4/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) Transfer A B) Transfer B C) Transfer C D) Transfer D
B) Transfer B
Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: A) Board of Directors. B) Treasurer. C) Controller. D) Executive Committee.
B) Treasurer.
An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that: 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) Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.
The best way to verify the amounts of dividend revenue received during the year is: A) Recomputation. B) Verification by reference to dividend record books. C) Confirmation with dividend-paying companies. D) Examination of cash disbursements records.
B) Verification by reference to dividend record books. Comparing the recorded amount of dividend revenue with dividend record books (published by investment advisory services) provides evidence of the amount of dividend revenue that should have been received during the year. It is virtually impossible to confirm the receipt of dividends with the company paying those dividends.
Internal control over cash receipts is weakened when an employee who receives customer mail receipts also: A) maintains a petty cash fund. B) records credits to individual accounts receivable. C) prepares bank deposit slips for all mail receipts. D) prepares initial cash receipts records.
B) records credits to individual accounts receivable.
The least crucial element of internal control over cash is: A) separation of cash record keeping from custody of cash. B) separation of cash receipts from preparing deposits. C) canceling the supporting documents for disbursements. D) preparation of the monthly bank reconciliation.
B) separation of cash receipts from preparing deposits.
The auditors who physically examine securities should insist that a client representative be present in order to: A) Detect fraudulent securities. B) Lend authority to the auditors' directives. C) Acknowledge the receipt of securities returned. D) Coordinate the return of securities to the proper locations.
C) Acknowledge the receipt of securities returned. Because of the liquidity of many securities, the auditor should insist that a client representative be present in order to acknowledge the receipt of securities returned. In the event of subsequent "disappearance" of a security the auditor will not be a suspect.
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 in the books. Which of the following is most likely to be effective in detecting this fraud? 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) Comparison of bank cutoff statement to the cash receipts and disbursements records.
Which of the following statements is not correct? 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) 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: A) Count the cash in advance of the balance sheet date in order to disclose any kiting operations at year-end. B) Coordinate the count of cash with the cutoff of accounts payable. C) Coordinate the count of cash with the count of marketable securities and other negotiable assets. D) Count the cash immediately upon the return of the confirmation letters from the financial institution.
C) Coordinate the count of cash with the count of marketable securities and other negotiable assets. Unless all negotiable assets are verified at one time, an opportunity exists for a dishonest officer or employee to conceal a shortage by transferring it from one asset category to another a step ahead of the auditors. For example, marketable securities could be pledged as collateral for a loan. The cash thus obtained could be included with other cash being counted by the auditors. After the cash count, the cash derived from the securities could be removed and used to redeem the pledged securities which would then be available for counting by the auditors. Of course, this type of manipulation could hardly be carried on unless there were weaknesses in internal control. Answer (1) is incorrect because counting cash in advance of the balance sheet date does not relate to kiting. Answer (2) is not persuasive because accounts payable can not be substituted for cash as can negotiable assets. Answer (4) is not correct because there is no particular significance to the amount of cash on hand on the day the bank confirmation letters happen to be returned.
The auditor's count of the client's cash should be coordinated to coincide with the: 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) Count of investment securities.
The financial management of a company should take steps to see that company's investment securities are protected. Which of the following is not a step that is designed to protect investment securities? A) Securities should be registered in the name of the owner. B) Access to securities should be vested in more than one person. C) Custody of securities should be assigned to persons who have the accounting responsibility for securities. D) Securities should be properly controlled physically in order to prevent unauthorized usage.
C) Custody of securities should be assigned to persons who have the accounting responsibility for securities.
Which of the following is not a control over cash disbursements? 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) Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse.
Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting? 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) Prepare a schedule of bank transfers.
Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom? 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) The cashier posts the receipts to the accounts receivable subsidiary ledger.
Which of the following is not one of the auditors' primary objectives in an examination of investments in securities? A) To determine whether securities are the property of the client. B) To determine whether securities actually exist. C) To determine whether all securities are in proper, secure, files at year-end. D) To determine whether securities are properly classified on the balance sheet.
C) To determine whether all securities are in proper, secure, files at year-end.
As compared to manual processing, electronic processing of cash transactions generally makes kiting: A) impossible to accomplish. B) easier to accomplish. C) more difficult to accomplish. D) neither easier, nor more difficult to accomplish.
C) more difficult to accomplish.
A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and submission of coupons for periodic interest collections probably should be delegated to the: B) cashier. C) internal auditors. C) treasurer. D) chief accountant.
C) treasurer.
Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: A) controller. B) executive committee. C) treasurer. D) board of directors.
C) treasurer.
The auditors who are engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to: A) detect lapping. B) detect kiting. C) verify reconciling items on the client's bank reconciliation. D) verify the cash balance reported on the standard financial institution confirmation form.
C) verify reconciling items on the client's bank reconciliation.
The auditors should insist that a representative of the client be present during the physical examination of securities in order to: 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) Acknowledge the receipt of securities returned.
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? 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) Comparing recorded dividends with a standard financial reporting service's record of dividends.
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? 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.
D) Examination of paid checks issued in payment of securities purchased.
To gather evidence regarding the balance per bank in a bank reconciliation, an auditor could examine all of the following except: A) Cutoff bank statement. B) Year-end bank statement. C) Bank confirmation. D) General ledger.
D) General ledger.
To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except: A) Cutoff bank statement. B) Year-end bank statement. C) Bank confirmation. D) General ledger.
D) General ledger. The general ledger will not have information on the balance per bank. The cutoff bank statement, year-end bank statement and bank confirmation will all include information on the balance per bank.
In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also: A) Reviews the monthly bank reconciliation. B) Returns the checks to accounts payable. C) Is denied access to the supporting documents. D) Is responsible for mailing the checks.
D) Is responsible for mailing the checks. When checks are signed they should not be returned to the accounting department. This control is used so as to avoid a situation in which the accounts payable department fabricates documents, and then collects the checks. Not returning the checks makes it more difficult for this sort of fraud in that the perpetrator must also establish a "safe" address for the check to be mailed to. Answer (1) is incorrect because control is stronger if individuals who are otherwise independent of the cash function prepare and review the monthly bank reconciliation. Answer (2) is incorrect because, as discussed, the checks should not be returned to accounts payable. Answer (3) is incorrect because the individual signing the checks needs access to the supporting documents so he or she can determine whether the expenditure is proper.
Which of the following is correct concerning "window dressing" for cash? 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) 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? A) Sales are understated. B) Accounts receivable are understated. C) Inventory is overstated. D) Net income is overstated.
D) 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: 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) No discrepancies exist between the data on the checks and the data in the journal.
Which of the following is not a control that generally is established over cash transactions? A) Separating cash handling from record keeping. B) Centralizing the receipt of cash. C) Depositing each day's receipts intact. D) Obtaining a receipt for every disbursement.
D) Obtaining a receipt for every disbursement.
A company's decision to use the fair value option for valuation of marketable securities is most likely to affect which of the following assertions the most? A) Completeness. B) Existence. C) Fairness. D) Presentation and Disclosure.
D) Presentation and Disclosure.
Which of the following audit procedures is the most appropriate when internal control over cash is weak or when a client requests an investigation of cash transactions? A) Cash confirmation. B) Bank reconciliation. C) Evaluation of ratio of cash to current liabilities. D) Proof of cash.
D) Proof of cash.
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? A) Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept. B) Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access. C) Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis. D) Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent.
D) Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent. Having the securities held in safekeeping by a bank or stockbroker provides strong internal control because they are not available to employees responsible for maintaining the accounting records of the securities. Thus the separation of the custody of securities from the accounting function is complete.
In order to avoid the misappropriation of company-owned financial investments, which of the following is the best course of action that can be taken by the management of a company with a large portfolio of financial investments? A) Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access. B) Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept. C) Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis. D) Require that the safekeeping function for securities be assigned to a securities broker who will act as a custodial agent.
D) Require that the safekeeping function for securities be assigned to a securities broker who will act as a custodial agent.
Internal control over marketable securities is enhanced when: 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) Securities are held under joint control of two or more officials.
Which of the following is not confirmed on the standard form used for cash balances at financial institutions? A) Cash checking account balances. B) Cash savings account balances. C) Loans payable. D) Securities held for the client by the financial institution.
D) Securities held for the client by the financial institution.
An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the best evidence on operating effectiveness? 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) Select and examine canceled checks and test whether the related receiving reports are dated no later than the checks.
Properly designed internal control will permit the same employee to: 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) Sign checks, and also cancel supporting documents.
An auditor's analytical procedures have revealed that the accounts receivable of a client have doubled since the end of the prior year. However, the allowance for doubtful accounts, as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor? 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) The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.
A client has $100,000 on deposit at year-end and owes the bank $250,000 on a note payable. The borrowing agreement calls for the client to maintain a minimum (compensating) balance of $40,000 on deposit during the life of the bank loan. On the balance sheet, the asset cash should be stated at $60,000, the excess of the deposit over the compensating balance. True False
False
A compensating balance agreement always requires that cash be reclassified as a noncurrent asset. True False
False
A proof of cash is an audit procedure that is performed on almost every engagement. True False
False
An improper bank reconciliation designed to conceal a cash shortage is more likely to overstate than understate the amount of outstanding checks. True False
False
An official of the client company took securities from the safe deposit box and sold them to obtain cash to meet a personal financial crisis. Even with proper internal control, if the official purchased identical securities before the year-end and placed them in the safe deposit box, this improper "borrowing" would probably go undetected during the annual audit. True False
False
Auditors normally verify the amount of dividends earned on the client's security investments by writing directly to the companies which paid the dividends. True False
False
Auditors should never count a cash fund with the custodian present because the custodian might be able to influence the count. True False
False
Cash should be deposited weekly so it can be counted several times before being sent to the bank. True False
False
Confirmations for cash balances should be mailed only to the financial institutions with which the client has a cash balance at year-end. True False
False
For investments in securities accounted for by the equity method, the auditors are primarily concerned with verifying the fair value of the investments. True False
False
Good internal control over financial investments requires that the treasurer obtain certificates for all securities and keep them in the company safe. True False
False
In relation to its materiality, the audit of cash requires little audit time. True False
False
Lapping of accounts receivable by an employee is not possible when there is adequate segregation of duties with respect to cash disbursements. True False
False
Mailroom personnel of a company should prepare a control listing of incoming cash receipts and deposit them intact daily. True False
False
Marketable equity securities should be valued at cost. True False
False
Signed checks should be returned to the cash disbursements clerk for mailing. True False
False
The audit working paper known as a "proof of cash" is a means of proving that checks paid by the bank during the test period were not in excess of authorized cash receipts during that same test period. True False
False
The auditors should count small petty cash funds at year-end to make sure that balance is not understated on the financial statements. True False
False
The inspection of securities on hand should be coordinated with the verification of inventories because both involve counting and inspection and can conveniently be combined. True False
False
An auditor may obtain information on the December 31 month-end balance per bank in which of the following? Standard Conformation Form Jan 1-10 Cutoff Statement A) Yes Yes B) Yes No C) No Yes D) Yes No A) Option A B) Option B C) Option C D) Option D
Option A
A cutoff bank statement provides assurance to the auditors that all checks outstanding at year-end were included in the list of outstanding checks in the year-end bank reconciliation. True False
True
A derivative is a financial instrument that derives its value from another financial instrument, an underlying asset, or indices. True False
True
A salesperson who uses a cash register to record over-the-counter sales should, at the end of each work day, turn over to a supervisor the cash register tape and a corresponding amount of cash. True False
True
An employee who prepares checks and submits them with supporting documents to the official authorized to sign checks should not be responsible for mailing the signed checks. True False
True
Confirmation requests should be mailed by the auditors in envelopes bearing the auditors' return address. True False
True
Designating the cashier to be custodian of the petty cash fund is more acceptable from the standpoint of internal control than making the cashier responsible for maintenance of accounts receivable records. True False
True
The "lapping" of cash receipts is most likely to occur when one person has both responsibility for record keeping for cash receipts and custody of cash. True False
True
The practice of "kiting" as a means of overstating cash is possible only if the client maintains two or more bank accounts. True False
True
The standard financial institution confirmation request used by the auditors is a means of obtaining documentary evidence about both assets and liabilities. True False
True
Verification of cash and other liquid assets on the same date may prevent substitution of one form of asset for another. True False
True
