Audit - Ch 10
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.
FALSE
Short selling enables managers to get away with perpetrating fraud undetected and undeterred
FALSE
Skimming occurs when an employee purchases merchandise and records the sale at an unauthorized discounted price.
FALSE
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
FALSE
The volume of activity in cash accounts makes cash accounts less susceptible to error than most other accounts.
FALSE
Which of the following terms best defines this scenario? 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.
Lapping.
Which of the following is a risk associated with complex financial instruments?
Management's objective for entering into such transactions may relate to misstating the financial statements.
Auditor expertise is critically important in evaluating the validity of the valuation of complex financial instruments.
TRUE
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.
TRUE
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.
TRUE
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.
TRUE
The following is a reasonable test of control over marketable securities: Inquire management about its process for establishing valuation of marketable securities and review related documentation.
TRUE
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.
TRUE
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.
1 & 3
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.
100% tests of details.
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 as low, and believes that the client has implemented effective controls in this area.
50% tests of details, 10% analytics, 40% tests of controls.
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?
Approve all new investments prior to reviewing their risks.
Affirmative answers to which of the following questions would lead the auditor to assess fraud risk at a higher level for cash? Is an individual with access to cash or its recording experiencing financial or personal distress? Is an individual with access to cash or its recording being compensated at an amount that he or she might consider low? Is the company in potential violation of its debt covenants? Two of the above (a-c). All of the above (a-c).
All of the above (a-c).
Which of the following is a common example of trend analysis of accounts and ratios that the auditor might consider for cash accounts? Compare monthly cash balances with past years and budgets. Identify unexpected spikes or lows in cash during the year. Compute trends in interest returns on investments. Two of the above (a-c). All of the above (a-c).
All of the above (a-c).
Which of the following represents a control related to cash that an auditor might test? Reviews of reconciliations of reported cash receipts with remittances prepared by independent parties. Reviews of cash budgets and comparison of them with actual cash balances. Reviews of discrepancies in cash balances. Two of the above (a-c). All of the above (a-c).
All of the above (a-c).
Inherent risk for cash is usually assessed as high for which of the following reasons? The volume of transactions flowing through cash accounts throughout the year makes the account more susceptible to error. The cash account is more susceptible to fraud because cash is liquid and easily transferable. 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. Cash can be easily manipulated. All of the above.
All of the above.
Which of the following is not a type of common control over cash?
Bank reconciliations by employees who handle cash.
Because cash balances are usually relatively low at year-end, auditing standards encourage auditors to send bank confirmations on a sample basis.
FALSE
Refer to Exhibit 10.15. Which of the following assertions is relevant to whether the marketable securities balances include all securities transactions that have taken place during the period?
Completeness.
Skimming most likely results in a violation of which of the following management assertions?
Completeness.
Because of the level of inherent risk associated with cash accounts, auditors are required to test the controls over cash accounts.
FALSE
Controls for completeness of cash are important because they help to provide reasonable assurance that the cash exists.
FALSE
Which of the following questions would be relevant for an inherent risk analysis related to cash?
Does the company have significant cash flow problems in meeting its current obligations on a timely basis?
A fake cash problem relates to management's cash valuation assertion.
FALSE
A typical bank statement prepared at an interim agreed-upon date and sent directly to the auditor is a bank transfer statement.
FALSE
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.
FALSE
Because a primary concern is that cash will be stolen and thus understated, the auditor is not usually concerned about overstatements of cash.
FALSE
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?
Rights and obligations.
Which of the following assertions is relevant to whether the company owns the cash accounts as of the balance sheet date?
Rights and obligations.
Refer to Exhibit 10.6. Which of the following represents a reasonable test of controls for cash receipts?
Segregation of duties between those handling cash and those recording cash transactions.
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.
TRUE
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.
TRUE
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?
The company reports consistent profits over several years, but operating cash flows are declining.
Which of the following statements regarding reperformance of bank reconciliations is true? 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. The process reconciles the balance per the bank statements with the balance per the books. 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. Two of the above (a-c) are true. All of the above (a-c) are true.
Two of the above (a-c) are true.
Which of the following assertions is relevant to whether the cash balances reflect the true underlying economic value of those assets?
Valuation or allocation.
