Audit Chapter 10

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

Marketable equity securities should be valued at cost. True False

False

5 To gather evidence regarding the balance per bank on 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.

General ledger.

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.

11 Jones embezzled $50,000 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: A) Lapping. B) Kiting. C) Effective cash management. D) Related party transactions.

Kiting.

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.

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.

6 What of the following is the risk that is of most concern to auditors when auditing cash? A) Detective risk. B) Inherent risk. C) Adjunct risk. D) Nonsampling risk.

Inherent risk.

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.

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.

Processes cash disbursements.

As compared to manual processing, electronic processing of cash transactions generally makes kiting: neither easier, nor more difficult to accomplish. easier to accomplish. impossible to accomplish. more difficult to accomplish.

more difficult to accomplish.

Internal control over cash receipts is weakened when an employee who receives customer mail receipts also: records credits to individual accounts receivable. prepares initial cash receipts records. prepares bank deposit slips for all mail receipts. maintains a petty cash fund.

records credits to individual accounts receivable.

The least crucial element of internal control over cash is: separation of cash receipts from preparing deposits. preparation of the monthly bank reconciliation. canceling the supporting documents for disbursements. separation of cash record keeping from custody of cash.

separation of cash receipts from preparing deposits.

A salesperson who uses a cash register to record over the counter sales should, at the end of each workday, turn over to a supervisor the cash register tape and a corresponding amount of cash. True False

True.

12 A security owned by a company is from another company that recently declared bankruptcy. Which of the following is the auditor's primary concern with the investment? A) Existence. B) Presentation. C) Completeness. D) Valuation.

Valuation.

10 Of the following, which procedure or document is most effective for detecting kiting? A) A bank cutoff statement. B) A bank reconciliation. C) A bank kiting statement. D) A bank transfer schedule.

A bank transfer schedule.

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.

14 A four column bank reconciliation ("proof of cash") will generally assist an auditor in detecting: A) An unrecorded (on the books) deposit made at the beginning of the month the amount was withdrawn late in the month, again with no book entry. B) A second payment of a liability that had already been paid in full. C) A check written and recorded on the books for $2,000, not $200 the amount of the actual liability. D) An embezzlement of a portion of the company's petty cash.;

An unrecorded (on the books) deposit made at the beginning of the month; the amount was withdrawn late in the month, again with no book entry.

3 A primary use by the auditor of a bank cutoff statement is to compare: A) Bank service charges on the cutoff statement 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 reconciliation.

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? Checks should be signed by the controller and at least one other employee of the company. Checks and supporting documents should be marked "Paid" immediately after the check is returned with the bank statement. Checks should be sent directly to the payee by the employee who prepares documents that authorize check preparation. Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations.

Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations.

A local gas station has one clerk that accepts cash payments for gas and rings them up on the cash register. Which of the following would be the best control to provide assurance that the cashier isn't keeping some of the cash? A) Count all cash before and after the shift and compare it to cash register totals. B) Require that each customer be given a receipt of their purchase. C) Compare cash register totals to a total that is automatically generated by each gas pump. D) Require that each employees have a separate cash drawer that only they use.

Compare cash register totals to a total that is automatically generated by each gas pump.

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.

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? Custody of securities should be assigned to persons who have the accounting responsibility for securities. Access to securities should be vested in more than one person. Securities should be properly controlled physically in order to prevent unauthorized usage. Securities should be registered in the name of the owner.

Custody of securities should be assigned to persons who have the accounting responsibility for securities.

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.

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

8 An auditor examining check disbursements discovered a missing check number. Upon inquiry to the person responsible for disbursements and reconciliation of the cash account, she is told that the check number is missing because the check was voided. What is the auditor's next step? A) Prepare a bank transfer schedule at to identify the check. B) Examine the bank confirmation to determine whether the check cleared. C) Since the person responsible for disbursements also reconciles the account, no additional procedures are necessary. D) Examine the voided checks file to determine whether the check is in the file.

Examine the voided checks file to determine whether the check is in the file.

15 Which of the following is confirmed on the standard form used for cash balances at financial institution? A) Factored accounts receivable. B) Loss contingencies. C) Loans payable. D) Safe deposit boxes controlled by the entity.

Loans payable.

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 audit procedures is the most appropriate when internal control over cash is weak or when a client requests an investigation of cash transactions? Cash confirmation. Proof of cash. Bank reconciliation. Evaluation of ratio of cash to current liabilities.

Proof of cash.

Under which of the following circumstances would an auditor be most likely to intensify an examination of a $500 imprest petty cash fund? The custodian occasionally uses the cash fund to cash employee checks. Reimbursement occurs twice each week. Reimbursement vouchers are not prenumbered. The custodian endorses reimbursement checks.

Reimbursement occurs twice each week.

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.

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? 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 securities broker who will act as a custodial agent. Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access. Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept.

Require that the safekeeping function for securities be assigned to a securities broker who will act as a custodial agent.

7 Which of the following is most likely to indicate fraud? A) Several overpayments are made for goods received from a supplier. B) The year end cash balance does not include cash in transit to the company at year-end. C) A check received after year end was inadvertently recorded as if received before year-end. D) A documented loan to an officer of the company.

Several overpayments are made for goods received from a supplier.

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.

2 The accounting functions and the cash receipts functions should be handled by which department(s)? A) Both functions should be under the control of the company Treasurer B) Both functions should be under the control of the company Controller C) The Controller should have control of accounting functions and the Treasurer should have control of cash receipt functions. D) The Treasurer should have control of accounting functions and the Controller should have control of cash receipt functions.

The Controller should have control of accounting functions and the Treasurer should have control of cash receipt functions.

4 It is most likely to be efficient to test the controls over financial investments when: A) Controls are thought to be weak. B) Substantive tests may be performed. C) Analytical procedures are possible. D) The company trades or holds a large number of securities.

The company trades or holds a large number of securities.

9 Which of the following is correct concerning cash confirmation requests? A) They ask for information on kiting activities. B) They should be sent quarterly by the auditors to financial institutions the client has accounts with. C) They should be sent by the client to financial institutions the client has accounts with. D) They may be sent electronically or non-electronically.

They may be sent electronically or non-electronically.

Which of the following is not one of the auditors' primary objectives in an examination of investments in securities? To determine whether all securities are in proper, secure, files at year-end. To determine whether securities are properly classified on the balance sheet. To determine whether securities are the property of the client. To determine whether securities actually exist.

To determine whether all securities are in proper, secure, files at year-end.

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.

13 A company owns a large amount of debt securities that pay interest twice a year - August 1 and February 1. On the financial statements the company accrued the 5 months of interest it was due as interest receivable. The auditor should: A) Require the accrual be reversed since the interest has not yet been paid. B) Confirm the interest accrual with the security issuer. C) Require the accrual be reversed since the company could sell the security before interest has been paid. D) Verify the company owns the security, check the accuracy of the accrual, and require no adjustment.

Verify the company owns the security, check the accuracy of the accrual, and require no adjustment.

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: treasurer. cashier. chief accountant. internal auditors.

treasurer.

Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: controller. treasurer. board of directors. executive committee.

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: verify reconciling items on the client's bank reconciliation. detect kiting. verify the cash balance reported on the standard financial institution confirmation form. detect lapping.

verify reconciling items on the client's bank reconciliation.