Audit Final chapter 10

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 unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation. A cash sale which was not recorded on the books and was stolen by a bookkeeper. An embezzlement of unrecorded cash receipts on receivables before they had been deposited into the bank. A credit sale which has been recorded twice in the sales journal.

An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation.

The auditors should insist that a representative of the client be present during the physical examination of securities in order to: Lend authority of the auditor's directives. Detect forged securities. Coordinate the return of all securities to proper locations. Acknowledge the receipt of securities returned.

Acknowledge the receipt of securities returned.

To establish the existence and ownership of a large long-term investment in the common stock of a publicly traded company, the auditors ordinarily perform a security count or: Rely on the client's internal controls if the auditors have reasonable assurance that the control procedures are being applied as prescribed. Confirm the number of shares owned that are held by an independent custodian. Determine the market price per share at the balance sheet date from published quotations. Confirm the number of shares owned with the issuing company.

Confirm the number of shares owned that are held by an independent custodian.

In which of the following areas are the auditors least likely to use the work of a specialist? Determining the value of complex financial instruments. Assessing control risk for clients using complex derivatives for hedging. Determination of the existence of a complex financial instrument. Valuing an equity investment that must be valued using a complex valuation model.

Determination of the existence of a complex financial instrument.

Which of the following is correct concerning "window dressing" for cash? Segregation of duties within the cash function effectively eliminates its occurrence. It generally involves the manipulation of inventory. It is illegal, and an audit is designed to provide reasonable assurance of its detection. It may increase but not falsify cash position.

It may increase but not falsify cash position.

Anderson embezzled $20,000 from her company's account in Bank X. At year-end, she hid the shortage by making a deposit on December 31 in Bank X, drawn on Bank Y. She has not recorded the transaction on the books. This is an example of: Lapping. Kiting. Effective cash management Related party transactions.

Kiting

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? Sales are understated. Accounts receivable are understated . Inventory is overstated. Net income is overstated.

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. Proper cash purchase discounts have been recorded. Cash disbursements are for goods and services actually received. 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.

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

Obtaining a receipt for every disbursement.

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? Prepare a bank transfer schedule using the client's cash receipts and cash disbursements journal. Receive a cutoff bank statement directly from the client's bank. 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 bank statement directly from the client's bank.

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

Review agreements underlying the derivative.

Which of the following is not confirmed on the standard confirmation form used for cash balances at financial institutions? cash checking account balances. Cash savings account balances. Loans payable. Securities held for the client by the financial institution.

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? Select and examine receiving reports and test whether the related canceled checks are dated no earlier than the receiving reports. Select and examine receiving reports and test whether the related canceled checks are dated no later than the receiving reports. Select and examine canceled checks and test whether the related receiving reports are dated no earlier than the checks. Select and examine canceled checks and test whether the related receiving reports are dated no later than the checks.

Select and examine canceled checks and test whether the related receiving reports are dated no later than the checks.

In November, two 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 interest revenue. The most effective method for detecting this type of error is: Foot the cash receipts journal for November. Send a bank confirmation as of year-end. Prepare a bank reconciliation as of year-end. Prepare a bank transfer schedule as of year-end.

Send a bank confirmation as of year-end.

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 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. Certified Public Accountant (CPA) did not sign the confirmation request before it was mailed.

The request was mailed by the assistant treasurer.

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

Understatement of outstanding checks

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: Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year. Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities. The annual provision for uncollectible accounts expense was inadequate because of worsening economic conditions. Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year.

Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.

An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to: Verify the cash balance reported on the bank confirmation inquiry form. Verify reconciling items on the client's bank reconciliation. detect lapping. Detect kiting.

Verify reconciling items on the client's bank reconciliation.

An auditor may obtain information on the December 31 month-end balance per bank in which of the following? Standard confirmation form jan 1 to 10 cutoff statement

yes