Chapter 10 Practice Problems

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.

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

A. Securities held for the client by the financial institution.

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. Acknowledge the receipt of securities returned. C. Coordinate the return of all securities to proper locations. D. Detect forged securities.

B. Acknowledge the receipt of securities returned.

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

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

Kiting would least likely be detected by: A. 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. C. Analyzing details of large cash deposits around year end. D. Preparing a four-column bank reconciliation for all major cash accounts.

B. Comparing customer remittance advices with recorded disbursements in the cash disbursements journal.

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

B. Develop an understanding of the economic substance of each derivative.

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.

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

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? A. Existence. B. Presentation and Disclosure C. Fairness. D. Completeness.

B. Presentation and Disclosure

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

B. 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: A. 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. C. Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year. D. The annual provision for uncollectible accounts expense was inadequate because of worsening economic conditions.

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

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. Verifying the mathematical accuracy of the vendor's invoice. C. Canceling supporting documentation after payment. D. Preparing the check for signature by an authorized person.

C. Canceling supporting documentation after payment.

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

C. 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 on the books. Which of the following is most likely to be effective in detecting this fraud? A. Bank confirmation. B. Receivable confirmation. C. Comparison of bank cutoff statement to the cash receipts and disbursements records. D. 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.

The auditors' 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. .

Which of the following is not a control over cash disbursements? A. Voided checks should be defaced and filed with paid checks. 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. Disbursements should be made by check

C. 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? A. Inspection of year-end brokers' statements. B. Vouching all changes during the year to brokers' advises and statements. C. Examination of paid checks issued in payment of securities purchased. D. Confirmation from the broker.

C. Examination of paid checks issued in payment of securities purchased.

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

C. Many forms of it require no action by the auditors.

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. Proper cash purchase discounts have been recorded. B. Cash disbursements are for goods and services actually received. C. No discrepancies exist between the data on the checks and the data in the journal. D. Recorded cash disbursement transactions are properly authorized.

C. 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. Depositing each day's receipts intact. B. Separating cash handling from recordkeeping. C. Obtaining a receipt for every disbursement. D. Centralizing the receipt of cash.

C. 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? A. Review composition of authenticated deposit slips. B. Prepare year-end bank reconciliations. C. Prepare a schedule of bank transfers. D. Review subsequent bank statements and canceled checks received directly from the banks.

C. Prepare a schedule of bank transfers.

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

C. Separate recordkeeping from accounting for cash to the extent possible.

The Standard Form to Confirm Account Balances with Financial Institutions includes information on all of the following except: A. Description of collateral for a direct liability. B. The interest rate of a direct liability. C. The principal amount paid on a direct liability. D. Date due of a direct liability.

C. The principal amount paid on a direct liability.

Which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees? A. Approval of all disbursements by an individual independent of cash receipts. B. Monthly bank cutoff statements. C. Prenumbered remittance advices. D. A bank lockbox system.

D. A bank lockbox system.

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

D. Check Clearing for the 21st Century Act

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. Comparing recorded dividends with amounts appearing on federal information form 1099s. C. Utilizing analytical techniques and statistical sampling. 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.

To gather evidence regarding the balance per bank in a bank reconciliation, an auditor could examine all of the following except: A. Bank confirmation. B. Cutoff bank statement. C. Year-end bank statement. D. General ledger.

D. General ledger.

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: A. Effective cash management. B. Related party transactions. C. Lapping. D. Kiting.

D. Kiting.

Tracing recorded sales transactions in the sales journal to the shipping documents (bills of lading) provides evidence about the: A. Presentation of payables. B. Billing of all sales transactions. C. Completeness of recording of sales transactions. D. Occurrence of sales transactions.

D. Occurrence of sales transactions.

Properly designed internal control will permit the same employee to: A. Reconcile the bank statements, and also receive and deposit cash. B. Receive and deposit checks, and also approve write-offs of customer accounts. C. Approve vouchers for payment, and also receive and deposit cash. D. Sign checks, and also cancel supporting documents.

D. Sign checks, and also cancel supporting documents.