Chapter 10: T/F
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 a. 100% tests of details. b. 70% tests of details, 10% analytics, 20% tests of controls. c. 50% tests of details, 10% analytics, 40% tests of controls. d. 20% tests of details, 40% analytics, 40% tests of controls.
c. 50% tests of details, 10% analytics, 40% tests of controls.
the volume of activity in cash accounts makes cash accounts less susceptible to error than most other accounts
false
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 a. 100% tests of details. b. 70% tests of details, 10% analytics, 20% tests of controls. c. 50% tests of details, 10% analytics, 40% tests of controls. d. 20% tests of details, 40% analytics, 40% tests of controls.
a. 100% tests of details.
which if the following questions would be relevant for an inherent risk analysis related to cash? a. does the company have significant cash flow problems in meeting its current obligation on a timely basis? b. are cash transactions properly authorized? c. are bank reconciliations performed on a timely basis by personnel independent of processing? d. does the internal audit department conduct timely reviews of the cash management and cash handling process? e. all of the above
a. does the company have significant cash flow problems in meeting its current obligation on a timely basis?
which of the following is a risk associated with complex financial instruments? a. management's objective for entering into such transactions may relate to misstating the financial statements b. most of these financial instruments have a high volume of activity and relate to deep capital markets c. most management teams today have the necessary sophistication to invest in complex financial instruments with relatively little downside risk. d. all of the above
a. management's objective for entering into such transactions may relate to misstating the financial statements
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? a. the company reports consistent profits over several years, but operating cash flows are declining b. no unusual large cash or other liquid asset transactions are found c. operating cash flow is not significantly different from that of the prior year d. investment income is consistent with the level of and returns expected from the investments e. all of the above
a. the company reports consistent profits over several years, but operating cash flows are declining
a bank confirmation contains which of the following two parts? a. 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 loa 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. a. 1 & 2 b. 1&3 c. 2&3 d. 2&4 e. 3&4
b. 1&3
the 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? a. receive and review period reports by the internal audit function on compliance with the organization's investment policies and procedures b. approve all new investments prior to reviewing their risks c. review and approve written policies and guidelines for investments in marketable securities d. periodically review the risks inherent in the portfolio of marketable securities to determine whether the risk is within parameters deemed acceptable by the board
b. approve all new investments prior to reviewing their risks
skimming most likely results in a violation of which of the following management assertions? a. existence b. completeness c. rights and obligations d. valuation or allocation e. all of the above
b. completeness
which of the following assertions is relevant to whether the marketable securities balances include all securities transactions that have taken place during the period? a. existence/occurence b. completeness c. rights and obligations d. valuation or allocation e. all of the above
b. completeness
which of the following represents a reasonable test of controls for cash receipts? a. document internal controls over cash by completing the internal control questionnaire or by flowcharting the process b. segregation of duties between those handling cash and those recording cash transactions c. obtain a bank confirmation d. obtain a bank cutoff statement e. all of the above
b. segregation of duties between those handling cash and those recording cash transactions
because of the level of inherent risk associated with cash accounts, auditors are required to test the controls over cash accounts
false
which of the following is not a type of common control over cash? a. segregation of duties b. restrictive endorsements of customer checks c. bank reconciliations by employees who handle cash d. renumbered cash receipt doc and turnaround docs e. two of the above
c. bank reconciliations by employees who handle cash
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? a. existence/occurence b. completeness c. rights and obligations d. valuation or allocation e. all of the above
c. rights and obligations
which of the following assertions is relevant to whether the company owns the cash accounts as of the balance sheet date? a. existence/occurence b. completeness c. rights and obligations d. valuation or allocation e. all of the above
c. rights and obligations
controls for completeness of cash are important because they help to provide reasonable assurance that the cash exists
false
inherent risk for cash is usually assessed as high for which of the following reasons? a. the volume of transactions flowing through cash accounts throughout the year makes the account more susceptible to error b. the cash account is more susceptible to faired because cash is liquid and easily transferable c. 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 d. cash can be easily manipulated e. all of the above
d. cash can be easily manipulated
which of the falling 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. a. skimming b. king c. collateralizing d. lapping
d. lapping
which of the following statements regarding reperformance of bank reconciliations is true? a. the auditors performance of a reconciliation of the client's bank accounts provides evidence as to the accuracy of the year-end cash balance b. the process reconciles the balance per the bank statements with the balance per the books c. reperformance of the bank reconciliation is ineffective in detect major errors, such as those that might be covered up by omitting or undercoating outstanding checks d. two of the above e. all of the above
d. two of the above
which of the following assertions is relevant to whether the cash balances reflect the true underlying economic value those assets? a. existence/occurence b. completeness c. rights and obligations d. valuation or allocation e. all of the above
d. valuation or allocation
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
affirmative answers to which of the following questions would lead the auditor to assess fraud risk at a higher level for cash? a. is an individual with access to cash or its recording experiencing financial or personal distress? b. is an individual with access to cash or its recording being compensated at an amount that he or she might consider low? c. is the company in potential violation of its debt covenants? d. two of the above e. all of the above
e. all of the above
which of the following is a common example of trend analysis of accounts and ratios that the auditor might consider for cash accounts? a. compare monthly cash balances with past years and budgets b. identify unexpected spikes or lows in cash during the year c. compute trends in interest returns on investments d. two of the above e. all of the above
e. all of the above
a fake cash problem relates to managements 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
because a primary concern is that cash will be stolen and thus understated, the auditor is not usually concerned about overstatements of cash
false
because cash balances are usually relatively low at year-end, auditing standards encourage auditors to send bank confirmations on a sample basis
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
true
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
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
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 of 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
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
