Professional Documents
Culture Documents
False
2. Control over the receipt of cash sales is best achieved when two or more employees
participate in each transaction.
True
False
False
4. Signed checks should be returned to the cash disbursements clerk for mailing.
True
False
False
6. Confirmations for cash balances should be mailed only to the financial institutions
with which the client has a cash balance at year-end.
True
False
False
False
9. Verification of cash and other liquid assets on the same date may prevent
substitution of one form of asset for another.
True
False
10-1
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McGraw-Hill Education.
10. For investments in securities accounted for by the equity method, the auditors are
primarily concerned with verifying the fair value of the investments.
True
False
10-2
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McGraw-Hill Education.
14. 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?
A.
B.
C.
D.
10-3
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
18.
An auditor may obtain information on the December 31 month-end balance per bank
in which of the following?
A.
Yes
Yes
B.
Yes
No
C.
No
Yes
D.
No
No
A.
B.
C.
D.
Option A
Option B
Option C
Option D
19.
An auditor may obtain information on the December 31 month-end balance per bank
in which of the following?
Yes
B.
Yes
C.
No
D.
No
A.
B.
C.
D.
Option A
Option B
Option C
Option D
10-4
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Schedule of Ba
20. Which of the following is correct concerning "window dressing" for cash?
A. A segregation of duties within the cash function effectively eliminates its
occurrence.
B. It generally involves manipulation of inventory.
C. It is illegal, and an audit is designed to provide reasonable assurance of its
detection.
D. Many forms of it require no action by the auditors.
21. Which of the following statements is not correct?
A. Cash is important to the audit process because of its vulnerability to
misappropriation, despite the fact that the balance at the balance sheet date may
be immaterial.
B. Payroll cash account balances kept on an imprest basis are more easily controlled
than others not so kept.
C. Confirmation of cash should only be performed as of the balance statement date
because the auditor expresses an opinion as of that date.
D. Reviewing interbank transfers is important to the auditor because of the possibility
that the client may be engaged in kiting.
22. The auditors use a bank cutoff statement to compare:
A. Deposits in transit on the year-end cash general ledger account 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 yearend bank statement.
23. A practical and effective audit procedure for the detection of lapping is:
A.
Preparing an interbank transfer schedule.
B. Comparing recorded cash receipts in detail against items making up the bank
deposit as shown on duplicate deposit slips validated by the bank.
C. Tracing recorded cash receipts to postings in customers' ledger cards.
D.
Preparing a proof of cash.
24. Which of the following is not a control that generally is established over cash
transactions?
A.
B.
C.
D.
10-5
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McGraw-Hill Education.
25. Which of the following controls would be most likely to reduce the risk of diversion of
customer receipts by a company's employees?
A.
A bank lockbox system.
B. Approval of all disbursements by an individual independent of cash receipts.
C.
Monthly bank cutoff statements.
D.
Prenumbered remittance advices.
26. Which of the following is not a control that generally is established over cash
receipts?
A. To prevent abstraction of cash, a control listing of cash receipts should be prepared
by mailroom personnel.
B. To insure accurate posting, the accounts receivable clerk should post the
customers' receipts from customers' checks.
C. To insure accuracy of the accounts receivable records, the records should be
reconciled monthly to the accounts receivable controlling account.
D. To prevent theft of cash, receipts should be deposited daily.
27. 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:
A. An unrecorded check written at the beginning of the month which was cashed
during the period covered by the reconciliation.
B. A cash sale which was not recorded on the books and was stolen by a bookkeeper.
C. An embezzlement of unrecorded cash receipts on receivables before they had
been deposited into the bank.
D. A credit sale which has been recorded twice in the sales journal.
28. In October, three 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 miscellaneous
revenue. The most effective method for detecting this type of error is:
A.
B.
C.
D.
29. 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.
B.
C.
D.
Lapping.
Kiting.
Effective cash management.
Related party transactions.
10-6
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McGraw-Hill Education.
30. 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. 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.
D.
Receivable confirmation.
31. Which of the following is not a universal rule for achieving internal control over cash?
10-7
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McGraw-Hill Education.
35. Which of the following is not confirmed on the standard confirmation form used for
cash balances at financial institutions?
A.
B.
C.
D.
39. The auditors should insist that a representative of the client be present during the
physical examination of securities in order to:
A.
B.
C.
D.
40. 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.
10-8
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McGraw-Hill Education.
41. 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. Recorded cash disbursement transactions are properly authorized.
B. Proper cash purchase discounts have been recorded.
C. Cash disbursements are for goods and services actually received.
D. No discrepancies exist between the data on the checks and the data in the journal.
42. 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. Utilizing analytical techniques and statistical sampling.
C. Comparing recorded dividends with amounts appearing on federal information
form 1099s.
D. Comparing recorded dividends with a standard financial reporting service's record
of dividends.
43. 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. Review subsequent bank statements and canceled checks received directly from
the banks.
C.
Prepare a schedule of bank transfers.
D.
Prepare year-end bank reconciliations.
44. Which one of the following would the auditor consider to be an incompatible
operation if the cashier receives remittances from the mailroom?
A.
The cashier prepares the daily deposit.
B. The cashier makes the daily deposit at a local bank.
C. The cashier posts the receipts to the accounts receivable subsidiary ledger.
D.
The cashier endorses the checks.
45. 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?
A. The confirmation request was signed by the treasurer.
B. Sending the request was meaningless because the account was closed before the
year-end.
C. The request was mailed by the assistant treasurer.
D. The CPA did not sign the confirmation request before it was mailed.
10-9
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
46. On receiving the bank cutoff statement, the auditor should trace:
A. Deposits in transit on the year-end bank reconciliation 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 deposits in the cash receipts journal.
D. Checks dated subsequent to year-end to the outstanding checks listed on the yearend bank reconciliation.
47. To gather evidence regarding the balance per bank in a bank reconciliation, an
auditor could examine all of the following except:
A.
B.
C.
D.
48. Contact with banks for the purpose of opening company bank accounts should
normally be the responsibility of the corporate:
A.
B.
C.
D.
Board of Directors.
Treasurer.
Controller.
Executive Committee.
10-10
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
49.
Which of the following cash transfers is most likely to result in a misstatement of cash
at December 31, 20X7?
Receipt
Paid by bank
Record Receiv
ed
ed by
in
bank
books
A 12/31/X
)
7
1/4/X8
12/31/X 12/31/X
7
7
B
)
1/5/X8
12/31/X
7
1/4/X8
1/5/X8
12/31/X
7
1/4/X8
1/11/X8
1/4/X8
1/4/X8
1/4/X8
C 12/31/X
)
7
D
)
A.
B.
C.
D.
1/4/X8
Transfer A.
Transfer B.
Transfer C.
Transfer D.
10-11
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
52. 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. Canceling supporting documentation after payment.
C. Verifying the mathematical accuracy of the vendor's invoice.
D. Preparing the check for signature by an authorized person.
53. 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.
54. Banks may process electronic "substitute checks" in place of customer written hard
copy checks due to the:
A.
Check Clearing for the 21st Century Act.
B. Public Company Accounting Oversight Board's Standard No. 2.
C.
Foreign Corrupt Practices Act.
D.
Sarbanes-Oxley Act.
55. When a client engages in transactions involving derivatives, the auditor should:
A. Develop an understanding of the economic substance of each derivative.
B. Confirm with the client's broker whether the derivatives are for trading purposes.
C. Notify the audit committee about the risks involved in derivative transactions.
D. Add an explanatory paragraph to the auditor's report describing the risks
associated with each derivative.
56. A company's decision to use the fair value option for valuation of marketable
securities is most likely to affect which of the following assertions the most?
A.
B.
C.
D.
Completeness.
Existence.
Fairness.
Presentation and Disclosure.
10-12
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
57. 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. Fourth quarter payroll taxes were properly accrued and recorded, but were not
paid 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. The annual provision for uncollectible accounts expense was inadequate because
of worsening economic conditions.
D. Notice of an increase in property tax rates was received by management, but was
not recorded until early in the subsequent year.
58. 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.
Essay Questions
10-13
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
59. You are working on the Bemco audit. Assume that each of the four sections of this
question are unrelated. Bill Wedman, another staff member, has given you the
following list of what he refers to as "internal control deficiencies" and has asked you
to review each point and make sure that you agree that each is an internal control
deficiency.
The purchasing department manager and assistant manager are the authorized check
signers.
All cash receipts (checks) received through the mail are prelisted by the two individuals who
open the mail.
7. All cash receipts received through the mail are restrictively endorsed when received.
8.
10-14
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McGraw-Hill Education.
60. Flemco has made a series of transfers between bank accounts near year-end, some
through inter-bank wired transfers and some through checks. You have audited the
wired transfers and agree that they have been properly stated and now have the
following schedule of transfers between cash accounts made using checks. You may
assume that dates per bank are correct, and that dates per books are the dates the
transactions were recorded in the books.
Bank accounts
Check
number
From
4040
1st Nat.
Suburban
3270
Valley
Midburg
4041
1st Nat.
Capital
3271
Valley
0700
Midburg
To
Bank
$112,000 12/31
1/5
62,500 12/31
1/3
121,000 1/2
1/4
Suburban
16,500 1/3
1/5
Suburban
15,800 12/30
1/5
Analyze each of the above transfers and determine whether you believe each causes
total cash to most likely be correct, overstated, or understated as of year-end.
10-15
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
As a
result
of the
transf
er,
total
cash a
t Dece
mber
31
appea
rs to
be
Q
u
e
s
ti
o
n
#
C
h
e
c C
k o
n r
u r
me
b c
e t
r
O
v
er
st
at
e
d
U
n
d
er
st
at
e
d
4
1 0
. 4
0
3
2 2
. 7
0
4
3 0
. 4
1
3
4 2
. 7
1
0
5 7
. 0
0
10-16
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McGraw-Hill Education.
61. Listed below are four interbank cash transfers, indicated by the letters a, b, c and d,
of a client for late December 20X1, and early January 20X2. Your answer choice for
the next two questions should be selected from this list.
Per Bank
Per Books
Per Bank
Per Books
a.
1/02
12/30
12/31
12/30
b.
1/04
12/31
1/02
12/31
c.
1/03
12/31
1/02
1/02
d.
1/02
1/02
12/31
1/02
62. In the audit of a client's financial statements, the auditors must be concerned with
the possibility that client personnel might be engaged in kiting or lapping.
a. Define lapping and describe an audit procedure that might detect lapping.
b. Define kiting and describe an audit procedure that might detect kiting.
10-17
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
63. Since financial investments are assets with a high degree of inherent risk, companies
must establish effective internal control over their investments.
a. Describe the functions that should be segregated to provide good internal control
over financial investments.
b. Describe two other internal control policies that should be established for financial
investments.
64. In many financial statements audits, auditing financial investments involves complex
tasks requiring specialized skill and knowledge.
a. List three audit tasks related to the audit of financial investments that may require
specialized skill or knowledge.
b. Define the term "financial derivative."
c. List the two general purposes why a client might acquire a financial derivative.
10-18
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
The auditors should count small petty cash funds at year-end to make sure that
balance is not understated on the financial statements.
FALSE
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-06 Assess the risks of material misstatement of cash and design further audit
procedures, including tests of controls and substantive procedures, to address the risks.
Topic: Audit of Cash
2.
Control over the receipt of cash sales is best achieved when two or more
employees participate in each transaction.
TRUE
3.
4.
Signed checks should be returned to the cash disbursements clerk for mailing.
FALSE
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
10-19
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Difficulty: 2 Medium
Learning Objective: 10-03 Explain the nature of the cash receipts and disbursements cycles, and describe the
fundamental controls over the business processes related to cash.
Topic: Cash
5.
6.
Confirmations for cash balances should be mailed only to the financial institutions
with which the client has a cash balance at year-end.
FALSE
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 10-06 Assess the risks of material misstatement of cash and design further audit
procedures, including tests of controls and substantive procedures, to address the risks.
Topic: Audit of Cash
7.
8.
9.
Verification of cash and other liquid assets on the same date may prevent
substitution of one form of asset for another.
TRUE
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-06 Assess the risks of material misstatement of cash and design further audit
procedures, including tests of controls and substantive procedures, to address the risks.
Topic: Audit of Cash
10.
For investments in securities accounted for by the equity method, the auditors are
primarily concerned with verifying the fair value of the investments.
FALSE
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-10 Describe tests of controls and substantive procedures used to audit financial
investments.
Topic: Audit of Financial Investments
10-21
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
12.
13.
14.
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?
A.
B.
C.
D.
10-22
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-06 Assess the risks of material misstatement of cash and design further audit
procedures, including tests of controls and substantive procedures, to address the risks.
Topic: Audit of Cash
15.
16.
10-23
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McGraw-Hill Education.
17.
18.
An auditor may obtain information on the December 31 month-end balance per
bank in which of the following?
A.
Yes
Yes
B.
Yes
No
C.
No
Yes
D.
No
No
A.
B.
C.
D.
Option A
Option B
Option C
Option D
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-06 Assess the risks of material misstatement of cash and design further audit
procedures, including tests of controls and substantive procedures, to address the risks.
Topic: Audit of Cash
10-24
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
19.
An auditor may obtain information on the December 31 month-end balance per
bank in which of the following?
Yes
B.
Yes
C.
No
D.
No
A.
B.
C.
D.
Schedule of Ba
Option A
Option B
Option C
Option D
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-06 Assess the risks of material misstatement of cash and design further audit
procedures, including tests of controls and substantive procedures, to address the risks.
Topic: Audit of Cash
20.
10-25
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McGraw-Hill Education.
21.
22.
23.
A practical and effective audit procedure for the detection of lapping is:
A.
Preparing an interbank transfer schedule.
B. Comparing recorded cash receipts in detail against items making up the bank
deposit as shown on duplicate deposit slips validated by the bank.
C. Tracing recorded cash receipts to postings in customers' ledger cards.
D.
Preparing a proof of cash.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Apply
10-26
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Difficulty: 3 Hard
Learning Objective: 10-06 Assess the risks of material misstatement of cash and design further audit
procedures, including tests of controls and substantive procedures, to address the risks.
Topic: Audit of Cash
24.
Which of the following is not a control that generally is established over cash
transactions?
A.
B.
C.
D.
25.
Which of the following controls would be most likely to reduce the risk of diversion
of customer receipts by a company's employees?
A.
A bank lockbox system.
B. Approval of all disbursements by an individual independent of cash receipts.
C.
Monthly bank cutoff statements.
D.
Prenumbered remittance advices.
26.
Which of the following is not a control that generally is established over cash
receipts?
A. To prevent abstraction of cash, a control listing of cash receipts should be
prepared by mailroom personnel.
B. To insure accurate posting, the accounts receivable clerk should post the
customers' receipts from customers' checks.
C. To insure accuracy of the accounts receivable records, the records should be
reconciled monthly to the accounts receivable controlling account.
D. To prevent theft of cash, receipts should be deposited daily.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
10-27
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Difficulty: 2 Medium
Learning Objective: 10-03 Explain the nature of the cash receipts and disbursements cycles, and describe the
fundamental controls over the business processes related to cash.
Topic: Cash
27.
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:
A. An unrecorded check written at the beginning of the month which was cashed
during the period covered by the reconciliation.
B. A cash sale which was not recorded on the books and was stolen by a
bookkeeper.
C. An embezzlement of unrecorded cash receipts on receivables before they had
been deposited into the bank.
D. A credit sale which has been recorded twice in the sales journal.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 10-06 Assess the risks of material misstatement of cash and design further audit
procedures, including tests of controls and substantive procedures, to address the risks.
Topic: Audit of Cash
28.
29.
Lapping.
Kiting.
Effective cash management.
Related party transactions.
AACSB: Analytical Thinking
10-28
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 10-06 Assess the risks of material misstatement of cash and design further audit
procedures, including tests of controls and substantive procedures, to address the risks.
Topic: Audit of Cash
30.
31.
Which of the following is not a universal rule for achieving internal control over
cash?
A. Separate recordkeeping from accounting for cash to the extent possible.
B.
Deposit each day's cash receipts intact.
C.
Separate cash handling from recordkeeping.
D. Have monthly bank reconciliations prepared by employees not responsible for
the issuance of checks.
10-29
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McGraw-Hill Education.
32.
33.
Which of the following is the best audit procedure for the detection of lapping?
A. Comparison of postings of cash receipts to accounts with the details of cash
deposits.
B.
Confirmation of the cash balance.
C.
Reconciliation of the cash account balances.
D.
Preparing a proof of cash.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 10-06 Assess the risks of material misstatement of cash and design further audit
procedures, including tests of controls and substantive procedures, to address the risks.
Topic: Audit of Cash
34.
10-30
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McGraw-Hill Education.
35.
Which of the following is not confirmed on the standard confirmation form used for
cash balances at financial institutions?
A.
B.
C.
D.
36.
37.
10-31
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McGraw-Hill Education.
38.
The Standard Form to Confirm Account Balances with Financial Institutions includes
information on all of the following except:
A.
B.
C.
D.
39.
The auditors should insist that a representative of the client be present during the
physical examination of securities in order to:
A.
B.
C.
D.
40.
The auditors' count of the client's cash should be coordinated to coincide with the:
A.
B.
C.
D.
10-32
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41.
42.
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.
Utilizing analytical techniques and statistical sampling.
C. Comparing recorded dividends with amounts appearing on federal information
form 1099s.
D. Comparing recorded dividends with a standard financial reporting service's
record of dividends.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 10-10 Describe tests of controls and substantive procedures used to audit financial
investments.
Source: AICPA
Topic: Audit of Financial Investments
43.
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. Review subsequent bank statements and canceled checks received directly
from the banks.
C.
Prepare a schedule of bank transfers.
D.
Prepare year-end bank reconciliations.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
10-33
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McGraw-Hill Education.
44.
45.
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?
A.
The confirmation request was signed by the treasurer.
B. Sending the request was meaningless because the account was closed before
the year-end.
C.
The request was mailed by the assistant treasurer.
D. The CPA did not sign the confirmation request before it was mailed.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-06 Assess the risks of material misstatement of cash and design further audit
procedures, including tests of controls and substantive procedures, to address the risks.
Source: AICPA
Topic: Audit of Cash
10-34
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McGraw-Hill Education.
46.
47.
48.
Contact with banks for the purpose of opening company bank accounts should
normally be the responsibility of the corporate:
A.
B.
C.
D.
Board of Directors.
Treasurer.
Controller.
Executive Committee.
Topic: Cash
49.
Which of the following cash transfers is most likely to result in a misstatement of
cash at December 31, 20X7?
Receipt
Paid by bank
Record Receiv
ed
ed by
in
bank
books
A 12/31/X
)
7
1/4/X8
12/31/X 12/31/X
7
7
B
)
1/5/X8
12/31/X
7
1/4/X8
1/5/X8
12/31/X
7
1/4/X8
1/11/X8
1/4/X8
1/4/X8
1/4/X8
C 12/31/X
)
7
D
)
A.
B.
C.
D.
1/4/X8
Transfer A.
Transfer B.
Transfer C.
Transfer D.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-06 Assess the risks of material misstatement of cash and design further audit
procedures, including tests of controls and substantive procedures, to address the risks.
Source: AICPA
Topic: Audit of Cash
50.
10-36
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 10-06 Assess the risks of material misstatement of cash and design further audit
procedures, including tests of controls and substantive procedures, to address the risks.
Topic: Audit of Cash
51.
Properly designed internal control will permit the same employee to:
A. Receive and deposit checks, and also approve write-offs of customer accounts.
B. Approve vouchers for payment, and also receive and deposit cash.
C. Reconcile the bank statements, and also receive and deposit cash.
D. Sign checks, and also cancel supporting documents.
52.
Which of the following procedures in the cash disbursements cycle should not be
performed by the accounts payable department?
A.
B.
C.
D.
53.
10-37
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McGraw-Hill Education.
procedures, including tests of controls and substantive procedures, to address the risks.
Topic: Audit of Cash
54.
55.
56.
A company's decision to use the fair value option for valuation of marketable
securities is most likely to affect which of the following assertions the most?
A.
B.
C.
D.
Completeness.
Existence.
Fairness.
Presentation and Disclosure.
57.
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. Fourth quarter payroll taxes were properly accrued and recorded, but were not
paid 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. The annual provision for uncollectible accounts expense was inadequate
because of worsening economic conditions.
D. Notice of an increase in property tax rates was received by management, but
was not recorded until early in the subsequent year.
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-08 Identify the auditors' objectives in the audit of financial investments.
Source: AICPA
Topic: Financial Investments
58.
Essay Questions
10-39
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McGraw-Hill Education.
59.
You are working on the Bemco audit. Assume that each of the four sections of this
question are unrelated. Bill Wedman, another staff member, has given you the
following list of what he refers to as "internal control deficiencies" and has asked
you to review each point and make sure that you agree that each is an internal
control deficiency.
The purchasing department manager and assistant manager are the authorized check
signers.
All cash receipts (checks) received through the mail are prelisted by the two individuals
who open the mail.
7. All cash receipts received through the mail are restrictively endorsed when received.
8.
10-41
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McGraw-Hill Education.
10-42
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McGraw-Hill Education.
60.
Flemco has made a series of transfers between bank accounts near year-end,
some through inter-bank wired transfers and some through checks. You have
audited the wired transfers and agree that they have been properly stated and
now have the following schedule of transfers between cash accounts made using
checks. You may assume that dates per bank are correct, and that dates per books
are the dates the transactions were recorded in the books.
Bank accounts
Check
number
From
4040
1st Nat.
Suburban
3270
Valley
Midburg
4041
1st Nat.
Capital
3271
Valley
0700
Midburg
To
Bank
$112,000 12/31
1/5
62,500 12/31
1/3
121,000 1/2
1/4
Suburban
16,500 1/3
1/5
Suburban
15,800 12/30
1/5
Analyze each of the above transfers and determine whether you believe each
causes total cash to most likely be correct, overstated, or understated as of yearend.
10-43
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McGraw-Hill Education.
As a
result
of the
transf
er,
total
cash a
t Dece
mber
31
appea
rs to
be
Q
u
e
s
ti
o
n
#
C
h
e
c C
ko
n r
u r
me
bc
e t
r
O
v
e
rs
t
a
t
e
d
U
n
d
er
st
at
e
d
4
1 0
. 4
0
3
2 2
. 7
0
4
3 0
. 4
1
3
4 2
. 7
1
0
5 7
. 0
0
61.
Listed below are four interbank cash transfers, indicated by the letters a, b, c and
d, of a client for late December 20X1, and early January 20X2. Your answer choice
for the next two questions should be selected from this list.
Per Bank
Per Books
Per Bank
Per Books
a.
1/02
12/30
12/31
12/30
b.
1/04
12/31
1/02
12/31
c.
1/03
12/31
1/02
1/02
d.
1/02
1/02
12/31
1/02
a. Unaffected.
b. Unaffected.
c. Understated. Although there are a number of possible situations, one is that in
which a check is written on the disbursing bank on the last day of December with a
credit to cash, and an associated debit to some expense account so as to decrease
reported profits (and taxes) for the year.
d. Overstated. One situation is that in which an employee has misappropriated
funds during the year, and draw a check transferring funds to the account with the
shortage so as to cover the shortage. As of December 31, the shortage is replaced,
with no reduction as yet recorded in the account on which it is drawn.
AACSB: Analytical Thinking
AICPA: BB Industry
10-45
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62.
In the audit of a client's financial statements, the auditors must be concerned with
the possibility that client personnel might be engaged in kiting or lapping.
a. Define lapping and describe an audit procedure that might detect lapping.
b. Define kiting and describe an audit procedure that might detect kiting.
10-46
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McGraw-Hill Education.
63.
Since financial investments are assets with a high degree of inherent risk,
companies must establish effective internal control over their investments.
a. Describe the functions that should be segregated to provide good internal
control over financial investments.
b. Describe two other internal control policies that should be established for
financial investments.
10-47
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64.
10-48
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McGraw-Hill Education.