Audit of Cash Theory

Auditing Theory - Cash and Financial Investments True / False Questions 1. The auditors should count small petty cash funds at year-end to make sure tha t balance is not understated on the financial statements. FALSE 2. Control over the receipt of cash sales is best achieved when two or more emp loyees participate in each transaction. TRUE 3. Mailroom personnel of a company should prepare a control listing of incoming cash receipts and deposit them intact daily. FALSE 4. Signed checks should be returned to the cash disbursements clerk for mailing . FALSE 5. Lapping of accounts receivable by an employee is not possible when there is adequate segregation of duties with respect to cash disbursements. FALSE 6. Confirmations for cash balances should be mailed only to the financial instit utions with which the client has a cash balance at year-end. FALSE 7. A proof of cash is an audit procedure that is performed on almost every enga gement. FALSE 8. A compensating balance agreement generally requires that cash be reclassifie d as a noncurrent asset. FALSE 9. Verification of cash and other liquid assets be verified on the same date ma y prevent substitution of one form of asset for another. TRUE 10. For investments in securities accounted for by the equity method, the audit ors are primarily concerned with verifying the market value of the investments. FALSE Multiple Choice Questions 11. An auditor's analytical procedures have revealed that the accounts receivabl e of a client have doubled since the end of the prior year. However, the allowan ce for doubtful accounts, as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy t he auditor? A. Credit standards were liberalized in the current year. B. Twice as many accounts receivable were written off in the prior year as compa red to this year. C. A greater percentage of accounts were currently listed in the "more than 90 d ays overdue" category than in the prior year. D. The client opened a second retail outlet in the current year and its credit s ales approximately equaled the older, established outlet. Source: AICPA 12. By preparing a four-column bank reconciliation ("proof of cash") at year-end , an auditor will generally be able to detect: A. An unrecorded deposit made at the bank at the end of the month. B. A second payment of an account payable which had already been paid in full tw o months earlier. C. An embezzlement of cash receipts not recorded in the cash receipts journal be fore they had been deposited into the bank. D. A receivable collected that had previously been written off as uncollectible. 13. Kiting would least likely be detected by:

A. Analyzing details of large cash deposits around year end. B. Comparing customer remittance advices with recorded disbursements in the cash disbursements journal. C. Preparing a four-column bank reconciliation for all major cash accounts. D. Preparing a schedule of interbank transfers by using the client's records and bank statements around year end. 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 c ash receipts were due to cash sales. Assuming the client uses a periodic invento ry system with a 12/31/XX count of the physical inventory, which of the followin g is most likely to be true relating to the year XX financial statements? A. Sales are understated. B. Accounts receivable are understated. C. Inventory is overstated. D. Net income is overstated. 15. An internal control questionnaire indicates that an approved receiving repo rt is required to accompany every check request for payment of merchandise. Whic h of the following procedures provides the best evidence on operating effectiven ess? A. Select and examine receiving reports and test whether the related canceled ch ecks are dated no earlier than the receiving reports. B. Select and examine receiving reports and test whether the related canceled ch ecks are dated no later than the receiving reports. C. Select and examine canceled checks and test whether the related receiving rep orts are dated no earlier than the checks. D. Select and examine canceled checks and test whether the related receiving rep orts are dated no later than the checks. 16. By preparing a four-column bank reconciliation ("proof of cash") at year-en d, an auditor will generally not be able to detect: A. An unrecorded deposit made at the bank at the end of the month. B. A second payment of an account payable which had already been paid in full tw o months earlier. C. An unrecorded check cashed during that month. D. A bank charge during the month not recorded on the books. 17. Which procedure is an auditor most likely to use to detect a check outstand ing at year-end that was not recorded as outstanding on the year-end bank reconc iliation? A. Prepare a bank transfer schedule using the client's cash receipts and cash di sbursements journal. B. Receive a cutoff statement directly from the client's bank. C. Prepare a four column bank reconciliation using the year-end bank statement. D. Confirm the year end balance using the standard form to confirm account balan ce information with financial institutions. 18 and 19 DELETED 20. Which of the following is correct concerning "window dressing" for cash? A. A segregation of duties within the cash function effectively eliminates its o ccurrence. B. It generally involves manipulation of inventory. C. It is illegal, and an audit is designed to provide reasonable assurance of it s 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 misapp ropriation, despite the fact that the balance at the balance sheet date may be i mmaterial. B. Payroll cash account balances kept on an imprest basis are more easily contro lled than others not so kept. C. Confirmation of cash should only be performed as of the balance statement dat e because the auditor expresses an opinion as of that date.

D. Reviewing interbank transfers is important to the auditor because of the poss ibility 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 i n the cash receipts journal. B. Checks dated prior to year-end to the outstanding checks listed on the year-e nd bank reconciliation. C. Deposits listed on the cutoff statement to disbursements in the cash disburse ments journal. D. Checks dated subsequent to year-end to the outstanding checks listed on the y ear-end 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 d eposit 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. Separating cash handling from recordkeeping. B. Centralizing the receipt of cash. C. Depositing each day's receipts intact. D. Obtaining a receipt for every disbursement. 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 cus tomers' 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. Tracing recorded sales transactions in the sales journal to the shipping do cuments (bills of lading) provides evidence about the: A. Completeness of recording of sales transactions. B. Occurrence of sales transactions. C. Billing of all sales transactions. D. Presentation of payables. 28. By preparing a four-column bank reconciliation ("proof of cash") for the las t 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 du ring the period covered by the reconciliation. B. A cash sale which was not recorded on the books and was stolen by a bookkeepe r. C. An embezzlement of unrecorded cash receipts on receivables before they had be en deposited into the bank. D. A credit sale which has been recorded twice in the sales journal. 29. In October, three months before year-end, the bookkeeper erroneously record ed the receipt of a one year bank loan with a debit to cash and a credit to misc ellaneous revenue. Select the most effective method for detecting this type of e rror. A. Foot the cash receipts journal for October. B. Send a bank confirmation as of year-end. C. Prepare a bank reconciliation as of year-end.

D. Prepare a bank transfer schedule as of year-end. 30. Jones embezzled P10,000 from his company's account in Bank A. At year-end h e 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. 31. Jones embezzled P10,000 from his company's account in Bank A. At year-end h e 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 mo st likely to be effective in detecting this fraud? A. Bank confirmation. B. Bank transfer schedule prepared using only the cash receipts and cash disburs ements journals. C. Comparison of bank cutoff statement to the cash receipts and disbursements re cords. D. Receivable confirmation. 32. Which of the following is not a universal rule for achieving internal contr ol 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 t he issuance of checks. 33. Which of the following is not a control over cash disbursements? A. Disbursements should be made by check. 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. Voided checks should be defaced and filed with paid checks. 34. Which of the following is the best audit procedure for the detection of lap ping? 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. 35. Which of the following manipulations of cash transactions would overstate t he cash balance on the financial statements? A. Understatement of outstanding checks. B. Overstatement of outstanding checks. C. Understatement of deposits in transit. D. Overstatement of bank services charges. 36. Which of the following is not confirmed on the standard form used for cash balances at financial institutions? A. Cash checking account balances. B. Cash savings account balances. C. Loans payable. D. Securities held for the client by the financial institution. 37. Internal control over marketable securities is enhanced when: A. Securities are held by the cashier. B. Securities are registered in the name of the custodian. C. Detailed records of securities are maintained by the custodian of the securit ies. D. Securities are held under joint control of two or more officials. 38. In a manufacturing company which one of the following audit procedures woul d 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. Confirmation from the broker.

B. Inspection of year-end brokers' statements. C. Vouching all changes during the year to brokers' advises and statements. D. Examination of paid checks issued in payment of securities purchased. Source: AICPA 39. The Standard Form to Confirm Account Balances with Financial Institutions in cludes information on all of the following except: A. Date due of a direct liability. B. The principal amount paid on a direct liability. C. Description of collateral for a direct liability. D. The interest rate of a direct liability. Source: AICPA 40. The auditors should insist that a representative of the client be present du ring the physical examination of securities in order to: A. Lend authority of the auditor's directives. B. Detect forged securities. C. Coordinate the return of all securities to proper locations. D. Acknowledge the receipt of securities returned. Source: AICPA 41. The auditors' count of the client's cash should be coordinated to coincide w ith 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. Source: AICPA 42. The auditors compare information on canceled checks with information contain ed 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 jou rnal. Source: AICPA 43. 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 depos it slips. B. Utilizing analytical techniques and statistical sampling. C. Comparing recorded dividends with amounts appearing on federal information fo rm 1099s. D. Comparing recorded dividends with a standard financial reporting service's re cord of dividends. Source: AICPA 44. Which of the following is one of the better auditing techniques that might b e 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.

Source: AICPA 45. 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. Source: AICPA 46. 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 cl osed during the year. After the client's treasurer has signed the request, it wa s mailed by the assistant treasurer. What is the major flaw in this audit proced ure? 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. Source: AICPA 47. On receiving the bank cutoff statement, the auditor should trace: A. Deposits in transit on the year-end bank reconciliation to deposits in the ca sh receipts journal. B. Checks dated prior to year end to the outstanding checks listed on the year-e nd bank reconciliation. C. Deposits listed on the cutoff statement to deposits in the cash receipts jour nal. D. Checks dated subsequent to year end to the outstanding checks listed on the y ear-end bank reconciliation. Source: AICPA 48. To gather evidence regarding the balance per bank in 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. Source: AICPA 49. DELETED 50. Contact with banks for the purpose of opening company bank accounts should n ormally be the responsibility of the corporate: A. Board of Directors. B. Treasurer. C. Controller. D. Executive Committee. Source: AICPA 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. Source: AICPA 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. Source: AICPA 53. The Parmalat fraud case apparently 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 writt en hard copy checks due to the: A. Check Clearing for the 21stCentury 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 sh ould A. Develop an understanding of the economic substance of each derivative. B. Confirm with the client's broker whether the derivatives are for trading purp oses. C. Notify the audit committee about the risks involved in derivative transaction s. D. Add an explanatory paragraph to the auditor's report describing the risks ass ociated with each derivative. Source: AICPA 56. A company's decision to use the fair value option for valuation of marketa ble securities is most likely to affects which of the following assertions the m ost? A. Completeness. B. Existence. C. Fairness. D. 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 l ikely 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 becaus e of worsening economic conditions. D. Notice of an increase in property tax rates was received by management, but w as not recorded until early in the subsequent year. Source: AICPA