Deck 23: Audit of Cash and Financial Instruments

Question 1

Which of the following is likely to be detected as part of the audit of the bank reconciliation?

A) failure to bill a customer
B) duplicate payment of a vendor invoice
C) cash received by the client after year-end, but included in cash receipts in the current year
D) an embezzlement of cash by intercepting cash receipts from customers before they are recorded

Answer 1

C

Question 2

A growing number of organizations, especially larger organizations, use pre-approved V-cards to make miscellaneous purchases instead of maintaining a petty cash fund.

Answer 2

False

Question 3

Companies may purchase marketable securities as a way to temporarily invest excess cash.

Answer 3

True

Question 4

Which of the following is not a "cash equivalent"?

A) time deposits
B) certificates of deposit
C) money market funds
D) marketable securities

Question 5

Debt instruments can be classified as trading securities, available-for-sale securities, or held-to-maturity securities; auditors should ensure that such debt instruments are classified, properly, in the financial statements consistent with accounting standards.

Question 6

The evidence accumulated for cash balances depends heavily on the results of tests performed in the other major transaction cycles.

Question 7

Cash is important because of its susceptibility to theft, and cash can be significantly misstated as illustrated in the China Media Express case.

Question 8

Cash is the only account included in every cycle except inventory and warehousing.

Question 9

Financial instruments, which include investments in debt and equity securities as well as derivative instruments, vary in significance across audit clients.

Question 10

Which of the following misstatements is most likely to be uncovered during an audit of a client's bank reconciliation?

A) duplicate payment of a vendor's invoice
B) billing a customer at a lower price than indicated by company policy
C) failure to record a collection of a note receivable by the bank on the client's behalf
D) payment to an employee for more than the hours actually worked

Question 11

Financial instruments

A) include debt securities and money market funds.
B) such as derivatives can be used as a way of hedging.
C) must be classified as held-to-maturity securities.
D) All of the above are correct.

Question 12

Examples of cash equivalents include time deposits, certificates of deposit, and marketable securities.

Question 13

An imprest petty cash fund would least likely be used to pay for which of the following items?

A) minor office supplies
B) monthly interest expense
C) stamps for small mailings
D) small contributions to a local charity

Question 14

An imprest petty cash fund

A) is a bank account.
B) is used for large, unusual purchases.
C) is usually reimbursed at least once a week for good internal control.
D) is being replaced by pre-approved purchase cards in many companies.

Question 15

Which of the following is an accurate statement regarding cash?

A) The amount of cash flowing into and out of the cash account is often larger than that for any other account in the financial statements.
B) The susceptibility of cash to embezzlement is greater than that for other types of assets.
C) Auditors must verify whether recorded cash in the general ledger correctly reflects all cash transactions that took place during the year.
D) All of the above are accurate statements.

Question 16

Describe each of the major types of cash accounts maintained by business entities.

Question 17

Consistent with financial accounting standards, equity investments are normally recorded at cost until they are disposed of in the future.

Question 18

The general cash account is considered a significant account in almost all audits

A) where the ending balance is material.
B) even when the ending balance is immaterial.
C) except those of not-for-profit organizations.
D) where either the beginning or ending balance is material.

Question 19

Branch bank accounts are useful for building banking relations in local communities.

Question 20

Which of the following would normally be discovered as part of the audit of the bank reconciliation?

A) failure to bill a customer
B) failure to include a deposit in transit on the bank reconciliation
C) duplicate payment of a vendor's invoice
D) payment to an employee for more hours than she or he worked

Question 21

A partial-period bank statement and the related copies of or digital access to cancelled checks, duplicate deposit slips, and other documents included in bank statements, mailed by the bank directly to the CPA firm's office, is called

A) a four-column proof of cash.
B) a year-end bank statement.
C) a cutoff bank statement.
D) a short-period bank statement.

Question 22

If a bank does not respond to a bank confirmation request, the auditor would most likely

A)
B)
C)
D)

Question 23

Which of the following items would not normally appear on bank reconciliations?

A) balance per bank
B) list of deposits in transit
C) outstanding deposits
D) outstanding checks

Question 24

Which of the following balance-related audit objectives typically is assessed as having high inherent risk for cash?

A) existence
B) cutoff
C) detail tie-in
D) presentation and disclosure

Question 25

The test of details of balances procedure that requires the auditor to trace the book balance on the reconciliation to the general ledger is an attempt to satisfy the audit objective of

A) detail tie-in.
B) existence.
C) completeness.
D) accuracy.

Question 26

The test of details of balances procedure that requires the auditor to foot the outstanding check and electronic payment list and deposits in transit is an attempt to satisfy which audit objective?

A) cutoff
B) presentation and disclosure
C) detail tie-in
D) completeness

Question 27

Because cash is the most desirable asset for people to steal, it has a higher

A) control risk.
B) inherent risk.
C) detection risk.
D) liquidity risk.

Question 28

List at least three misstatements that are designed to be detected by a bank reconciliation.

Question 29

The direct receipt of a confirmation from every bank with which the client does business is

A) required by auditing standards for every audit.
B) not necessary unless material fraud is suspected.
C) recommended but not required by auditing standards.
D) necessary for every audit except when there are an unusually large number of active accounts.

Question 30

"Failure to bill a customer" is an example of an error that results in the failure to receive cash, but would not be discovered as part of the audit of the bank reconciliation. State three other examples of errors or irregularities that result in the improper payment of, or failure to receive, cash, but that would not be discovered during the audit of the bank reconciliation. How are these types of misstatements normally uncovered in the audit?

Question 31

The reason for testing the client's bank reconciliation is to verify whether the client's recorded bank balance is the same amount as the actual cash in bank, except for deposits in transit, checks outstanding, and other reconciling items. The information needed to complete the tests of the reconciliation is provided by the

A) client's records and ledgers for the year under audit.
B) cutoff bank statement.
C) client's records and ledgers for the subsequent year.
D) canceled checks for the year under audit.

Question 32

The audit procedure which requires the auditor to record the last check number used on the last day of the year and subsequently trace to the outstanding checks and the cash disbursements records is performed to satisfy the audit objective of

A) detail tie-in.
B) existence.
C) completeness.
D) cutoff.

Question 33

The audit objective of determining that cash in bank, as stated on the reconciliation, foots correctly and agrees with the general ledger can be tested by which of the following procedures?

A) performing tests for kiting
B) receiving and testing a cutoff bank statement
C) proving the bank reconciliation as to additions and subtractions, including all reconciling items
D) examining the minutes of the board of directors for restrictions on the use of cash

Question 34

In an effort to satisfy the completeness objective, the auditor could perform which of the following test of details of balance procedures?

A) Trace the book balance on the reconciliation to the general ledger.
B) Trace outstanding checks to subsequent period bank statements.
C) Perform a four-column proof of cash.
D) Review financial statements to make sure that material savings accounts and certificates of deposit are disclosed separately.

Question 35

In addition to confirming bank balances of your audit client, a bank confirmation would normally contain

A) the client's bank loans with due date, interest rate, and collateral requested.
B) the client's credit history as regards to paying back loans.
C) the client's managements bank account information.
D) the client's business prospects.

Question 36

The starting point for the verification of the balance in the general bank account is to obtain

A) a bank reconciliation from the client.
B) the client's cash account from the general ledger.
C) a cutoff bank statement directly from the bank.
D) the client's year-end bank statement.

Question 37

Which of the following statements is correct?

A) Auditors must obtain bank confirmations for audits of nonpublic entities.
B) Auditors are required to obtain bank confirmations under international auditing standards.
C) Auditing standards do not address specific requirements regarding bank confirmations.
D) Auditing standards do not require bank confirmations.

Question 38

The general cash account will not be audited if the ending balance is immaterial.

Question 39

Which of the following statements is correct?

A) Bank personnel are responsible for providing reasonable assurance that a response to a bank confirmation is accurate.
B) Bank personnel are responsible for providing complete assurance that a bank confirmation is complete.
C) Bank personnel are not responsible for searching their records for bank balances or loans beyond those included on the bank confirmation.
D) Bank personnel are not responsible for providing information related to interest on the bank confirmation.

Question 40

Which of the following cycles does not affect cash in bank?

A) capital acquisitions cycle
B) inventory and warehousing
C) payroll and personnel cycle
D) acquisitions and disbursements

Question 41

If an auditor waits until the subsequent period bank statement is available to verify reconciling items, it is primarily a test for

A) errors.
B) omissions.
C) kiting.
D) intentional misstatements.

Question 42

The client may mail the bank confirmation requests if the auditor believes doing so will increase the likelihood that the confirmation will be returned promptly.

Question 43

The bank reconciliation control is enhanced when a qualified employee reviews the monthly reconciliation as soon as possible after its completion.

Question 44

The starting point for the verification of the balance in the general bank account is to obtain a bank cut-off statement.

Question 45

The auditors test the client's monthly bank reconciliation to verify whether the client's recorded bank balance is the same amount as the actual cash in the bank. Which of the following would not explain a difference between the company's cash balance and the bank's balance for the client?

A) deposits in transit
B) Checks are written by the client in the same month the checks clear the bank.
C) other reconciling items
D) outstanding checks

Question 46

Tracing outstanding checks to subsequent period bank statements tests the cutoff audit objective.

Question 47

________ is an automated fraud detection tool offered by most banks.

A) Positive pay
B) A bank confirmation
C) Fraud buster
D) Check matching

Question 48

The most important balance-related audit objectives in the audit of cash include all except which of the following?

A) existence
B) accuracy
C) completeness
D) occurrence

Question 49

Auditors usually design bank confirmations that address the client's specific circumstances.

Question 50

To test the client's list of outstanding checks on the bank reconciliation for completeness, the auditor should trace from the list to the checks included with the cutoff bank statement.

Question 51

Many of the auditor's audit procedures in the audit of cash center around the client's bank confirmations.

Question 52

The standard bank confirmation form has been agreed upon by the

A) SEC and FASB.
B) AICPA and the SEC.
C) SEC and the American Bankers' Association.
D) AICPA and the American Bankers' Association.

Question 53

The three most important audit objectives for cash are accuracy, existence, and classification.

Question 54

When auditing the general cash account, receipt of a standard bank confirmation is the starting point for verifying the company's general cash account balance.

Question 55

The bank reconciliation

A) must be done on a daily basis if the client uses electronic banking.
B) should be performed by someone independent of the handling or recording of cash receipts.
C) should be performed by someone who handles cash disbursements.
D) ensures that no cash has been embezzled.

Question 56

When auditing the year-end cash balance, one of the areas of focus is on the accuracy objective.

Question 57

When assessing risks affecting cash,

A) if a business defers preparing bank reconciliations for long periods, the value of the control is reduced and may affect the auditor's assessment of control risk for cash.
B) most companies are likely to have significant client business risks affecting their cash balances.
C) there is a low inherent risk for the existence and completeness objectives for cash.
D) all of the above are accurate statements.

Question 58

Which of the following balance-related objectives applies to auditing the general cash account?

A)
B)
C)
D)

Question 59

Which of the following verifications would generally not be performed by the auditor in the month subsequent to the balance sheet date?

A) Foot the lists of all canceled checks, debit memos, deposits, and credit memos.
B) Verify the bank statement balances when the footed totals are used.
C) Verify the book statement balances tie to the cash receipts and disbursements journals for the year under audit.
D) Review the items included in the footings to make sure that they were cancelled by the bank.

Question 60

Which of the following is not included in Phase I of the auditing of year-end general cash balances?

A) Identify client business risks affecting cash.
B) Design and perform tests of controls and substantive tests of transactions.
C) Set performance materiality and assess inherent risk.
D) Assess control risk.

Question 61

The presentation of cash in the financial statements is normal straight-forward unless restrictions on cash or compensating balance agreements with a bank exist.

Question 62

Ordinarily, all deposits-in-transit listed on the year-end bank reconciliation should appear as deposits on the cutoff bank statement.

Question 63

Auditors are not always required to obtain bank confirmations.

Question 64

A major consideration in the audit of the general cash balance is the possibility of fraud. The auditor must extend his or her procedures in the audit of year-end cash to determine the possibility of a material fraud when there are

A) large cash balances at the end of the year.
B) large cash receipts and disbursements during the year.
C) no imprest accounts used for payroll.
D) inadequate internal controls.

Question 65

A monthly bank reconciliation of the general bank account on a timely basis by someone involved in either the handling or the recording of cash receipts and disbursements is an essential control over the ending cash balance.

Question 66

The auditor is generally concerned about the realizable value and the rights to cash.

Question 67

Instead of receiving a cutoff bank statement or if online access to client bank account information is not available to the auditor, auditors can wait until the subsequent period bank statement is available to verify reconciling items. Discuss the purpose of reviewing the subsequent period bank statement and list the verifications the auditor performs on this bank statement.

Question 68

Explain the purpose of testing the client's bank reconciliation, and discuss the major audit procedures involved.

Question 69

Positive pay reduces potential check fraud by matching account number, check number, and dollar amounts of each check presented for payment against the electronic records of checks provided by the company.

Question 70

The auditor uses a proof of cash to determine whether

A)
B)
C)
D)

Question 71

A common test of details the auditor should perform with regards to determining if cash is appropriately described and presented in the financial statements is to review the Board of Director minutes and loan agreements for any restrictions on cash.

Question 72

A proof of cash represents

A) a test of controls and substantive test of transactions.
B) a substantive test of transactions.
C) a substantive test of transactions and test of details of balances.
D) a test of details of balances.

Question 73

Internal controls over year-end cash balances in the general account can be divided into two categories. List the two below.

Question 74

A proof of cash is effective at identifying which of the following misstatements?

A) checks written for an improper amount
B) checks issued to invalid vendors
C) fraudulent checks
D) checks recorded in the books for an amount different from that on the check

Question 75

Auditors are likely to prepare a proof of cash when the client has

A) material internal control weaknesses in cash.
B) material internal control weaknesses in accounts receivable and revenue.
C) material internal control weaknesses in accounts payable and inventory.
D) material internal control weaknesses in payroll.

Question 76

The audit and accounting concern addressed in a monthly proof of cash is with

A) adjusting account balances.
B) reconciling the amounts recorded in the books with the amounts included in the bank statement.
C) determining the month-end balance.
D) identifying cash transfers.

Question 77

A statement near the bottom of the standard bank confirmation form requires the bank to inform auditors of open lines of credit and compensating balance requirements.

Question 78

The methodology for auditing year-end cash is generally the same as the auditing for all other balance sheet accounts.

Question 79

In testing the year-end balance in the general cash account, the auditor must accumulate sufficient appropriate evidence to evaluate whether cash, as stated on the balance sheet, is fairly stated and properly disclosed in accordance with six of the nine balance-related audit objectives used for all tests of details of balances. Name those six audit objectives.

Question 80

Explain what is meant by a cutoff bank statement, and discuss the purpose of the cutoff bank statement in the audit of cash.