Deck 17: Audit of Cash Balances

Question 1

What is an important benefit of independent preparation of bank reconciliations?

A) an opportunity to independently check that cheques have two signatures
B) the client being able to check that the bank is processing transactions correctly
C) the ability to internally verify cash receipt and disbursement transactions
D) the best time to carefully account for cheques issued

Answer 1

C

Question 2

Certain types of misstatements that affect cash may be detected in the audit of tests of controls. Which of the following misstatements would be detected in the audit of the acquisition and payment cycle?

A) failure to bill a customer for goods shipped
B) billing a customer at the incorrect price
C) improper reimbursement of an officers' personal expenses
D) paying an employee at the incorrect wage rate

Answer 2

C

Question 3

A) "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 would not be discovered during the audit of the bank reconciliation. How are these types of misstatements normally uncovered in the audit?
B) State three examples of errors or irregularities that normally would be uncovered during the audit of the bank reconciliation.

Answer 3

A)Many answers are possible. Student answers may vary.
•billing a customer at a lower price than called for by company policy
•a defalcation of cash by interception of cash receipts from customers before they are recorded; the account is charged off as a bad debt
•duplicate payment of a vendor's invoice
•improper payments of officers' personal expenditures
•payment for raw materials that were not received
•payment to an employee for more hours than he or she worked
•payment of interest to a related party for an amount in excess of the going rate
If these misstatements are to be uncovered in the audit, their discovery must come about through tests of controls.
B)•failure to include a cheque that has not cleared the bank on the outstanding cheque list, even though it has been recorded in the cash disbursements journal
•cash received by the client subsequent to the balance sheet date but recorded as cash receipts in the current year
•deposits recorded as cash receipts near the end of the year, deposited in the bank, and included in the bank reconciliation as a deposit in transit
•payments on notes payable debited directly to the bank balance by the bank but not entered in the client's records

Question 4

From an audit perspective, an imprest bank account at a client can

A) require less time for the audit of general cash.
B) increase audit risk.
C) result in an increase in control risk.
D) improve client internal controls.

Question 5

A branch bank account is helpful for

A) limiting the impact of a fraud.
B) improving internal controls.
C) empowering the different branches of the company.
D) building public relations in local communities.

Question 6

During the audit of cash, the focus of the audit is to

A) do substantive tests of payments for supplies.
B) conduct control tests of sales transactions.
C) verify the bank reconciliation.
D) conduct control tests over payments.

Question 7

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

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

Question 8

When are short-term investments that are readily converted to cash included in the cash account in the financial statements?

A) if they are held in local currency (i.e., Canadian dollars)
B) when there is little risk of change in value
C) when they are under the control of the treasury department
D) if interest has been paid up to the year end date

Question 9

Certain types of misstatements that affect cash may be detected in the audit of tests of controls. Which of the following misstatements would be detected in the audit of the sales and collection cycle?

A) a defalcation of cash hidden by an unauthorized write-off of a bad debt
B) accidental duplicate payment of a vendor's invoice
C) payment for raw materials that were not received
D) payment to an employee at an incorrect wage rate

Question 10

Which of the following statements best describes the position of cash on the balance sheet at most organizations that utilize effective cash management practices?

A) Cash is usually immaterial.
B) Cash is usually highly material.
C) Cash is usually dispersed among many different accounts.
D) Cash is usually affected by many different capital asset accounts.

Question 11

A) Describe each of the major types of cash accounts maintained by business entities.
B) Discuss the advantages of using an imprest bank account for payroll transactions.

Question 12

Toasted Tomato is a restaurant in Ottawa. You walk by this restaurant frequently and noticed it is usually empty. When you came in to do the audit, you were surprised to see that they had a large cash balance and high sales. Toasted Tomato might

A) have a going concern issue.
B) be engaging in money laundering.
C) have lower business risk than initially anticipated.
D) have weak internal controls.

Question 13

Which of the following is an essential internal control in the cash cycle?

A) use of two signatures on payroll cheques and payables cheques
B) independent receipt of the bank statement from the bank
C) careful accounting of the continuity of cheques returned from the bank
D) independent preparation of bank reconciliations

Question 14

A significant part of the total audit that relates to cash is the audit of

A) physical inventory on hand using an inventory count.
B) assessment of the accounting policies in use.
C) substantive testing of the ending accounts payable balance.
D) sales and collections, payables payments, and payroll payments.

Question 15

Which of the following misstatements in the payroll cycle could be detected during the audit of payroll transactions (but would not be discovered as part of the audit of the bank reconciliation)?

A) failure to include outstanding payroll cheques on the outstanding cheque list
B) overpayment of Receiver General payments received after the year end but recorded as cash receipts in the current year
C) unclaimed payroll cheques recorded as a deposit near the end of the year, but reconciled as deposits in transit
D) payment to fictitious employees that had been set up by the payroll supervisor

Question 16

The auditor has examined the financial statements, particularly the cash flow statement, and the notes to the financial statements to determine that all relevant information is presented clearly. Which audit assertion is associated with this audit test?

A) classification
B) allocation
C) understandability
D) valuation

Question 17

Sandra is analyzing the cash cycle of her audit client. Which of the following could indicate a liquidity problem?

A) obsolete inventory
B) high level of inventory
C) inventory on consignment
D) backordered inventory

Question 18

The general cash account is considered significant in almost all audits

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

Question 19

There is a greater risk of defalcation for cash than for other types of assets because

A) it is easier to steal.
B) most other assets must be converted to cash to make them usable.
C) companies usually have weak internal controls surrounding cash.
D) most employees have access to cash.

Question 20

Which of the following misstatements could be detected as part of the tests of a bank reconciliation?

A) payment of interest to a related party at an incorrect rate
B) exclusion of mortgage interest receivable from the balance sheet
C) deposits recorded as cash receipts at the end of year, but included as outstanding deposits (deposits in transit)
D) a defalcation of cash by interception of collections before they are recorded

Question 21

Serena is the assistant controller of Opus Inc. As a result of a recent expansion, the controller has been very busy and delegated the signing authority for cheques to Serena. Further, due to the cash accountant leaving on maternity leave, Serena was asked to perform the bank reconciliation until they found someone to replace the cash accountant.
Serena is a qualified accountant and has been able to handle all of these additional tasks. However, she asked her boss for a raise to compensate her for the additional responsibilities that she currently has. Her boss indicated that this was only temporary and the company could not afford a raise for now.
Serena created a vendor in the system with her home address. She has been paying this vendor $2000 for the past 3 months as a means of compensating herself. This theft has yet to be discovered by Opus.
Required:

A) What internal controls are missing that enable the theft to occur?
B) What audit procedures might detect the theft?

Question 22

During his examination of a January 19, 2015 cutoff bank statement, an auditor noticed that the majority of cheques listed as outstanding at December 31, 2014 had not cleared the bank. This would indicate

A) a high probability of lapping.
B) a high probability of kiting.
C) that the cash disbursements journal had been held open past December 31, 2014.
D) that the cash disbursements journal had been closed prior to December 31, 2014.

Question 23

Bank reconciliations are normally verified on a 100-percent basis. Testing the reasonableness of the cash balance is therefore

A) less important than for most other audit areas.
B) more important than for other audit areas.
C) equally as important as other audit areas.
D) less important than for the audit of other assets but more important than the audit of liabilities.

Question 24

The test of balances procedure that requires the auditor to trace the unadjusted 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 25

If the auditor does not obtain a cutoff statement directly from the bank for testing, an alternative procedure that the auditor can use is to

A) account for a continuity of cheques that covers the year end.
B) reconcile cash paid to the cash disbursements journal for the last month of the year.
C) reconcile cash received to the cash receipts journal for the last month of the year.
D) prove the bank statement for the period after the year end.

Question 26

The audit procedure that requires the auditor to record the last cheque number used on the last day of the year and subsequently trace to the outstanding cheques and the cash disbursements journal is performed to satisfy the audit objective of

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

Question 27

An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to

A) verify the cash balance reported on the bank confirmation inquiry form.
B) verify reconciling items on the client's bank reconciliation.
C) detect lapping.
D) detect kiting.

Question 28

The auditor has determined exchange rates used by the client to present cash in foreign currencies and has recalculated the amounts. Which audit assertion is associated with this audit procedure?

A) existence
B) valuation
C) allocation
D) classification

Question 29

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

A) the client's December bank statement and reconcile it.
B) a bank reconciliation from the client.
C) a cutoff bank statement directly from the bank.
D) the client's cash account balance from the general ledger.

Question 30

What is the best way to prevent potential alteration, deletion, or addition of cancelled cheques, duplicate deposit slips, or other documents provided with the bank statement?

A) Have the bank statements be provided unopened to an independent reconciler.
B) Have the person responsible for recording cash receipts do the bank reconciliation.
C) Have the signing officer(s) review the bank reconciliation.
D) Have the bank statements provided to the accounts payable supervisor.

Question 31

A) Distinguish between i) risks of error, ii) risks of fraud, and iii) risks of inadequate presentation or disclosure of financial information.
B) For each of the three types of risks described in

A), provide three examples of major risks of error or fraud in the cash cycle.

Question 32

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 cheques to subsequent period bank statements.
C) Obtain and test a cutoff bank statement.
D) Review financial statements to make sure that material savings accounts and certificates of deposit are disclosed separately.

Question 33

After testing the bank reconciliation and inspecting the cutoff bank statement received from the bank, the auditor has determined that there are two outstanding cheques from the list on the bank reconciliation that have still not cleared the bank. The auditor's next step should be to

A) trace the details of the two cheques to the cash disbursements journal.
B) trace the details of the two cheques to their associated expense accounts.
C) reperform the calculations in the bank reconciliation.
D) compare the total of the bank reconciliation to the bank confirmation.

Question 34

A) Discuss the methodology for designing tests of details of balances for cash in the bank.
B) An effective monthly bank reconciliation by client personnel includes nine procedures. List these nine bank reconciliation procedures.
C) Discuss two analytical procedures commonly performed during the audit of the cash account.

Question 35

After the bank confirmation has been received by the auditor, the auditor should

A) recalculate the bank reconciliation in its entirety.
B) verify that cash cutoff was correct for that bank account.
C) trace the general ledger cash account balance to the amount confirmed.
D) trace the bank reconciliation cash amount to the amount confirmed.

Question 36

When examining the bank reconciliation for the imprest payroll account, it is normal for the only reconciling item to be

A) outstanding cheques.
B) direct deposits from customers.
C) outstanding deposits.
D) corrections to payroll amounts.

Question 37

Which of the following situations would indicate a susceptibility to fraud that pertains to theft of cash?

A) lack of segregation of duties between the handling of cash and the recording of cash
B) cash disbursement cheques requiring only one authorizing signature
C) payroll rates being approved by the corporate controller
D) customer master file changes being handled by the controller's executive assistant

Question 38

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 the bank, except for deposits in transit, cheques outstanding, and other reconciling items. The information needed to complete the tests of the reconciliation are provided by the

A) client's journals and ledgers for the year under audit.
B) cutoff bank statement.
C) client's journals and ledgers for the subsequent year.
D) cancelled cheques for the year under audit.

Question 39

A partial-period bank statement and the related cancelled cheques, duplicate deposit slips, and other documents included in bank statements, mailed by the bank directly to the public accounting firm's office, is called a

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

Question 40

Which of the following is a common analytical procedure that may detect misstatements in cash?

A) calculation of inventory turnover and gross profit
B) review of amounts included in the earnings-per-share calculations
C) comparison of outstanding cheques and deposits in transit with the prior year bank reconciliation
D) comparison of gross sales on a month by month basis with the prior year

Question 41

The process of transferring money from one bank account to another and improperly recording the transaction in both accounts is called

A) lapping.
B) embezzling.
C) kiting.
D) a scam.

Question 42

Jane works for Middle Co. She is responsible for opening the mail and preparing the bank deposit for cheques received, which she then gives to the owner. After the owner has deposited the cash, he gives Jane the stamped bank deposit slip, which she uses to record the cash received in the accounts receivable records. How does this allocation of responsibilities affect the audit process?

A) The auditor should increase control testing with respect to the accuracy assertion.
B) The auditor should do substantive tests (compare the deposit slips to the accounts receivable records).
C) The auditor should consider the possibility of material fraud.
D) The auditor should increase control testing with respect to the completeness assertion.

Question 43

What type of audit test is a proof of cash?

A) test of control
B) test of details
C) dual-purpose
D) analytical review

Question 44

What audit objective is associated with the comparison of disbursement and receipt information on a bank transfer schedule to the cash disbursements and cash receipts journals?

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

Question 45

A) Many auditors prove the subsequent period bank statement if a cutoff statement is not received directly from the bank. Discuss the purpose of proving the subsequent period statement, and explain the audit procedures performed during the proof of cash.
B) Discuss the circumstances in which an auditor would prepare a proof of cash.

Question 46

You are the auditor of Brody Grass Inc. The CEO expressed a concern that the audit fees for the year were very high. You explained that this is largely due to poor internal controls in the cash and transaction cycle and that the audit fees could decrease if better controls were in place.
Provide 5 examples of general cash account controls that Brody Grass Inc. could implement.

Question 47

The auditor uses a proof of cash to determine whether

A) internal controls over cash have been functioning effectively in the period under audit.
B) all recorded cash receipts were deposited and whether all recorded cash disbursements were paid by the bank.
C) accounts receivable was properly recorded and whether cash receipts transactions were properly recorded.
D) accounts payable was properly recorded and whether cash disbursement transactions were properly recorded.

Question 48

Under what circumstances would an auditor prepare a proof of cash?

A) When the client has material internal control weaknesses in cash.
B) When control risk is set at minimum.
C) When inherent risk in cash is considered to be low.
D) When an enterprise resource system is in use for processing of cash transactions.

Question 49

Testing to ensure that bank transfers are recorded in both the receiving and disbursing banks helps to detect evidence

A) that would reduce inherent risk to a minimum.
B) associated with an attempt to conceal a theft of cash.
C) that increases reliability with respect to the accuracy of the transfer schedule.
D) that would warrant decreasing control risk to a minimum.

Question 50

Disbursements on the bank transfer schedule should be correctly included in or excluded from year-end bank reconciliations as outstanding cheques. Understating outstanding cheques on the bank reconciliation indicates

A) the possibility of kiting.
B) a cutoff error in the bank account.
C) an understatement of the bank balance.
D) an increase in inherent risks associated with cash.

Question 51

Which of the following audit tests pertains to the accuracy assertion?

A) prepare proof of cash
B) test a cutoff bank statement
C) examine minutes and loan agreements
D) read the notes to the financial statements

Question 52

A four-column proof of cash can be performed for

A) one or more interim months.
B) the entire year.
C) the last month of the year.
D) any specified time period for which bank statements are available and which the auditor chooses to designate.

Question 53

A) Explain what is meant by a cutoff bank statement and discuss the purpose of the cutoff bank statement in the audit of cash.
B) Explain the purpose of testing the client's bank reconciliation and discuss the major audit procedures involved.

Question 54

On the last day of the fiscal year, the cash disbursements clerk drew a company cheque on bank A and deposited the cheque in the company account in bank B to cover a previous theft of cash. The disbursement had not been recorded. The auditor will best detect this form of kiting by

A) comparing the detail of cash receipts as shown by the cash receipts records with the detail on the confirmed duplicate deposit tickets for three days prior to and subsequent to year-end.
B) preparing from the cash disbursements book a summary of bank transfers for one week prior to and subsequent to year-end.
C) examining the composition of deposits in both bank A and B subsequent to year-end.
D) examining paid cheques returned with the bank statement of the next account period after year-end.

Question 55

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) material internal control weaknesses.

Question 56

What is the purpose of an extended test of the bank reconciliation?

A) to verify whether all transactions included in the journals for the last month of the year were correctly allocated to the bank reconciliation
B) to compensate for material weaknesses in internal control with respect to segregation of duties
C) to increase detection risk for the audit of cash
D) to verify whether specific transactions that flowed through the cash account were correctly recorded

Question 57

Following are situations that an auditor might find by means of tests of controls or tests of details of cash balances for a company with a December year end.

A) The accountant did not record or deposit a cash receipt for $50 000 that was received on December 28. Cash is prelisted by the receptionist.
B) Cheques prepared up to January 6 were dated December 31 and recorded in the cash disbursements journal.
C) A cheque was issued for office supplies that were never received by the client. Required: List a substantive audit procedure that could uncover each of the preceding situations.

Question 58

A) Explain what is meant by kiting and discuss how it is performed.
B) Discuss how an auditor can test for kiting.

Question 59

On a bank transfer schedule, if a cash disbursement was recorded in the current fiscal year and the receipt in the subsequent fiscal year, this might be

A) the best way to record this type of transaction.
B) an indication of increased inherent risk with respect to cash.
C) an attempt to cover a cash shortage.
D) an indication of an error in recording information by the bank.

Question 60

In addition to the possibility of kiting, inaccurate handling of bank transfers could result in

A) a misclassification between cash and accounts receivable.
B) an incorrect balance in the accounts receivable account.
C) a misclassification between cash and accounts payable.
D) an incorrect balance in the bank loan account.

Question 61

Stella is auditing the electronic receipts and payments. The extent of her audit work conducted on the bank reconciliation will

A) be less extensive than if the company did not engage in electronic receipts and payments.
B) be more extensive than if the company did not engage in electronic receipts and payments.
C) depend on the assessed quality of internal controls.
D) be significantly diminished if Stella can determine that the receipts and payments come from a reputable bank with proper internal controls.

Question 62

Electronic data interchange (EDI) represents the electronic transfer of

A) funds.
B) business documents.
C) data between accounting systems of the company's entities.
D) information between the bank and the company.

Question 63

Outline the audit procedures that would be performed when testing electronic receipts and payments.

Question 64

The most important internal control for petty cash is

A) the use of an imprest fund that is the responsibility of one individual.
B) keeping it in a safe or locked drawer.
C) keeping the amount of cash to a minimum.
D) accessibility so that cheques won't have to be written for small amounts.

Question 65

Petty cash tests can ordinarily be performed at any time during the year, but as a matter of convenience they are typically done

A) on the balance sheet date.
B) near the end of the field work.
C) at the same time as the observation of inventory, since both auditor and client must be present at that time.
D) on any interim date.