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 partial-period bank statement and the related canceled 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.

Answer 2

C

Question 3

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

Answer 3

•General cash account.This is the focal point of cash for most organizations because virtually all cash receipts and disbursements flow through this account.
•Imprest payroll account.As a means of improving internal control,many companies establish a separate imprest bank account for making payroll payments to employees.In such an account,a fixed balance,such as $1,000,is maintained.Immediately before each pay period,one check is drawn on the general cash account to deposit the total amount of the net payroll in the imprest payroll account.
•Branch bank account.For a company operating in multiple locations,it is often desirable to have a separate bank balance at each location.Branch bank accounts are useful for building public relations in local communities and permitting the centralization of operations at the branch level.
•Imprest petty cash fund.This fund is used for small cash acquisitions that can be paid more conveniently and quickly by cash than by check,or for the convenience of employees in cashing personal or payroll checks.
•Cash equivalents.Excess cash accumulated during certain parts of the operating cycle that will be needed in the reasonably near future is often invested in short-term,highly liquid cash equivalents such as time deposits,certificates of deposit,and money market funds.

Question 4

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

Question 5

Which of the following statements is correct?

A) Auditors must obtain bank confirmations for audits of non-public 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 6

"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 7

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 8

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

A) Time deposits
B) Certificates of deposit
C) Money market funds
D) Marketable securities

Question 9

The test of details of balances procedure that requires the auditor to foot the outstanding check 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 10

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 11

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 12

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) Footing the outstanding checks list and the list of deposits in transit
D) Examining the minutes of the board of directors for restrictions on the use of cash

Question 13

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 14

Bank reconciliation audit tests are designed to detect misstatements other than through the improper payment of cash or failure to receive cash normally would not be detected as part of the tests of the bank reconciliation.List below at least THREE misstatements that are designed to be detected by bank reconciliation.

Question 15

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

Question 16

All of the following would not be uncovered by a bank reconciliation except for:

A) duplicate payment of a vendor's invoice.
B) improper payments of officers' personal expenditures.
C) payments on notes payable debited directly to the the bank account by the bank but not recorded on the books.
D) payment to an employee for more hours than he worked.

Question 17

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 18

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 worked

Question 19

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 20

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 21

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 22

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

A)
B)
C)
D)

Question 23

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 24

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 25

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

A)
B)
C)
D)

Question 26

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

A) Existence
B) Accuracy
C) Completeness
D) Occurrence

Question 27

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 28

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

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

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 31

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 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

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

Question 34

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 are 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 35

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 36

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 37

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

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

Question 38

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 39

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 40

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 41

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

Question 42

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 43

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 44

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

Question 45

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

Question 46

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

Question 47

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 48

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

Question 49

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

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

Question 50

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

Question 51

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

Question 52

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 53

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 54

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

Question 55

The auditor uses a proof of cash to determine whether:

A)
B)
C)
D)

Question 56

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

Question 57

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 58

Instead of receiving a cutoff bank statement,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 59

Auditors are not always required to obtain bank confirmations.

Question 60

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

Question 61

The following information applies to the questions below:
Listed below are four interbank cash transfers, indicated by the numbers 1, 2, 3, and 4, of a client for late December 2013 and early January 2014:
Based on the schedule of interbank transfers above,which of the cash transfers indicates an error in cash cutoff at December 31,2013?

A) 1
B) 2
C) 3
D) 4

Question 62

Explain kiting,and discuss how it is performed.

Question 63

A proof of cash is not an effective procedure for identifying which of the following types of misstatements?

A) All recorded disbursements were paid by the bank.
B) All recorded cash receipts were deposited.
C) All amounts that were paid by the bank were recorded.
D) Some checks were written for incorrect amounts.

Question 64

Which of the following is a correct statement?

A) A proof of cash receipts is a test of the balance in the cash account at a point in time.
B) The proof of cash disbursements is effective for discovering a check written for the incorrect amount for which the dollar amount in cash disbursements is also incorrect.
C) It is extremely difficult for an auditor to detect thefts of cash, especially omitted transactions and account balances.
D) Segregation of duties is not an important control procedure for cash in a small business.

Question 65

The process of transferring money from one bank account to another and improperly recording the transaction is referred to as:

A) kiting.
B) lapping.
C) scamming.
D) embezzling.

Question 66

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

A) Checks written for incorrect amounts
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 67

The following information applies to the questions below:
Listed below are four interbank cash transfers, indicated by the numbers 1, 2, 3, and 4, of a client for late December 2013 and early January 2014:
Based on the schedule of interbank transfers above,which of the cash transfers would not appear as an outstanding check on the December 31,2013 bank reconciliation?

A) 1
B) 2
C) 3
D) 4

Question 68

The transfer of money from one bank account to another and improperly recording the transfer so that the amount is recorded as an asset in both banks is referred to as kiting.

Question 69

Match six of the terms (a-k)with the descriptions/definitions provided below (1-6):
a.Bank reconciliation
b.Branch cash account
c.Cash equivalents
d.Cutoff bank statement
e.General cash account
f.Imprest payroll account
g.Imprest petty cash fund
h.Kiting
i.Proof of cash
j.Standard bank confirmation form
k.Lapping
________ 1.A fund of cash maintained within the company for small cash acquisitions,expenses,or to cash employees' checks.
________ 2.A form approved by the AICPA and American Bankers' Association through which the bank responds to the auditor about bank balance and loan information.
________ 3.Excess cash invested in short-term,highly liquid investments such as time deposits,certificates of deposit,and money market funds.
________ 4.The primary bank account for most organizations.
________ 5.The transfer of money from one bank account to another and improperly recording the transfer so that the amount is recorded as an asset in both accounts.
________ 6.The document usually prepared by client personnel of the differences between the cash balance recorded in the general ledger and the amount in the bank account.

Question 70

Listing all bank transfers made a few days before and after the balance sheet date and tracing each to the accounting records for proper recording is a useful approach to test for:

A) kiting.
B) lapping.
C) income smoothing.
D) channel stuffing.

Question 71

Tests for kiting are performed using only a schedule of intrabank transfers.

Question 72

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

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

Question 73

A proof of cash includes four reconciliation tasks.List below two of those tasks.

Question 74

A proof of cash includes a reconciliation of cash receipts deposited in the bank with the cash disbursements records for a given period.

Question 75

What should be audited on an interbank transfer schedule?

Question 76

Auditors sometimes prepare a proof of cash when the client has material internal control weaknesses in cash.List two procedures that the proof of cash determines were or were not done.

Question 77

When the auditor believes the year-end bank reconciliation may be intentionally misstated,it is appropriate to perform extended tests of the year-end bank reconciliation.Assuming the client has a October 31 year-end,these extended tests would not include:

A) comparing all September 30 reconciling items with canceled checks and other documents in the October bank statement.
B) comparing all canceled checks and deposit slips in the October bank statement with the October cash disbursements and receipts records.
C) carrying out all proper procedures subsequent to the end of the year with the use of the bank cutoff statement.
D) determining that all outstanding checks had cleared by the date of the bank cutoff statement.

Question 78

The following information applies to the questions below:
Listed below are four interbank cash transfers, indicated by the numbers 1, 2, 3, and 4, of a client for late December 2013 and early January 2014:
Based on the schedule of interbank transfers above,which of the cash transfers would appear as a deposit in transit on the December 31,2013 bank reconciliation?

A) 1
B) 2
C) 3
D) 4

Question 79

Auditors will often prepare a proof of cash when the client has material internal control weaknesses in cash receipts and cash disbursements.The purpose of the proof of cash is to determine the client's accounting records for cash are reliable.List below the four requirements the proof of cash is designed to provide for the auditor.

Question 80

A proof of cash involves a combination of substantive tests of transactions and tests of details of balances.