Deck 12: Audit of Cash and Other Liquid Assets

Question 1

Cash flow is often managed by organizations through the use of lockboxes and outsourced cash management arrangements with banks.

Answer 1

True

Question 2

When the year-end cash balance is immaterial,the audit of the cash account is unnecessary.

Answer 2

False

Question 3

A lockbox is a mailbox type of depository device that is located in front of the client's premises,allowing customers to remit payment in a timely manner.

Answer 3

False

Question 4

Working capital may be tied to certain debt covenants causing cash to be considered material for audit purposes.

Question 5

An analysis of the client's internal control over cash and marketable securities should take place during the performance of the substantive tests on these accounts.

Question 6

The auditor is responsible for auditing the necessary disclosures when material lines of credit and compensating balance arrangements have been made by the client with a lender.

Question 7

The auditor places more emphasis on the audit of the cash account because of the account's susceptibility to fraud.

Question 8

When control risk is assessed at a high level for cash,the auditor will perform detailed substantive tests.

Question 9

Strong internal control over the cash account requires that the same person who is responsible for making the bank deposit also prepare the bank reconciliation since that person is most experienced with the transactions.

Question 10

Customer checks received at the client company should be restrictively endorsed within one week of receipt in the mail.

Question 11

The cash balance that a financial institution requires its customer to maintain in a non-interest-bearing account to offset a line of credit is a compensating balance.

Question 12

To ensure that all customer remittances received by the bank are posted when a lockbox is being used,control procedures should require that all remittance advices be sent by the bank to the client.

Question 13

An imprest payroll account should never reach a zero balance.

Question 14

Cash is no longer considered highly susceptible to theft because of the advent of computers,safes and armored cars.

Question 15

Technology makes it more difficult to forge evidence.

Question 16

The deposit of cash directly at the bank to speed collections often involves the use of a lockbox.

Question 17

Electronic Funds Transfers have controls built into the process and do not require further reconciliation by the client.

Question 18

The risk of the company issuing checks near year-end and mailing them subsequently is not important to the auditor as the action does not affect cash balances.

Question 19

A possible intentional overstatement of cash may be covered up by omitting large balance-outstanding checks from the bank reconciliation.

Question 20

A turnaround document is an effective control because it lists useful information for further processing of the collection on account.

Question 21

The standard bank confirmation should be sent to all banks used by the client during the year except those with a zero balance.

Question 22

Testing of debt securities and commercial paper would typically include an analysis of interest income.

Question 23

The cutoff statement is mailed to the client for an agreed upon-date and then copied for the audit files.

Question 24

Kiting fraudulently places the company's marketable securities in the name of the officers.

Question 25

The audit tests for marketable securities need not include a review of broker's advices for cost and sales price of securities as the auditor has more persuasive evidence in the form of deposit tickets and canceled checks.

Question 26

Internal audits are seldom an effective deterrent to the theft of cash.

Question 27

By determining whether any restrictions on the use of commercial paper by an entity are disclosed in the footnotes,the auditor satisfies the assertion of completeness.

Question 28

Commercial paper is the term applied to notes issued by major corporations with poor credit ratings.

Question 29

The standard bank confirmation should be sent to all banks used by the client during the year,including those with a zero balance.

Question 30

Kiting involves the overstatement of a bank account by transferring funds at the end of the year to another bank account and failing to record the disbursement.

Question 31

Gains and losses are not considered in testing as they do not need to be disclosed.

Question 32

An independent bank reconciliation provides evidence of the correctness of the year-end cash balance.

Question 33

The auditor may discover evidence of lapping by preparing an interbank transfer schedule.

Question 34

Kiting may be detected by the auditor by preparing a bank transfer schedule of all client accounts.

Question 35

The primary purpose of the cutoff bank statement is to verify the reconciling items on the bank reconciliation.

Question 36

The standard bank confirmation is used by the auditor to test for lapping.

Question 37

The standard bank confirmation includes the confirmation of cash accounts but not liabilities with financial institutions.

Question 38

Kiting is an example of a technique used to intentionally and materially overstate cash.

Question 39

Notes issued by major corporations are known as commercial paper.

Question 40

The auditor obtains the current market value of marketable securities by confirmation with the holder of the security.

Question 41

The ending price of securities can be verified through reliable publications and websites such as the Wall Street Journal.

Question 42

Which one of the following is a reason that the cash account is material to the auditor?

A)The cash account is the culmination of transactions that are of little significance.
B)The cash account is more susceptible to fraud than most other accounts.
C)Many debt or loan agreements may be tied to dividend restrictions.
D)Automated systems may have strong electronic controls built-in.

Question 43

Documents that accompany customer payments to help the clerk identify the payments are called

A)receipts such as register tapes.
B)accommodation certificates such as authenticated customer tokens.
C)turnaround documents such as remittance advices.
D)checks stamped with restrictive endorsements such as customer signatures.

Question 44

Strong internal control over the cash account requires that the same person who is responsible for making the bank deposit not post the increase to cash in the accounting system.

Question 45

Management has developed cash management techniques to perform which of the following?

A)Increase the time to collect billings.
B)Reduce the amount of volume of cash transactions.
C)Automate the cash management process.
D)Increase the liquidity of cash balances.

Question 46

A cash management arrangement with a bank whereby the organization's customers send payments directly to the client's bank,which deposits the remittance to the client's account,is a

A)lockbox.
B)bank transfer.
C)imprest bank account.
D)collar.

Question 47

If a company maintains a compensating balance of cash,the company must

A)disclose the compensating account arrangement in financial statements.
B)close out the balance prior to year-end.
C)tie balances to debt covenants.
D)provide a lockbox for appropriate line-of-credit draws.

Question 48

Which of the following best prevents the theft of customer checks received in the mail?

A)Custody by the accounts receivable manager.
B)Restricted endorsements placed on the check as soon as it arrives.
C)Weekly deposits to a secure bank.
D)Reconciliation of bank accounts each month.

Question 49

As cash processing systems become more automated and integrated,the general concept of segregation of duties

A)becomes less important.
B)becomes more important.
C)does not change.
D)becomes completely computerized without human interaction.

Question 50

Electronic authorization privileges for cash transactions may be best assigned to individuals based on

A)roles and activities falling within appropriate segregation of duties.
B)identification cards with picture identification.
C)encrypted passwords memorized by employees.
D)the principle of "absolute knowledge".

Question 51

Which one of the following is an example of proper internal control that the auditor would expect to find in place for cash processing systems?

A)Periodic internal audits of cash controls and cash management.
B)The treasurer performs monthly bank reconciliations on a timely basis.
C)Prenumbered turnaround documents such as bills of lading.
D)Authentication such as passwords allowing the controller to execute wire transfers.

Question 52

Lockbox arrangements for the collection of cash have which of the following as an advantage?

A)The manual processing associated with maintaining control of the receipts is now shifted to a computer.
B)Cash is deposited directly into the bank.
C)The bank usually establishes only one lockbox geographically next to the client to minimize delay in collections.
D)Eliminates the customer decision for the due date of payment.

Question 53

To its detriment,the FASB has largely ignored the treatment of derivative instruments.

Question 54

A compensating balance arrangement usually causes the company to

A)increase its interest income.
B)increase the effective interest rate on corporate borrowing.
C)decrease the effective interest rate on corporate borrowing.
D)exhibit no change in the effective interest rate on corporate borrowing.

Question 55

Hedging transactions cause significant disclosure in financial statements and may require loss recognition.

Question 56

Which one of the following is not a fundamental control element the auditor would expect to find in place for all cash processing systems?

A)Segregation of duties
B)Electronic payments
C)Authorization of transactions
D)Periodic internal audits

Question 57

What form of evidence is used by the auditor to verify bank reconciliation items?

A)Cash counting observation.
B)General ledger.
C)Invoices.
D)Cutoff statement.

Question 58

Which of the following controls over cash would an auditor expect to observe?

A)Reconciliation of the general ledger to the subsidiary ledger.
B)Checks permanently marked "for deposit only" with the proper routing information.
C)Internal audits of marketable securities held in the company's lockbox.
D)Authorization privileges given only to those employees using the accounting system.

Question 59

The cash account is material to the auditor for which of the following reasons?

A)The cash account is the culmination of a large volume of transactions.
B)The cash account is not as susceptible to fraud as most other accounts.
C)Many debt or loan agreements may have collateral agreements tied to long-term assets.
D)Automated systems might possess strong internal controls.

Question 60

Which one of the following is not a risk associated with cash?

A)Susceptibility to error because of the large volume of transactions.
B)Susceptibility to fraud by misstatement.
C)Susceptibility to poorly developed automated systems with strong audit trail requirements.
D)Susceptibility to fraud by theft.

Question 61

A fraudulent cash scheme to overstate cash assets at year end by recording deposits in transit in both the account from which the cash is withdrawn and the account to which it is transferred is

A)lapping of cash.
B)kiting of cash.
C)embezzlement of cash.
D)restrictive endorsements of cash.

Question 62

Auditing sophisticated financial instruments requires the auditor to obtain an understanding of all of the following except

A)Risks and objectives of the instruments.
B)Contracts and terms of the instrument.
C)Financial accounting and disclosure for the instrument.
D)Credit rating of the client purchasing the instrument.

Question 63

Accounting standards require that investments in marketable securities be presented and disclosed

A)by classification as trading,available-for-sale or held-to maturity.
B)for an analyst's determination of liquidity.
C)for the company's physical possession of the security versus agent holdings.
D)for the expected success of the organization of investment.

Question 64

The audit of investments includes the procedure of examining the documents for any restrictions in order to test the assertion of

A)existence.
B)rights.
C)completeness.
D)valuation.

Question 65

During the audit of EmpireAge,Inc. ,the auditor notes a large series of checks that does not clear for an unusually long time after period end.What may the auditor suspect from this observation?

A)Vendors are eager to get their payments.
B)The reconciliation is accurate.
C)Cash does not exist.
D)The presence of held-checks at period-end.

Question 66

In the course of testing cash balances at the balance sheet date,the auditor foots the bank reconciliation and traces its reported book balance to the trial balance and its bank balance to the standard confirmation in addressing the assertion(s)of

A)rights.
B)valuation.
C)existence.
D)all of the above.

Question 67

Debt instruments with a variable interest rate are referred to as

A)junk bonds.
B)floating rate note.
C)event-risk protected debt.
D)zero-coupon bond.

Question 68

Operational audits of cash management seek to identify areas in which cash management may be improved to contribute to the overall profitability and effectiveness of the organization.The internal auditor would use which of the following procedures on an operational audit of cash?

A)determine the compliance of treasury activities with company policy
B)review procedures for identifying and investing excess funds
C)review procedures for handling cash receipts
D)all of the above

Question 69

How will the auditor most likely utilize the bank reconciliation as evidence in the audit of cash?

A)The auditor sends the reconciliation to the bank for independent verification.
B)The auditor performs the reconciliation for the client to record the proper cash balance.
C)The auditor traces the book balance of the reconciliation to the cutoff bank statement.
D)The auditor tests deposits-in-transit and outstanding items to other corroborating evidence.

Question 70

The standard bank confirmation includes a designated place for the financial institution to report

A)loans and collateral.
B)a reconciliation of the lockbox.
C)cash held on consignment.
D)maturity dates for certificates of deposit.

Question 71

The auditor best determines the existence of investments by

A)footing the schedule of recorded investments.
B)confirming or examining recorded investments.
C)examining the recorded investments for name and title.
D)recomputation of interest and/or gains and losses.

Question 72

Bonds sold at a deep discount from face value on which no periodic interest payments are made are referred to as

A)junk bonds.
B)zero-coupon bonds.
C)pay-in-kind debentures.
D)a treasury bond.

Question 73

A client investing in derivative type investments carries the risk of

A)difficult valuation of the instruments.
B)non-verifiable existence of the instruments.
C)thin FASB guidance relative to disclosure of the instruments.
D)lacking paper trail for completeness of the instruments.

Question 74

Which of the following best represents kiting?

A)Theft of cash for personal use and cover-up using the bank statement.
B)A fraudulent cash scheme to overstate cash assets at year end by recording deposits in transit.
C)Manipulation of financial reporting by increasing both cash and debt by the same amount.
D)Colluding to steal cash by wiring money to a fictional vendor and concealing it with customer payments.

Question 75

The auditor obtains and reviews a cutoff bank statement primarily to

A)verify the balance of cash per the bank's general ledger at the balance sheet date.
B)verify the reconciling items on the year-end bank reconciliation.
C)test for intentional lapping of bank transfers.
D)foot the cutoff bank statement for completeness.

Question 76

The reported fair market value of securities held by the client can be verified by the auditor by

A)comparing the values to those securities held by the auditing firm.
B)confirming the fair values with the client as of the close of the year.
C)comparing the fair values with the fair values of similar securities.
D)comparing the fair values to credible publications and websites.

Question 77

How does the auditor typically test for the existence of cash?

A)counting cash at the depository institution.
B)inquiry of management.
C)standard bank confirmation.
D)tracing the bank reconciliation to the general ledger.

Question 78

Which of the following represents a normal substantive audit procedure for cash balances?

A)Verify material deposits-in-transit to subsequent statements.
B)Review cash confirms received by the client from the bank.
C)Foot cutoff bank statements provided by the financial institutions.
D)Perform kiting techniques to transfer cash between two client accounts.

Question 79

The auditor will send a standard bank confirmation to which of the following?

A)financial institutions of customers using the lockbox.
B)financial institutions for which the client has a balance greater than $0 at the end of the year.
C)financial institutions with which the client has transacted during the year.
D)financial institutions used by significant shareholders.

Question 80

Most international companies purchase hedges to monitor its exposure to

A)interest rate changes.
B)currency fluctuations.
C)commodities price fluctuations.
D)stock price fluctuations.