Question 1

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.

Accepted Answer

The answer of A) Discuss the methodology for designing tests...

Question 2

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

Accepted Answer

Outstanding cheques are a common reconciling item in the bank reconciliation for an imprest payroll account because they represent checks issued but not yet cleared by the bank.

Question 3

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

Accepted Answer

The answer of The starting point for the verification of...

Question 4

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

Accepted Answer

The cash disbursements journal had been held open past December 31, 2014.

Question 5

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

Accepted Answer

Comparison of outstanding cheques and deposits in transit with the prior year bank reconciliation is a common analytical procedure that may detect misstatements in cash. This helps to identify any discrepancies between the company's accounting records and bank statement, which may indicate errors or fraudulent activity. The other options are not specifically related to detecting misstatements in cash.

Question 6

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

Accepted Answer

The answer of In an effort to satisfy the completeness...

Question 7

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

Accepted Answer

A cutoff bank statement is requested to verify reconciling items on the client's bank reconciliation, such as outstanding checks or deposits in transit that may have cleared after the end of the period being audited. This ensures that the client's cash balance is accurately reflected in the financial statements. It is not used to detect lapping or kiting, nor is it used to verify the cash balance reported on the bank confirmation inquiry form.

Question 8

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?

Accepted Answer

Having the bank statements provided unopened to an independent reconciler ensures that no one has had the opportunity to alter, delete or add any documents before they are reviewed and reconciled. This adds an extra layer of security to the process.

Question 9

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

Accepted Answer

A cutoff bank statement is a partial-period bank statement which is sent by the bank directly to the public accounting firm's office along with related cancelled cheques, duplicate deposit slips, and other documents. This statement helps in verifying the reconciling items between the bank and company records, which occur due to timing differences in recording transactions. Options A, B, and D are incorrect as they do not accurately describe the features of a cutoff bank statement.

Question 10

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.

Accepted Answer

The answer of A) Distinguish between i) risks of error,...

Question 11

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

Accepted Answer

Bank reconciliations are typically verified in their entirety during an audit, ensuring that the cash balance reported by the company matches the balance reported by the bank. This comprehensive verification process reduces the need for additional testing on the reasonableness of the cash balance, making it less important than for most other audit areas where such a direct and complete verification method is not possible.

Question 12

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

Accepted Answer

The answer of The audit procedure that requires the auditor...

Question 13

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?

Accepted Answer

The audit assertion associated with the audit procedure of recalculating cash in foreign currencies using exchange rates determined by the auditor is valuation. This assertion ensures that the amounts presented in the financial statements are appropriately measured and valued in accordance with applicable accounting standards.

Question 14

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

Accepted Answer

The cutoff bank statement provides information on deposits in transit and cheques outstanding as of the end of the year, which are necessary for completing the tests of the client's bank reconciliation. The client's journals and ledgers for the year under audit may provide some useful information, but may not have all the necessary details on outstanding items and may not reflect any adjustments made during the bank reconciliation process. The cancelled cheques may help to identify specific transactions, but do not provide information on outstanding items or reconciling items. The client's journals and ledgers for the subsequent year are not relevant to verifying the accuracy of the bank balance as of the end of the year under audit.

Question 15

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

Accepted Answer

The answer of After the bank confirmation has been received...

Question 16

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

Accepted Answer

The auditor should trace the details of the two outstanding cheques to the cash disbursements journal to ensure that the cheques were properly recorded and to confirm that they were issued for valid business purposes. This will help the auditor identify any potential errors or fraudulent activity. Tracing the cheques to their associated expense accounts or reperforming the calculations in the bank reconciliation would not address the issue of the outstanding cheques, and comparing the total of the bank reconciliation to the bank confirmation would not provide any additional information on the outstanding cheques.

Question 17

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

Accepted Answer

The answer of The test of balances procedure that requires...

Question 18

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?

Accepted Answer

The answer of Serena is the assistant controller of Opus...

Question 19

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

Accepted Answer

The answer of If the auditor does not obtain a...

Question 20

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

Accepted Answer

Lack of segregation of duties between the handling of cash and the recording of cash creates an opportunity for theft of cash as there is no independent verification or oversight.

Quiz 17: Audit of Cash Balances