Question 1

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

Accepted Answer

The presentation of cash is normally straightforward, but restrictions on cash or compensating balance agreements with a bank can complicate it.

Question 2

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

Accepted Answer

Deposits-in-transit are deposits made by the company that have not yet been recorded by the bank because they were made after the bank statement cutoff date. Therefore, they should appear on the next bank statement as deposits. As such, they should be listed as outstanding deposits on the company's year-end bank reconciliation. When the next bank statement is received, these deposits-in-transit will no longer be outstanding as they will have been recorded by the bank.

Question 3

Auditors are not always required to obtain bank confirmations.

Accepted Answer

Auditors are not always required to obtain bank confirmations, but they may choose to request them as part of their auditing procedures. The need for bank confirmations can depend on the nature and complexity of the client's operations, as well as the level of risk associated with the financial statements. However, in some cases, auditors may rely on other forms of evidence or perform alternative procedures instead of obtaining bank confirmations.

Question 4

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

Accepted Answer

Inadequate internal controls increase the risk of fraud, so auditors must extend their procedures to assess the possibility of material fraud when internal controls are lacking.

Question 5

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.

Accepted Answer

A monthly bank reconciliation should ideally be performed by someone who is not involved in the handling or recording of cash receipts and disbursements to ensure independence and objectivity, enhancing the control over the ending cash balance.

Question 6

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

Accepted Answer

The answer of The auditor is generally concerned about the...

Question 7

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.

Accepted Answer

The answer of Instead of receiving a cutoff bank statement...

Question 8

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

Accepted Answer

The answer of Explain the purpose of testing the client's...

Question 9

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.

Accepted Answer

Positive pay is a service provided by banks to their customers to reduce fraudulent checks. The bank matches each check presented for payment against the electronic records of checks provided by the company, including account number, check number, and dollar amounts. If there is any discrepancy, the bank will alert the company to the potential fraud, and they can decide whether to approve or reject the payment. This helps to prevent check fraud and protect the company's finances.

Question 10

The auditor uses a proof of cash to determine whether

Accepted Answer

A proof of cash is used to reconcile the cash balance shown on the company's books with the actual cash on hand or in the bank. None of the other options pertain to this concept.

Question 11

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.

Accepted Answer

Reviewing Board of Director minutes and loan agreements for restrictions on cash is a common test of details that the auditor should perform to determine if cash is appropriately described and presented in the financial statements. This helps to ensure that any restrictions on cash are accurately disclosed in the financial statements.

Question 12

A proof of cash represents

Accepted Answer

A proof of cash is a procedure used in auditing to reconcile the cash balance shown on the company's bank statement with the balance shown in its accounting records. This involves both a substantive test of transactions to ensure that all cash transactions have been recorded accurately, and a test of details of balances to ensure that the cash balance is accurate according to the company's records. Therefore, the best choice is C - a substantive test of transactions and test of details of balances.

Question 13

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

Accepted Answer

The answer of Internal controls over year-end cash balances in...

Question 14

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

Accepted Answer

A proof of cash compares the cash transactions listed in the company's bank statement to those recorded in the general ledger. Therefore, it is effective at identifying misstatements related to checks recorded in the books for an amount different from that on the check. This is because such misstatements will be reflected in the reconciling items between the bank statement and the general ledger, which are the focus of the proof of cash. The other misstatements listed are not directly related to the cash balance and may require other audit procedures to detect.

Question 15

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

Accepted Answer

A proof of cash is typically prepared when there are material internal control weaknesses in cash. This document helps auditors reconcile the bank balance with the accounting records and identify any discrepancies or fraudulent activity. It is important to perform this procedure when there are control weaknesses to ensure the accuracy of the cash balance and prevent potential misstatements. Weaknesses in other areas, such as accounts receivable, revenue, accounts payable, inventory, or payroll, may require different audit procedures.

Question 16

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

Accepted Answer

A monthly proof of cash is used to reconcile the amounts recorded in the books with the amounts included in the bank statement. This helps to identify any discrepancies and potential errors in either the books or the bank statement. It ensures that the month-end balance is correct and accurate. By reconciling the amounts, cash transfers can also be identified and any necessary adjustments can be made to the account balances.

Question 17

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.

Accepted Answer

The answer of A statement near the bottom of the...

Question 18

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

Accepted Answer

Auditing year-end cash follows the same methodology as auditing other balance sheet accounts, which includes assessing the adequacy of internal controls, collecting and analyzing supporting documentation, and performing substantive testing to verify the accuracy of the account balance.

Question 19

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.

Accepted Answer

The answer of In testing the year-end balance in the...

Question 20

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

Accepted Answer

The answer of Explain what is meant by a cutoff...

Quiz 23: Audit of Cash and Financial Instruments