Question 1

An auditor usually tests the reasonableness of dividend income from investments in stock of public companies by computing the amounts that should have been received by referring to

Accepted Answer

The answer of An auditor usually tests the reasonableness of...

Question 2

Which of the following pairs of accounts would an auditor most likely analyze on the same working paper?

Accepted Answer

Analyzing notes receivable and interest income together allows the auditor to assess the appropriateness of the interest income recognized in relation to the notes receivable balances, ensuring that interest income is accurately recorded in accordance with the terms of the notes.

Question 3

A company has additional temporary funds to invest.The Board of Directors decided to purchase marketable securities and assigned the future purchase and sale decisions to a responsible financial executive.The best person(s)to make periodic reviews of the investment activity authorized by that executive should be

Accepted Answer

An investment committee of the Board of Directors is the best choice for making periodic reviews of the investment activity authorized by the financial executive. This committee would provide a check and balance system to ensure that the executive is making sound investment decisions and that they are in line with the company's goals and objectives. The committee would also be responsible for reviewing and approving any changes to the investment portfolio. Their oversight would ensure that the company's temporary funds are invested wisely, and they would be accountable to the Board of Directors for their decisions.

Question 4

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom?

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The answer of Which one of the following would the...

Question 5

An auditor ordinarily should send a standard confirmation request to all banks with which the client has done business during the year under audit,regardless of the year-end balance,because this procedure

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The answer of An auditor ordinarily should send a standard...

Question 6

Which of the following controls would an entity most likely use in safeguarding against the loss of marketable securities?

Accepted Answer

The most effective control in safeguarding marketable securities would be to have an independent trust company with no direct contact with the employees who have recordkeeping responsibilities hold possession of the securities. This reduces the risk of theft or misappropriation by internal employees or parties with access to the entity's safe. Option B is an ineffective control as it only verifies the securities on the balance sheet date once a year, and the securities could be lost or stolen at any time between the verification dates. Option C is an auditing control and does not prevent loss or theft of the securities. Option D is also an ineffective control as it still relies on a designated member who may have access to the securities and could potentially cause harm.

Question 7

Examining a sample of cancelled checks for an authorized signature tests which of the following assertions for cash?

Accepted Answer

Examining a sample of cancelled checks for an authorized signature tests the assertion of Authorization, as it confirms that the cash disbursement was approved by an authorized individual.

Question 8

A primary purpose of the proof of cash is to

Accepted Answer

The primary purpose of the proof of cash is to ensure that all cash receipts recorded in the cash receipts journal were deposited in the bank account. This helps to prevent fraud and investigate variances, but its main function is to reconcile cash receipts and disbursements. B) and C) are therefore incorrect choices.

Question 9

The auditor should ordinarily mail confirmation requests to all banks with which the client has conducted any business during the year,regardless of the year-end balance,since

Accepted Answer

The confirmation form also seeks information about indebtedness to the bank, which could be a material disclosure for financial statement users. Therefore, the auditor should send confirmation requests to all banks with which the client has conducted any business during the year, regardless of the year-end balance. This is in line with generally accepted auditing standards. B and D are not correct because the primary purpose of bank confirmations is to provide evidence about the existence, completeness, and valuation of cash balances and other bank-related information, not to detect kiting activities or to relieve the auditor of responsibility for nondetection of forged checks.

Question 10

To gather evidence regarding the balance per bank in a bank reconciliation,an auditor would examine all of the following except the:

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The answer of To gather evidence regarding the balance per...

Question 11

Which of the following procedures most likely would give the greatest assurance that securities held as investments are safeguarded?

Accepted Answer

Access to securities requiring the presence of two designated officials provides the greatest assurance that securities held as investments are safeguarded. This control creates a system of checks and balances to ensure that no one person has complete access to the securities. Option A does not provide enough assurance as there is still potential for securities to be accessed before the year-end. Option B relies on the honesty of the employee receiving the proceeds, which may not be foolproof. Option C only addresses the authorization of investment acquisitions and does not provide any measures for safeguarding existing investments.

Question 12

The cashier of Brooke Company covered a shortage in the cash working fund with cash obtained on December 31 from a local bank by cashing,but not recording,a check drawn on the company's out-of-town bank.How would the auditor discover this manipulation?

Accepted Answer

Preparing and detail testing a bank transfer schedule would reveal discrepancies in the timing and recording of transactions between banks, thus uncovering the manipulation.

Question 13

In confirming with an outside agent,such as a financial institution,that the agent is holding investment securities in the client's name,an auditor most likely gathers evidence in support of management's financial statement assertions regarding

Accepted Answer

Confirming with an outside agent about investment securities supports all assertions: Existence (securities exist), Rights and obligations (client owns the securities), and Completeness (all securities are recorded).

Question 14

When an entity uses a trust company as custodian of its marketable securities,the possibility of concealing fraud most likely would be reduced if the

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The answer of When an entity uses a trust company...

Question 15

Tracing a sample of remittance advices to entries in the cash receipts journal tests which of the following assertions for cash?

Accepted Answer

Tracing a sample of remittance advices to entries in the cash receipts journal ensures that all cash received has been recorded (completeness). It does not necessarily test occurrence (whether the cash received was valid), authorization (whether the cash was received in accordance with internal controls), or cutoff (whether the cash was recorded in the correct accounting period).

Question 16

An imprest cash account is

Accepted Answer

An imprest cash account is a type of account that contains a specific or stipulated amount of money that is set aside for a limited purpose. This account is usually used for petty cash purposes, such as reimbursing employees for small expenses. It is a way to ensure that there is always a predetermined amount of cash available for specific needs. Therefore, option C is the correct answer. Options A, B, and D do not accurately describe an imprest cash account.

Question 17

A company holds bearer bonds as a short-term investment.Responsibility for custody of these bonds and submission of coupons for collections of periodic interest probably should be delegated to the

Accepted Answer

Custody and management of short-term investments like bearer bonds should be entrusted to the Treasurer as they are responsible for managing the company's finances and cash management. They will ensure proper custody of the bonds and timely collection of coupons for periodic interest payments. The Chief Accountant may be responsible for recording the transactions related to the bonds, while the Internal Auditor may oversee the internal controls related to the investment. The Cashier may not have the necessary expertise to manage these types of investments.

Question 18

An auditor should trace interbank transfers for the last part of the audit period and first part of the subsequent period to detect whether

Accepted Answer

Tracing interbank transfers can help detect kiting, which is artificially inflating cash balances by transferring funds between bank accounts to create the appearance of available funds. This is why tracing interbank transfers is an effective way to detect such a fraud.

Question 19

All of the following can assist the auditor in testing the existence assertion for investment securities except:

Accepted Answer

Comparing fair value to cost may assist in testing the valuation assertion for investment securities, but it does not directly relate to testing the existence assertion. Physical examination, confirmation with the issuer, and confirmation with the custodian can provide evidence of the existence of investment securities.

Question 20

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

Accepted Answer

The auditor requests a cutoff bank statement to verify reconciling items on the client's bank reconciliation. This statement helps the auditor in determining if any outstanding checks or deposits in transit have been recorded properly in the correct accounting period. By doing so, the auditor can ensure that the balances in the financial statement match with the balances in the bank statement. Thus, option B is the correct answer. Option A is incorrect because the auditor verifies the cash balance reported by the bank independently of the cutoff statement. Option C and D are also incorrect because these procedures are used to detect fraud related to cash disbursement and receipts, respectively.

Quiz 16: Auditing the Financinginvesting Process: Cash and Investments