Deck 10: Auditing Cash and Marketable Securities

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

When a lockbox is used,the financial institution records the deposit and then forwards customer transaction data to the client to update cash and accounts receivable records.

Answer 3

True

Question 4

Auditors usually perform relatively limited substantive analytics for cash accounts and instead focus on substantive tests of details.

Question 5

The existence or occurrence assertion as related to cash is concerned with proper classification on the balance sheet.

Question 6

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 7

The auditor's performance of an independent reconciliation of the client's bank accounts provides evidence as to the rights and obligations of the year-end cash balances.

Question 8

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

Question 9

An imprest payroll account should never reach a zero balance.

Question 10

When the year-end cash balance is immaterial,audit procedures on the cash account are unnecessary.

Question 11

In assessing risk relating to fraud,auditors brainstorm about potential fraud risks.

Question 12

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.

Question 13

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

Question 14

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

Question 15

A perception of being underpaid is not a typical incentive for a fraudster

Question 16

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

Question 17

The audit of the cash account is inherently risky due to volume of activity,liquidity and the account's susceptibility to fraud.

Question 18

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 19

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

Question 20

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 21

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

Question 22

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

Question 23

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 24

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

Question 25

Auditors test the assertion of completeness by determining if any restrictions on the use of commercial paper by an entity are disclosed in the footnotes.

Question 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

The valuation/allocation and completeness assertions are usually the most relevant for auditing cash.

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

Notes issued by major corporations are known as commercial paper.

Question 37

The valuation assertion is most relevant to the audit of marketable securities.

Question 38

The recording of a marketable security depends,in large part,on management's intention with the investment.

Question 39

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

Question 40

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

Question 41

A company must do which of the following,if a company maintains a compensating balance of cash?

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 42

Effective internal control over the cash account requires that the person responsible for making the bank deposit does not post the increase to cash in the accounting system.

Question 43

The cash account is significant 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)Cash is the only account that provides opportunity for fraud.
D)Automated systems do not possess the capability to maintain strong internal controls over cash.

Question 44

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

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

Question 45

Inadequate records of cash by the company can provide opportunity for fraud.

Question 46

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

A)The large volume of transactions.
B)Importance of meeting debt covenants.
C)Documents are prenumbered.
D)Easy to manipulate.

Question 47

Which of the following describes documents that accompany customer payments to help the clerk identify the payments?

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 48

Electronic authorization privileges for cash transactions may be best assigned to individuals based on which of the following?

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 49

Derivative instruments are long-term hybrid-type securities meant to increase the return on investments.

Question 50

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

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

Question 51

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

Question 52

Which of the following situations would normally be discovered as part of the test 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 53

Which of the following controls would be most successful in mitigating the theft of customer checks received in the mail?

A)Custody of receipts 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 54

A compensating balance arrangement usually results in which of the following for a company?

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

Management has developed cash management techniques for which of the following reasons?

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 56

Which of the following is 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?

A)Lockbox.
B)Bank transfer.
C)Imprest bank account.
D)Imprest Account.

Question 57

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 58

Lockbox arrangements for the collection of cash have which of the following advantages?

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 59

As cash processing systems become more automated and integrated,which of the following is true about the general concept of segregation of duties?

A)Segregation of duties becomes less important.
B)Segregation of duties becomes more important.
C)The importance of segregation of duties does not change.
D)Segregation of duties becomes completely computerized without human involvement.

Question 60

During the testing of a year end bank reconciliation,an auditor noticed that the majority of checks listed as outstanding at year-end had not cleared the bank.Which of the following is a likely explanation?

A)A high probability of kiting.
B)A high probability of lapping.
C)The year-end cash disbursements records had been closed prior to year-end.
D)The year-end cash disbursements records had been held open past year-end.

Question 61

Which of the following represents a typical 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 62

When 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.Which of the following assertions is being tested with these procedures?

A)Rights.
B)Valuation.
C)Existence.
D)All of the above.

Question 63

Which of the following best describes 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 64

Which of the following would not be used as part of analytical procedure for marketable securities?

A)Develop expectations about the level of amounts in ending balances.
B)Develop expectations about the relationship between the balances.
C)Verify ending balances prior to calculating the percent change.
D)Review changes in the balances,risk composition,and classification types.

Question 65

Which of the following would the auditor use to determine the existence of investments?

A)Footing the schedule of recorded investments.
B)Confirming or examining recorded investments.
C)Examining the recorded investments for name and title.
D)Recomputing interest and/or gains and losses.

Question 66

The emphasis in verifying petty cash is normally on which of the following?

A)Year-end balance.
B)Controls over petty cash.
C)Transactions for the period.
D)Balance sheet classification.

Question 67

Which of the following is the primary reason the auditor obtains and reviews a cutoff bank statement?

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 68

Which of the following best describes 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?

A)Lapping of cash.
B)Kiting of cash.
C)Embezzlement of cash.
D)Restrictive endorsements of cash.

Question 69

When auditing marketable securities,the auditor will do which of the following?

A)Examine broker's advices evidencing purchase of securities.
B)Recompute income.
C)Foot schedule.
D)Both A and B.
E)All of the above.

Question 70

Which assertion related to investments is tested when the auditor examines the documents for any restrictions?

A)Existence.
B)Rights.
C)Completeness.
D)Valuation.

Question 71

Which of the following items would not normally appear on bank reconciliations?

A)Balance per bank.
B)Outstanding deposits list.
C)Balance per books.
D)Outstanding checks list.

Question 72

Assume that an auditor notes a large series of checks that does not clear the bank for an unusually long time after period end.Which of the following would the auditor likely 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 73

Which of the following is required by accounting standards for the presentation and disclosure of investments in marketable securities?

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 74

Which of the following is the most relevant assertion with regards to the audit of cash?

A)Completeness.
B)Rights and obligations.
C)Valuation and allocation.
D)Presentation and disclosure.

Question 75

Investments in securities are classified as which of the following?

A)Held-to-maturity.
B)Trading securities.
C)Available-for-sale securities.
D)All of the above.

Question 76

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 77

The reported fair market value of securities held by the client can be verified by the auditor through which of the following procedures?

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 78

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 79

Which of the following procedures does the auditor typically perform when testing the existence of cash?

A)Counting cash at the depository institution.
B)Inquiry of management.
C)Sending a standard bank confirmation.
D)Tracing the bank reconciliation to the general ledger.

Question 80

The ease with which cash can be stolen is most related to which of the following risks?

A)Control risk.
B)Inherent risk.
C)Detection risk.
D)Liquidity risk.