Deck 17: Auditing Cash and Investments

Question 1

The account balance audit objective, "Year-end transfers of cash between banks are recorded in the proper period", is derived from the:

A) occurrence assertion.
B) cut-off assertion
C) completeness assertion.
D) classification assertion

Answer 1

cut-off assertion

Question 2

Which of the following would not normally be done by the auditor in connection with the subsequent period's bank statement?

A) use a bank statement for a period ending at least 7 days after year-end.
B) trace deposits in transit on the bank reconciliation to deposits on the bank statement.
C) scan the cut-off statement for unusual items.
D) all the above tasks would be done by the auditor in connection with the subsequent period's bank statement

Answer 2

D

Question 3

Audit tests to detect lapping involve which of the following?

A) confirm accounts payable.
B) compare details of cash payments journal entries with the details of corresponding daily deposit slips.
C) use a bank cut-off statement.
D) make a surprise cash count of currency and customers cheques on hand and oversee the banking of these amounts

Answer 3

D

Question 4

In working with the bank reconciliation and the subsequent period's bank statement, the auditor finds that a prior-period cheque was not on the reconciliation as an outstanding cheque. This may be an indication of:

A) lapping.
B) kiting.
C) window dressing.
D) an attempt to conceal a cash shortage.

Question 5

The practice where a cheque is paid into a bank account of an entity in a group of companies before balance date but recorded by the payer as a disbursement that occurred after balance date is known as:

A) kiting
B) lapping
C) low-balling
D) none of the above.

Question 6

The control of all funds during the count of cash on hand is meant primarily to prevent:

A) any chance of double counting.
B) transfers by the entity's personnel of counted to uncounted funds
C) unauthorised disbursements.
D) cash going missing

Question 7

During the count of cash on hand, it is not necessary for the auditor to:

A) insist on the presence of an internal auditor throughout the count.
B) insist on the presence of the custodian of the cash throughout the count.
C) obtain a signed receipt from the custodian on return of the funds.
D) ascertain that all undeposited funds are payable to the order of the client, either directly or through endorsement.

Question 8

If the petty cash account is tested in detail by the auditor, it is usually because:

A) it is always material.
B) it is quickly and easily tested.
C) of the possibility of unrecorded disbursements.
D) the company requested a petty cash audit.

Question 9

Which of these combinations is a correct representation of the usual assessed levels of inherent risk in the cash area? $$\begin{array} { l l l } \text { High } & \text { Law } \\\text { A valuation } & \text { completeness } \\\text { B. existerice } & \text { completeness } \\\text { C valuation } & \text { rights and obligations } \\\text { D existence } & \text { valuation }\end{array}$$

A) A
B) B
C) C
D) D

Question 10

The starting point for verifying cash balances is to:

A) review the current period's activity in the general ledger cash accounts for any significant entries that are unusual.
B) determine the mathematical accuracy of cash balances in the general ledger.
C) trace the current period's opening balances to the closing audited balances in the previous year's working papers.
D) obtain any schedules that might have been prepared by the entity showing undeposited cash receipt summaries.

Question 11

The auditor should trace bank transfers using a bank transfer schedule primarily to determine if:

A) cash has been understated due to kiting.
B) cash has been understated due to lapping.
C) cash has been overstated due to kiting.
D) cash has been overstated due to lapping.

Question 12

In performing analytical procedures in the cash area, the auditor will usually:

A) compare this year's balance(s) to the operating profit
B) compare this year's balance(s) to total assets.
C) compare this year's balance(s) to the level of sales as a percentage.
D) often won't perform any analytical review.

Question 13

Audit evidence for share holdings on the CHESS register is normally the:

A) debenture certificate.
B) CHESS share certificate.
C) CHESS holdings statement.
D) cancelled (or presented) cheque.

Question 14

Kiting is possible when:

A) one person handles cash receipts and another maintains the accounts receivable ledger.
B) one person handles cash receipts and maintains the accounts receivable ledger.
C) one person issues cheques and another records them.
D) one person issues cheques and records them.

Question 15

Unlike other balance sheet account balances cash:

A) is illiquid.
B) may be an asset or a liability.
C) cannot have a credit balance.
D) cannot have a debit balance.

Question 16

Since the custodian may have substituted personal cash to cover a cash shortage, the count of cash on hand provides weak evidence for the:

A) existence assertion.
B) completeness assertion.
C) rights and obligations assertion.
D) valuation assertion

Question 17

Information concerning 'other arrangements' with banks is obtained from the client's banks, in the bank confirmation form. This information is likely to include:

A) compensating liabilities.
B) contingent balances.
C) unused facilities.
D) average daily balances.

Question 18

The standard bank confirmation requests information about all of the following except:

A) account balances.
B) loan balances.
C) other arrangements that the client may have with the bank.
D) secondary endorsements.

Question 19

Initial substantive procedures for cash balance assertions may include all of the following except:

A) trace opening balances for cash on hand and in bank to the previous year's working papers.
B) review activity in general ledger accounts for cash and investigate entries that appear unusual in amount or source.
C) obtain entity-prepared summaries of cash on hand and in bank, verify mathematical accuracy and determine agreement with general ledger.
D) all of the above are initial substantive procedures for cash balance assertions.

Question 20

In working with the bank reconciliation and the subsequent period bank statement, the auditor finds that many of the cheques on the outstanding cheque list did not clear during the cut-off period. This may be an indication of:

A) lapping.
B) kiting.
C) window dressing.
D) an attempt to conceal a cash shortage.

Question 21

One 'red flag' that may indicate fraud in relation to cash register operations is:

A) unusually low inventory shrinkage.
B) increasing cash sales, relative to credit card sales.
C) cashiers who cannot issue refunds without supervision.
D) multiple refunds or voids just under the review limit.

Question 22

One of the commonly used substantive tests for cash balances is to confirm the bank balance directly with the bank through a Bank Confirmation Audit Request. What is the difference between the requirements of GS 016.and accepted practice in the industry? Name five of the categories of information requested on a standard Bank Confirmation Audit Request.

Question 23

In auditing tests of details of balances for investments, the auditor's procedures may include all of the following except:

A) inspecting and confirming chess records.
B) inspecting and counting securities on hand.
C) recalculating investment revenue earned.
D) vouching purchases and sales of investments to brokers' advices

Question 24

Verification procedures for investment income is least likely to include:

A) recalculation by the auditor.
B) direct confirmation with the investee.
C) inspection of debenture certificates.
D) inspection of dividend record books.

Question 25

ASA 600 (ISA 600) recommends that in the audit of group entities, where the auditor is not also the auditor of another group entity, the principal auditor may:

A) be able to rely on the work of the other auditor.
B) ask the other auditor about the independence requirements, and offer representations as to compliance.
C) send a detailed questionnaire to the other auditor
D) ignore the findings of the other auditor.

Question 26

Analytical procedures applied to investment balance sheet accounts provide:

A) evidence for the existence assertion.
B) evidence for the completeness assertion.
C) evidence for the presentation or disclosure assertion.
D) little or no evidence.

Question 27

The correct statement concerning the materiality of securities is:

A) short-term investments may be immaterial to the solvency position but material to the income statement.
B) long-term investments may be immaterial to both the financial position and the income statement.
C) long-term investments may be immaterial to the financial position but material to the income statement.
D) short-term investments may be material to the solvency position but immaterial to the income statement.

Question 28

The inspecting and counting of securities on hand is ordinarily performed simultaneously with the auditor's:

A) counting of cash.
B) observing of the inventory counting.
C) conducting analytical procedures.
D) checking the bank reconciliation.

Question 29

Cash should be correctly identified and classified in the balance sheet. The classification that is correct is:

A) cash on deposit is a non-current asset.
B) cash on deposit is a current asset.
C) fixed-term deposits are always non-current assets.
D) fixed-term deposits are always current assets.

Question 30

Although the auditor adopts a predominantly substantive approach to the audit of cash balances, an understanding of procedures for maintaining accountability over cash is necessary for the design of substantive tests of details. Name and describe the two main procedures for internal control of cash.

Question 31

Tests of details of balances for investment balance assertions include all of these except:

A) inspect and count securities on hand.
B) confirm securities held by others.
C) vouch entries in investment and related income and equity accounts.
D) recalculate investment revenue earned.

Question 32

The statement that is not true concerning the confirmation of securities held by outsiders for safe keeping is;

A) either positive or negative confirmations can be used.
B) confirmations should be requested as of the date other securities are counted.
C) the auditor should receive responses directly from the custodian.
D) the data confirmed are the same as the data that should be noted when the auditor is able to inspect the securities.

Question 33

1. Identify the matters the auditor should observe when inspecting securities.
2.List the requirements for the presentation of investments in securities that would conform to the disclosure requirements of Corporations Act and Accounting Standards.

Question 34

Which of the following is correct concerning the inspecting and counting of securities on hand?

A) a receipt should be provided by the auditor to the custodian when the securities are returned.
B) the auditor should observe the broker's advice number on the document.
C) all securities should be controlled by the auditor until the count is completed.
D) all of the above are correct

Question 35

Are there any issues that may arise with the valuation of cash balances?

Question 36

For most entities investment transactions are:

A) infrequent, but individual transactions can be substantial.
B) frequent, but individual transactions are usually substantial.
C) infrequent, but individual transactions are usually small.
D) frequent, but individual transactions are usually small.

Question 37

For infrequently traded securities, which are material in amount, the auditor should ordinarily:

A) estimate the market price themselves
B) require the security to be classified as a long-term investment.
C) obtain direct confirmation from an independent broker.
D) inspect the books of the investee directly.

Question 38

The predominantly substantive approach is generally used for investing transactions because of:

A) infrequent transactions.
B) high volume of transactions.
C) ineffective controls.
D) effective controls.

Question 39

When inspecting securities on hand the auditor needs to record all these matters except:

A) the name of the owner.
B) the certificate number of the document
C) the description of the security
D) all of the above need to be recorded

Question 40

Why is detection risk for verifying cash balances invariably low? Why does the auditor not often use analytical procedures for the audit of cash balances?

Question 41

Why is the predominantly substantive approach used for most entities in the audit of investment balances? Why is it rarely possible to obtain much evidence from analytical procedures in the audit of investment balances?

Question 42

What is the purpose of 'window dressing'? How would it be perpetrated? What is the main indicator of window dressing, and why does the indicator work?

Question 43

One of the commonly used substantive tests for cash balances is to verify bank reconciliations performed by the entity. Name the five steps in verifying the bank reconciliation. Are there circumstances under which auditors might perform the bank reconciliation for themselves? If not, why not? If so, what are they?

Question 44

Name and describe five possible internal controls related to the investment function.

Question 45

What should the auditor do to perform cash counts properly? Why are they important to the audit of cash on hand? Why is a cash count often not performed?