Deck 10: Auditing Cash and Marketable Securities

Question 1

Because substantive audit procedures are largely ineffective for cash accounts,auditors typically focus on tests of controls when the risk of material misstatement is assessed at a high level.

Answer 1

False

Question 2

Automated controls over cash eliminate the inherent risks associated with the cash account.

Answer 2

False

Question 3

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.

Answer 3

False

Question 4

In auditing cash accounts,auditors typically focus primarily on the existence/occurrence and completeness assertions.

Question 5

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

Question 6

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

Question 7

A risk of fraud is not associated with petty cash funds because of the small amounts of money involved.

Question 8

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

Question 9

A turnaround document is an effective control because it contains information useful for further processing of a payment received from a customer.

Question 10

Cash and cash equivalents reported on the balance sheet may include debt securities that mature less than six months from the balance sheet date.

Question 11

Skimming occurs when an employee makes a sale but does not record it and steals the cash.

Question 12

Client management's review of monthly bank reconciliations prepared by employees is an example of a control over the accuracy of cash balances that the auditor might test.

Question 13

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

Question 14

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 15

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

Question 16

Periodic bank reconciliations should be performed by the individual who makes the client's bank deposits.

Question 17

An assessment 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 18

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

Question 19

The existence of debt covenants with restrictions related to cash or working capital increase the risks of material misstatement in cash accounts.

Question 20

Planning analytical procedures for cash balances typically include trend analysis and ratios for comparison with the auditor's expectations.

Question 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

Notes issued by major corporations are known as commercial paper.

Question 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

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 34

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

Question 35

Smurfing 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 36

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

Question 37

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

Question 38

Independent reconciliations of bank statement balances with the balance on the books should identify misstatements and any unusual banking activity.

Question 39

Money laundering is designed to create the appearance that large sums of cash obtained from criminal activities,such as drug trafficking,originated from legitimate business sources.

Question 40

Gains and losses are not considered by auditors in testing marketable securities,as they do not need to be disclosed.

Question 41

Which of the following is not a normal edit test as part of computerized control for checks?

A)Field checks.
B)Self-checking digits.
C)Cross-references.
D)Reasonableness tests.

Question 42

Under which of the following circumstances would the valuation assertion for cash most likely have an increased level of inherent risk?

A)Client has cash holdings in foreign currency in a politically unstable country.
B)Client has cash holdings in multiple U.S.financial institutions over a wide geographic area.
C)Client holds investments in complex financial instruments.
D)All of the above.

Question 43

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)Restrictive endorsements placed on checks as soon as they arrive.
C)Weekly deposits to a secure bank.
D)Reconciliation of bank accounts each month.

Question 44

During the testing of a year-end bank reconciliation,an auditor noticed that the majority of checks listed as outstanding at year-end did not clear the bank until the middle of the subsequent month.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)Checks were issued before year-end but not mailed until the subsequent period.

Question 45

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 46

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

A)Large volume of transactions.
B)Importance of meeting debt covenants.
C)Complex valuation issues.
D)Easy to manipulate.

Question 47

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 48

All marketable securities are carried at fair market value on the balance sheet.

Question 49

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 50

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

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

Question 51

Many financial instruments offer a potentially higher return for investors along with a reduced level of risk.

Question 52

When auditing financial hedges,the auditor should understand the product,identify relevant risks and controls,and understand the appropriate accounting.

Question 53

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 54

Thinly traded securities have a greater inherent risk related to valuation.

Question 55

Which of the following situations would normally be discovered by testing 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 56

When there is a ready market for a financial instrument,the audit procedures related to valuation and disclosures are more straightforward than when the instrument is not readily marketable.

Question 57

The cash account is significant to the auditor for which of the following reasons?

A)The cash account balance 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 58

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

Question 59

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 60

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 61

Which of the following would not be used as part of analytical procedures 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 62

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.

Question 63

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 64

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 65

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 66

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 67

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 68

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 69

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

A)Footing the schedule of recorded investments.
B)Confirming or examining recorded investments.
C)Reviewing a schedule of investments sold during the year.
D)Recomputing interest and/or gains and losses.

Question 70

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

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

Question 71

Which of the following best describes a fraudulent 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 72

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 73

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 74

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 75

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 76

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 77

Which of the following best describes kiting?

A)Theft of cash for personal use and cover-up using the bank statement.
B)A fraudulent scheme to overstate cash at year-end by manipulating year-end transfers between bank accounts.
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 78

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 confirmations 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 79

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 80

Which of the following types of securities is valued at amortized cost,subject to an impairment test?

A)Held-to-maturity securities.
B)Available-for-sale securities.
C)Cash equivalent securities.
D)Trading securities.