Deck 10: Cash and Investment Business Processes

Question 1

Management prepares the financial statements and footnotes but the auditor prepares the discussion of the investments.

Answer 1

False

Question 2

Understatement errors are far more likely to occur in the cash and investment cycle than overstatement errors.

Answer 2

False

Question 3

When using analytical procedures,the auditor often considers non-financial measures in the evaluation of changes from one year to the next.

Answer 3

True

Question 4

According to FASB Concept Statement No.5,Recognition and Measurement in Financial Statements of Business Enterprises,an asset is recognized when the benefit of another asset has been reduced or when a liability has been incurred.

Question 5

Because the most likely misstatement in the cash and investment process are understatement errors,and valuation is the most important assertion for the investment process and existence is the most important assertion for the cash balance.

Question 6

On the balance sheet,the cash and investment process includes

A)ending balance in the cash account
B)gains and losses on the sale of investments
C)interest and dividends
D)unrealized gains and losses on investment securities classified as trading securities
E)adjustments to other comprehensive income related to unrealized gains and losses on available-for-sale investment securities
F)both A and B
G)both A and E
H)both C and D

Question 7

The totals at the end of the year in the cash and investment process expense accounts reflect

A)all the business conducted during the year
B)only the transactions completed during the year
C)all the transactions recorded during the year
D)only the transactions initiated during the year

Question 8

On the balance sheet,the cash and investment process includes

A)ending balance in the cash account
B)interest and dividends
C)gains and losses on sale of investments
D)trading securities
E)unrealized gains and losses on investment securities classified as trading securities
F)both A and D
G)both B and C
H)both D and E

Question 9

On the income statement,the cash and investment process includes

A)ending balance in the cash account
B)gains and losses on the sale of investments
C)net income and dividends
D)unrealized gains and losses on investment securities classified as trading securities
E)adjustments to other comprehensive income related to unrealized gains and losses on available-for-sale investment securities
F)both A and C
G)both A and E
Both B and D

Question 10

The totals in the cash and investment process balance sheet accounts reflect

A)all the transactions recorded during the year
B)a beginning balance as of the last day of the current year
C)only the amounts in the accounts on the last day of the year
D)the total amount of the transactions recorded during the year
E)the net amount of the transactions recorded during the year
F)both A and B
G)both C and E
H)both D and E

Question 11

On the income statement,the cash and investment process includes

A)ending balance in the cash account
B)gains and losses on the purchase of investments
C)interest and dividends
D)unrealized gains and losses on investment securities classified as trading securities
E)adjustments to other comprehensive income related to unrealized gains and losses on available-for-sale investment securities
F)both A and B
G)both C and D
H)both D and E

Question 12

A bank statement is used by the auditors to verify cash investments each month.

Question 13

The three categories of investment are: (1)investments held to maturity, (2)trading securities,and (3)available for sale investments.

Question 14

On the income statement,the cash and investment process includes

A)ending balance in the cash account
B)gains and losses on the sale of investments
C)interest and dividends
D)realized gains and losses on investment securities classified as trading securities
E)adjustments to other comprehensive income related to unrealized gains and losses on available-for-sale investment securities
F)both B and C
G)both C and D
H)both D and E

Question 15

Management makes the decision to design internal controls to prevent or detect misstatements in the financial statements based on whether the volume of transactions in this process justifies the use of internal controls.

Question 16

For the cash and investment process,management asserts that cash and investments exist at the balance sheet date and that the gain and loss transactions recorded for the investments occurred during the year.

Question 17

On the balance sheet,the cash and investment process includes

A)interest and dividends
B)unrealized gains and losses on investment securities classified as trading securities
C)available for sale investments
D)gains and losses on sale of investments
E)adjustments to other comprehensive income related to unrealized gains and losses on available-for-sale investment securities
F)both A and B
G)both C and E
H)both D and E

Question 18

The auditor must determine whether the cash and investment process transactions recorded in the revenue and expense accounts during the year

A)have been properly recorded in accordance with GAAS
B)have been fairly presented at the end of the year
C)are capable of being transferred to the owners equity account
D)have comparable transactions on the balance sheet

Question 19

On the balance sheet,the cash and investment process includes

A)interest and dividends
B)investments held to maturity
C)unrealized gains and losses on investment securities classified as trading securities
D)trading securities
E)gains and losses on sale of investments
F)both A and E
G)both B and C
Both B and D

Question 20

On the balance sheet,the cash and investment process includes

A)interest and dividends
B)investments held to maturity
C)available for sale investments
D)gains and losses on sale of investments
E)unrealized gains and losses on investment securities classified as trading securities
F)both A and B
G)both B and C
H)both D and E

Question 21

The auditor is responsible,in the cash and investment process,for determining

A)only if the ending balance in the balance sheet account is stated in accordance with the applicable financial reporting framework.
B)only if the ending balance in the income statement account is stated in accordance with the applicable financial reporting framework.
C)only if the beginning balance in the balance sheet account is stated in accordance with the applicable financial reporting framework.
D)only if the beginning balance in the income statement account is stated in accordance with the applicable financial reporting framework.

Question 22

The documents in the investment business process include the

A)bank advice
B)bank transfer schedule
C)bank reconciliations
D)standard bank recalculation
E)bank purchase schedule
F)both A and B
G)both B and C
H)both D and E

Question 23

The most efficient way for the auditor to determine whether the accounts in the business process are prepared in accordance with the applicable financial reporting framework used by the company is for the auditor to consider

A)misstatements that have occurred in the business process
B)misstatements that might occur in the business process and then gather evidence to see if the misstatements have occurred
C)misstatements that are reasonably certain to occur in the business process and then go gather evidence to see if the misstatements have occurred
D)intentional misstatements that might occur in the business process and then go gather evidence to see if the misstatements have occurred

Question 24

In the cash and investment process,clients may understate

A)unrealized holding losses on trading securities
B)unrealized holding losses on held to maturity securities
C)unrealized holding losses on available-for-sale securities
D)realized holding gains and losses on securities
E)realized holding gains or losses on available-for-sale securities

Question 25

The auditor's role in an audit of a business process is

A)to determine whether the accounts in the business process are prepared in accordance with the applicable financial reporting framework used by the company
B)to determine whether the accounts in the business process are free from material misstatements
C)to determine whether the accounts in the business process are prepared in accordance with the applicable financial reporting framework used by the auditor
D)to determine whether the accounts in the business process are prepared in accordance with the applicable financial reporting framework used by management

Question 26

Unrealized holding gains and losses on available-for-sale securities are

A)included on the balance sheet of the company and have an impact on net income
B)included on the income statement of the company and have an impact on net income
C)included on the balance sheet of the company and have no impact on net income
D)included on the income statement of the company and have no impact on net income

Question 27

Unrealized holding gains and losses are recognized on trading securities at the end of each year,based on

A)the difference between the purchase price and the market value of the security at the end of the year
B)the difference between the carrying value and the market value of the security at the end of the year
C)the difference between the purchase price and the carrying value of the security at the end of the year
D)the average of the purchase price and the market value of the security at the end of the year
E)the difference between the market value of the security last year and the market value of the security this year

Question 28

In planning the audit,the auditor determines

A)the relevance of evidence,the timing of the evidence collection,and the extent of evidence to be gathered
B)the nature of evidence,the method of the evidence collection,and the extent of evidence to be gathered
C)the nature of evidence,the timing of the evidence collection,and the reliability of evidence to be gathered
D)the nature of evidence,the timing of the evidence collection,and the extent of evidence to be gathered

Question 29

Unrealized holding gains and losses on trading securities are

A)included on the balance sheet of the company and have an impact on net income
B)included on the income statement of the company and have an impact on net income
C)included on the balance sheet of the company and have no impact on net income
D)included on the income statement of the company and have no impact on net income

Question 30

Once an asset is acquired,it continues to be measured at

A)the amount initially recorded,unless the measurement method changes
B)the amount initially measured,unless an event occurs that changes the measurement method
C)the amount initially recorded,unless an event occurs that changes the liability value
D)the amount initially recorded,unless an event occurs that changes the asset value

Question 31

Investments in trading securities and available-for-sale securities are valued at market value at year end because

A)the current market price is relevant and reliable
B)the current market price is accurate and reliable
C)the current market price is relevant and accurate
D)the current market price is not relevant and reliable for these investments

Question 32

Realized gains and losses are recognized on the sale of investments

A)at the end of the year
B)when included on the balance sheet of the company and have an impact on net income
C)when they are sold
D)when included on the income statement of the company and have no impact on net income

Question 33

The amount that an asset is recorded at is based on

A)the fair market value of the asset acquired at the date of recognition of the asset
B)the fair market value of the liability acquired at the date of recognition of the asset
C)the exchange price at the date of recognition of the asset
D)the advertised price at the date of recognition of the asset

Question 34

According to FASB Concept Statement No.5,Recognition and Measurement in Financial Statements of Business Enterprises,an asset is recognized

A)when the benefit of another asset has been increased or when a liability has been incurred
B)when the benefit of another asset has been reduced or when a liability has been removed
C)when the benefit of another asset has been increased or when a liability has been removed
D)when the benefit of another asset has been reduced or when a liability has been incurred

Question 35

The documents in the investment business process include the

A)bank statement
B)bank advice schedule
C)bank recalculations
D)standard bank confirmation
E)bank purchase schedule
F)both A and D
G)both B and C
H)both D and E

Question 36

The documents in the investment business process include the

A)broker's advice
B)market value at end-of-year
C)bank recalculations
D)standard bank inquiry
E)bank purchase schedule
F)both A and B
G)both C and D
H)both D and E

Question 37

Clients may overstate

A)cash
B)investments
C)realized gains and losses on investment securities
D)realized holding gains and losses on securities
E)realized holding gains or losses on available-for-sale securities
F)both A and B
G)both C and D
H)both D and E

Question 38

It is important for the auditor to understand what is likely to go wrong in a process and then

A)search for the misstatements
B)plan the audit
C)perform a risk assessment
D)test internal control

Question 39

Held-to-maturity investments are not valued at market value at year end because

A)they are valued a depreciated cost
B)the current market price is not accurate for these investments
C)the current market price is not quantifiable for these investments
D)the current market price is not relevant and reliable for these investments

Question 40

The documents in the investment business process include the

A)adjusting journal entry report
B)bank purchase schedule
C)bank recalculations
D)standard bank inquiry
E)broker's advice
F)both A and B
G)both A and E
H)both B and C

Question 41

When assets are overstated (intentional or unintentional)

A)management has a better chance to earn their end of year bonuses
B)outsiders are mislead about the future cash flows when the assets are sold
C)outsiders are mislead about the current cash flows
D)management is misleading outsiders about the future cash flows that the assets can earn

Question 42

Management asserts that

A)the company has the right to the income of cash and investments
B)all transactions related to the investment account have been accurately recorded
C)all cash and investment transactions that should be presented in the financial statements are included
D)transactions related to the investment process have been recorded
E)the investment accounts are reliable according to the rules of the applicable financial reporting framework at year-end
F)both A and B
G)both B and C
H)both D and E

Question 43

In planning the audit of cash and investments,the members of the audit team should

A)review all adjustments made to the securities accounts
B)evaluate the basis for the transfer of securities from one account to another
C)discuss the potential for misstatement due to fraud in the cash and investment process
D)review documentation in support of acquisition or disposition of securities

Question 44

Companies can alter the amount of unrealized gain or loss for investment securities

A)companies cannot alter the amount of unrealized gain or loss
B)by selling securities and then repurchasing the same securities
C)by moving securities from one account to another to suit their purpose
D)by trading securities for better investments

Question 45

The most common misstatements that an auditor is likely to see in the cash and investment process accounts involves

A)misclassification of trading and available-for-sale securities
B)misclassification of held-to-maturity investments
C)overstatement of unrealized gains
D)understatement of cash
E)overstatement of cash
F)both A and B
G)both C and D
Both A and E

Question 46

Which of the following are management assertions about the accounts in cash and investment process?

A)existence or occurrence - for classes of transactions
B)completeness - for both classes of transactions and account balances
C)valuation and allocation - for both classes of transactions and account balances
D)rights and obligations - for both classes of transactions and account balances
E)accuracy - for both classes of transactions and account balances

Question 47

Management asserts that

A)the company has the right to the assets of cash and investments
B)all balances related to the investment account have been accurately recorded
C)all cash and investment transactions that should be presented in the financial statements are relevant
D)transactions related to the investment process have been properly classified
E)the investment accounts are reliable according to the rules of the applicable financial reporting framework at year-end
F)both A and D
G)both B and C
H)both D and E

Question 48

Which of the following are management assertions about the accounts in cash and investment process?

A)existence or occurrence - for classes of transactions
B)completeness - for classes of transactions
C)valuation and allocation - for both classes of transactions and account balances
D)rights and obligations - for account balances
E)accuracy - for both classes of transactions and account balances

Question 49

The unrealized gain and loss adjustment for the trading securities

A)has no impact on the income statement
B)has an impact on the cash account
C)has an impact on the income statement
D)has an impact on the holding security account

Question 50

Misstatements in the cash and investment process should be considered

A)when determining the nature,timing,and extent of substantive testing in the cash and investment process
B)when evaluating evidence gathered from the cash and investment process
C)when assessing control risk for the cash and investment process
D)when assessing inherent risk for the cash and investment process
E)all of the above

Question 51

Management asserts that

A)the company has the right to the income of cash and investments
B)all balances related to the investment account have been accurately recorded
C)all cash and investment transactions that should be presented in the financial statements are included
D)transactions related to the investment process have been recorded
E)the investment accounts are valued correctly according to the rules of the applicable financial reporting framework at year-end
F)both A and B
G)both C and E
H)both D and E

Question 52

Which of the following transfers increase net income?

A)transferring an unrealized gain from the available-for-sale account to the trading securities account
B)transferring an unrealized loss from the available-for-sale account to the trading securities account
C)transferring an unrealized gain from the held-to-maturity account to the trading securities account
D)transferring an unrealized holding gain from the trading securities account to the available-for-sale account
E)transferring an unrealized holding loss from the trading securities account to the available-for-sale account
F)both A and B
G)both A and E
H)both C and D

Question 53

Although cash is fairly easy to audit,it may also be easy to misstate cash for companies using checks to disburse cash.In this case,the correct cash amount at the end of the year is found by

A)taking the confirmed balances from the banks and adjusting these amounts by subtracting the checks outstanding and subtracting the deposits in transit
B)taking the confirmed balances from the banks and adjusting these amounts by the checks outstanding and the deposits in transit
C)taking the confirmed balances from management and adjusting these amounts by the checks outstanding and the deposits in transit
D)taking the confirmed balances from the banks and adjusting these amounts by adding the checks outstanding and the deposits in transit

Question 54

Management asserts that

A)the company has the right to the assets of cash and investments
B)all balances related to the investment account have been accurately recorded
C)all cash and investment transactions that should be presented in the financial statements are relevant
D)transactions related to the investment process have been recorded
E)the investment accounts are valued correctly according to the rules of the applicable financial reporting framework at year-end
F)both A and E
G)both C and D
H)both D and E

Question 55

Which of the following are management assertions about the accounts in cash and investment process?

A)existence or occurrence - for classes of transactions
B)completeness - for account balances
C)valuation and allocation - for account balances
D)rights and obligations - for both classes of transactions and account balances
E)accuracy - for both classes of transactions and account balances

Question 56

Management asserts that

A)the company has recorded the assets of cash and investments
B)all transactions related to the investment account have been accurately recorded
C)all cash and investment transactions that should be presented in the financial statements are relevant
D)transactions related to the investment process have been properly classified
E)the investment accounts are reliable according to the rules of the applicable financial reporting framework at year-end
F)both A and B
G)both B and D
H)both C and E

Question 57

The relevant assertions in the cash and investment process are related to

A)the risk in the business process and the likelihood of a misstatement in the process
B)the risk in the business process and the statistical odds of a misstatement in the process
C)the accuracy in the business process and the likelihood of a misstatement in the process
D)the accuracy in the business process and the statistical odds of a misstatement in the process

Question 58

Which of the following are management assertions about the accounts in cash and investment process?

A)existence or occurrence - for classes of transactions
B)completeness - for account balances
C)valuation and allocation - for classes of transactions
D)rights and obligations - for both classes of transactions and account balances
E)accuracy - for classes of transactions

Question 59

Which of the following are management assertions about the accounts in cash and investment process?

A)existence or occurrence - for both classes of transactions and account balances
B)completeness - for account balances
C)valuation and allocation - for both classes of transactions and account balances
D)rights and obligations - for both classes of transactions and account balances
E)accuracy - for account balances

Question 60

The client may use a variety of methods to overstate investment securities and cash.These include

A)companies may manipulate the particular securities in the holding security account and the available for sale account to overstate unrealized gains from trading securities and to increase income
B)companies may manipulate the particular securities in the trading security account and the available for sale account to overstate realized gains from holding securities and to increase income
C)misstating the amount of cash by manipulating the adjustments done to the year-end bank reconciliation
D)companies may manipulate the particular securities in the trading security account and the available for sale account to overstate unrealized gains from holding securities and to increase income
E)misstating the amount of cash by manipulating the adjustments done to the year-end account reconciliation
F)both A and B
G)both C and D
H)both D and E

Question 61

For investments disclosed at fair value at year end,the auditor should

A)determine whether the applicable financial reporting framework specifies the method to be used to properly record the investments
B)determine whether the applicable financial reporting framework specifies the method to be used to determine fair value of the investments
C)evaluate whether management's determination of fair value is consistent with the applicable financial reporting framework
D)evaluate whether management's recording of the investment is consistent with the applicable financial reporting framework
E)evaluate whether management's determination of fair value is relevant to the applicable financial reporting framework
F)both B and C
G)both C and D
H)both D and E

Question 62

Key control procedures for cash are

A)segregation of duties
B)authorization procedures
C)documented transaction trails
D)physical controls
E)both A and B
F)both A and E
G)both C and D

Question 63

Which of the following is not a key substantive test of balances for the investment process?

A)confirmation
B)tracing
C)recalculation
D)reperformance

Question 64

The auditing standards require the auditor to review the procedures used to develop fair value estimates for investments to determine if they are consistent with the applicable financial reporting framework.To do this the auditor

A)should consider reasons used by management in selecting the valuation model
B)must consider assumptions used by management in selecting the valuation model
C)should consider the timing used by management in selecting the valuation model
D)should consider how the model is used to generate estimates of fair value
E)must consider how the model is used to generate estimates of fair value
F)both A and B
G)both B and E
H)both C and D

Question 65

Key control procedures for investments are

A)segregation of duties
B)policies and procedures
C)documented transaction trails
D)independent recalculations
E)logical controls
F)both A and C
G)both B and C
H)both D and E

Question 66

IT controls that the auditor might expect to find in the cash process are

A)IT system restricts access to individuals authorized to input investment purchases and investment sales
B)IT system restricts access to individuals authorized to input cash transfers between bank and accounts
C)Trading and available-for-sale investments must have a broker's advice number to be entered into the accounting system
D)Bank transfer report is generated daily (weekly or monthly)and is reviewed by an individual one level above the level making the transfer
E)Held-to-maturity investments must have a face value,which includes the stated amount of the bond and the discount or premium on the bond
F)Both B and D

Question 67

Management makes the decision to design internal controls to prevent or detect misstatements in the financial statements based on

A)whether the risks in this process justifies the use of internal controls
B)whether the balances in this process justifies the use of internal controls
C)whether the volume of transactions in this process justifies the use of internal controls
D)whether the relevancy of transactions in this process justifies the use of internal controls

Question 68

The auditor uses substantive tests of transactions in the investment business process to

A)test the reliability of transactions during the year
B)test the reliability of balances at the end of the year
C)test the recording of balances at the end of the year
D)test the recording of transactions during the year

Question 69

When using analytical procedures in the cash and investment process,the auditor might consider

A)the type of investment securities purchased and sold in the current year and the prior year
B)the number of investment securities purchased and sold in the current year and the prior year
C)the average interest rate earned on the held-to-maturity securities
D)the average interest rate earned on the available-for-sale securities
E)the average interest rate earned on the trading securities
F)both B and C
G)both C and D
H)both D and E

Question 70

IT controls that the auditor might expect to find in the investment process are

A)IT system restricts access to individuals authorized to input investment purchases and investment sales
B)IT system restricts access to individuals authorized to input cash transfers between bank and accounts
C)IT system restricts access to individuals authorized to adjust cash balances
D)The accounting system matches information on the broker's advice with the purchase history of the investment security before processing a sale of investment securities
E)Bank transfer report is generated daily (weekly or monthly)and is reviewed by an individual one level above the level making the transfer
F)both A and B
G)both A and D
H)both C and E

Question 71

Key control procedures for investments are

A)segregation of securities
B)policies and procedures
C)documented transaction trails
D)independent recalculations
E)physical controls
F)both A and B
G)both C and D
Both C and E

Question 72

Although management may have designed internal controls,the auditor may choose not to test them because

A)the auditor believes it is more efficient to use analytical procedures to gather evidence
B)the auditor believes it is more effective to use substantive testing to gather evidence
C)the auditor believes it is more efficient to use substantive testing to gather evidence
D)the auditor believes it is more effective to use analytical procedures to gather evidence

Question 73

Whether the auditor chooses to test or not to test internal controls in the cash and investment process,the auditor is required to

A)obtain an understanding of internal controls relevant to the audit
B)review internal control procedures relevant to the audit
C)obtain a description of internal controls relevant to the audit
D)perform a walkthrough of internal controls relevant to the audit

Question 74

IT controls that the auditor might expect to find in the investment process are

A)IT system restricts access to individuals authorized to adjust cash balances
B)IT system restricts access to individuals authorized to input cash transfers between bank and accounts
C)Trading and available-for-sale investments must have a broker's advice number to be entered into the accounting system
D)Bank transfer report is generated daily (weekly or monthly)and is reviewed by an individual one level above the level making the transfer
E)Held-to-maturity investments must have a face value,which includes the stated amount of the bond and the discount or premium on the bond
F)both A and B
G)both B and C
Both C and E

Question 75

Based on an analytical review,the auditor determines that trading securities are reporting a gain and available-for-sale securities are reporting a loss.The auditor's concern would be

A)whether the securities in the trading account and the available-for-sale account are accurately recorded
B)whether the securities in the trading account and the available-for-sale account are being manipulated by management
C)whether the securities in the trading account and the available-for-sale account are properly classified
D)whether the securities in the trading account and the available-for-sale account are properly adjusted

Question 76

Key control procedures for investments are

A)segregation of securities
B)authorization procedures
C)documented balances
D)independent reconciliations
E)logical controls
F)both A and B
G)both B and D
H)both D and E

Question 77

The decision to test internal controls in the cash and investment process is based on

A)whether it is an effective way to gather evidence
B)whether it is an efficient way to gather evidence
C)whether it is a relevant way to gather evidence
D)whether it is a reliable way to gather evidence

Question 78

The auditor gathers evidence to evaluate management's assertions using

A)internal control tests
B)substantive tests of transactions or balances
C)the client's policies and procedures
D)industry data
E)both A and B
F)both C and D
G)both D and E

Question 79

IT controls that the auditor might expect to find in the cash process are

A)IT system restricts access to individuals authorized to adjust cash balances
B)IT system restricts access to individuals authorized to input investment purchases and investment sales
C)Trading and available-for-sale investments must have a broker's advice number to be entered into the accounting system
D)Bank transfer report is generated daily (weekly or monthly)and is reviewed by an individual one level above the level making the transfer
E)Held-to-maturity investments must have a face value,which includes the stated amount of the bond and the discount or premium on the bond
F)both A and D
G)both B and C
H)both C and E

Question 80

Investment securities do not include

A)stocks
B)bonds
C)derivative instruments
D)hedge funds