Deck 12: Auditing Cash and Investments

Question 1

In the auditing of investments, the key issues are to ensure that the investments exist, are
owned, are properly recorded (including profits or losses on any sales) and disclosed, and
are properly valued at the end of the reporting period.

Answer 1

True

Question 2

Which of these statements is the most correct? In the bank reconciliation,

A) the difference between the balance on the entity's bank statement and the balance recorded in the entity's records will be due to outstanding cheques and bank charges.
B) the difference (if any) between the balance on the entity's bank statement with the balance recorded in the entity's records will be due to deposits in transit, outstanding cheques, and direct debits and credits on the bank statement.
C) the difference between the balance on the entity's bank statement with the balance recorded in the entity's records will be due to deposits in transit and outstanding cheques.
D) the difference (if any) between the balance on the entity's bank statement with the balance recorded in the entity's records will be due to bank charges and direct debits and credits on the bank statement.

Answer 2

C

Question 3

An imprest petty cash fund is a cash fund maintained at a constant level via
replenishment with the value of receipts paid out of the fund.

Answer 3

True

Question 4

Often the purchase and sale of investments are processed separately from other
purchases and sales, especially for entities holding substantial investment portfolios where
specific control procedures over investments are likely implemented.

Question 5

Auditors usually vouch purchases and sales of investments by examining brokers'
advices and evidence of appropriate approval. Purchases and sales of non-current
investments, for example, should be vouched to authorizations in the minutes of directors'
meetings.

Question 6

For many entities, cash balances represent a large proportion of assets. However, the
amount of cash flowing through the accounts over a period of time is usually smaller than for
any other account in the financial statements.

Question 7

In the auditing of cash and investments, the key issues are to ensure that the cash exists
and is owned by the client and that all cash transactions at the end of the reporting period
are complete and properly disclosed.

Question 8

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.

Question 9

Where substantial investments are held, a separate investment subsidiary ledger or
investment register may be maintained. This records details of acquisitions and disposals,
the receipt of interest and dividends, and market values.

Question 10

To verify the amounts included in the consolidated financial statements, the auditor must
obtain and verify the financial statements of each group entity. Where the auditor is not also
the auditor of another group entity, consideration must be given to the extent of
reliance that may be placed on the work of the other auditor.

Question 11

When a company (or other entity) controls another company (or other entity),
Under IFRS, consolidated financial statements must be prepared for the economic entity.

Question 12

The significance of cash to the entity's liquidity and the fact that the balance is relatively
small mean that the acceptable level of detection risk in verifying cash balances is invariably
set as low.

Question 13

Investment transactions rarely present cut-off problems, so the auditor may perform
many substantive procedures before or after the end of the reporting period. Income
statement account balances relating to investments are usually verified at the same time.

Question 14

Which of following assertions is a key concern for cash?

A) classification and presentation
B) existence and classification
C) completeness and rights and obligations
D) existence and completeness

Question 15

Entities commonly invest in other entities, and these investments take a variety of forms
including equity securities such as preference or ordinary shares, or debt securities such as
corporate debentures or government bonds.

Question 16

Ensuring that investment transactions are recorded in the correct accounts is an
example of testing the accuracy audit objective.

Question 17

Cash balances do not normally show a stable or predictable relationship with other current
or historical financial or operating data. As a result, the auditor will often not perform any
analytical review procedures in this part of the audit.

Question 18

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

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

Question 19

The balance of petty cash is generally material and for this reason the majority of audits
involve a significant audit of petty cash.

Question 20

Lapping is an irregularity that results in the deliberate misappropriation of cash receipts,
either temporarily or permanently, for the personal use of the individual perpetrating the
unauthorized act.

Question 21

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) unauthorized disbursements.
D) cash going missing.

Question 22

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 23

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

Question 24

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 25

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 26

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 27

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 28

Unlike other balance sheets, cash account balances

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

Question 29

Which of these is a substantive test of details of balances used for cash balances?

A) verifying the bank reconciliation
B) obtaining and using the subsequent period's bank statement
C) confirming bank balances
D) all of the above

Question 30

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 31

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) accuracy and valuation assertion.

Question 32

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 33

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.

Question 34

Which of these statements is the most correct?

A) A high volume of transactions flowing through an entity's cash account contributes to a significant level of inherent risk for cash balance assertions.
B) A high volume of transactions flowing through an entity's cash account contributes to a significant level of detection risk for cash balance assertions.
C) A high volume of transactions flowing through an entity's cash account contributes to a significant level of risk particularly for the disclosure assertion.
D) A high volume of transactions flowing through an entity's cash account contributes to a significant level of risk particularly for the rights and obligations assertion.

Question 35

A bank confirmation request provides information to the auditor about

A) account balances.
B) loan documents.
C) the client's securities.
D) all of the above

Question 36

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 37

In the planning of an audit, it was decided that cash would not be audited because it comprised only 1 per cent of total assets. How would you respond to this decision?

A) Whether or not this was acceptable would depend on the company and the type of industry.
B) Cash is always going to be material, no matter what amount it is.
C) An amount of 1 per cent of total assets is likely to be immaterial.
D) It is probable that this amount would still be considered material, due to the nature of cash.

Question 38

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 39

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 40

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 41

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 42

Verification procedures for investment income are 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 43

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 44

Audit evidence for share holdings on the investment brokerage register is normally the

A) debenture certificate.
B) company's investment register.
C) brokerage account holdings statement.
D) cancelled (or presented) cheque.

Question 45

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 46

Which of these procedures do auditors usually perform as a test of details of transactions to verify all management assertions relating to investments?

A) trace purchases of investments to brokers' advices
B) vouch purchases and sales of investments to brokers' advices
C) inspect the minutes of directors meetings
D) both b and c

Question 47

Which statement is the most correct?

A) The imprest petty cash fund should be in the custody of no more than two individuals.
B) The imprest petty cash fund should be maintained at the imprest amount.
C) The balance of the petty cash fund should always be audited.
D) Use of an imprest petty cash fund enables small items to be purchased with no documentation required.

Question 48

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 49

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 50

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 51

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

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

Question 52

A procedure the auditor can employ to detect 'lapping' is

A) confirming accounts on a surprise basis at an interim date.
B) making a surprise cash count.
C) comparing details of cash receipts journal entries with the details of corresponding daily deposit slips.
D) all of the above

Question 53

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 54

Which of these controls would be the most effective in assuring that the proper custody of assets in the investing cycle is maintained?

A) The purchase and sale of investments are executed on the specific authorization of the board of directors.
B) The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safety deposit box by independent personnel.
C) Direct access to securities in the safety deposit box is limited to only one corporate officer.
D) Personnel who post investment transactions to the general ledger are not permitted to update the investment subsidiary ledger.

Question 55

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 56

The 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 57

Which of the following would be the best protection for an entity that wishes to prevent the 'lapping' of trade accounts receivable?

A) Request that customers' payment cheques be made payable to the entity and addressed to the chief financial officer.
B) Have customers send payments directly to the entity's bank.
C) Segregate duties so that no employee has access to both the cheques from customers and currency from daily cash receipts.
D) Make sure that the same person always deals with cash receipts.

Question 58

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 59

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 assertion.
D) little or no evidence.

Question 60

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

Question 61

Describe the audit process for investment transactions, indicating the audit risks that need to be addressed and the mitigating controls that can be implemented.

Question 62

CAS 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 63

Which check could not be carried out for securities held by a client?

A) check of paper certificate of legal title for securities held in listed companies
B) checks with the bank of securities held in safety deposit boxes
C) any checks made other than at balance date
D) All of the above checks could be carried out.

Question 64

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?

Question 65

Describe the audit process for cash transactions, indicating the audit risks that need to be addressed and the mitigating controls that can be implemented.

Question 66

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 67

Why is a 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 68

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

Question 69

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 accounting standards.

Question 70

One of the commonly used substantive tests for cash balances is to confirm the bank balance directly with the bank Name five categories of information requested on a standard bank confirmation request.

Question 71

Although the auditor primarily adopts a 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 72

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 73

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 74

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