Deck 12: Auditing Cash and Investments

Question 1

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

Answer 1

False

Question 2

For many entities, cash balancrepresent 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.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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 5

Which of these combinations is a correct representation of the usual assessed levels of inherent risk in the cash area? High Low
A) valuation completeness
B) existence completeness
C) valuation rights and obligations
D) existence valuation

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

Question 6

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

Question 7

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 8

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 9

Auditors usually vouch purchasand salof investments by examining brokers' advicand evidence of appropriate approval. Purchasand salof non-current investments, for example, should be vouched to authorizations in the minutof directors' meetings.

Question 10

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

Question 11

Cash balancdo not normally show a stable or predictable relationship with other current or historical financial or operating data. As a result, the auditor will oft en not perform any analytical review procedurin this part of the audit.

Question 12

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

Question 13

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 14

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 15

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

Question 16

Entiticommonly invest in other entities, and these investments take a variety of forms including equity securitisuch as preference or ordinary shares, or debt securitisuch as corporate debenturor government bonds.

Question 17

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 balancis invariably set as low.

Question 18

In performing analytical procedurin 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 19

In the auditing of cash and investments, the key issuare 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 20

Often the purchase and sale of investments are processed separately from other purchasand sales, especially for entitiholding substantial investment portfolios where specific control procedurover investments are likely implemented.

Question 21

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 22

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 23

The starting point for verifying cash balancis 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 24

Initial substantive procedurfor 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 25

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 26

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 27

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 28

In working with the bank reconciliation and the subsequent period bank statement, the auditor finds that many of the chequon 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 29

Unlike other balance sheet account balanccash:

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 30

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 31

The correct statement concerning the materiality of securitiis:

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 32

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

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

Question 33

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 34

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 35

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 36

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 37

The practice where a cheque is paid into a bank account of an entity in a group of companibefore 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 38

In auditing tests of details of balancfor investments, the auditor's procedurmay 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 39

Analytical procedurapplied 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 40

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 41

The statement that is not true concerning the confirmation of securitiheld 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 42

For most entitiinvestment 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 43

Why is detection risk for verifying cash balancinvariably low? Why dothe auditor not often use analytical procedurfor the audit of cash balances?

Question 44

The inspecting and counting of securition 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 45

When inspecting securition 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 46

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 47

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 48

Identify the matters the auditor should observe when inspecting securities. List the requirements for the presentation of investments in securitithat would conform to the disclosure requirements of accounting standards.

Question 49

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

Question 50

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

Question 51

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

Question 52

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

Question 53

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

Question 54

CAS 600 (I600) 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 55

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

Question 56

Verification procedurfor 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 57

Tests of details of balancfor 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 58

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 59

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 60

Which of the following is correct concerning the inspecting and counting of securition 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 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

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 63

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