Deck 23: Audit of Cash Balances

Question 1

"Failure to bill a customer" is an example of an error that results in the failure to receive cash, but would not be discovered as part of the audit of the bank reconciliation. State three other examples of errors or irregularities that result in the improper payment of, or failure to receive, cash, but that would not be discovered during the audit of the bank reconciliation. How are these types of misstatements normally uncovered in the audit?

Answer 1

• An embezzlement of cash by interception of cash receipts from customers before they are recorded with the account charged off as a bad debt.
• Duplicate payment of a vendor's invoice.
• Improper payments of officers' personal expenditures.
• Payment for raw materials that were not received.
• Payment to an employee for more hours than he or she worked.
• Payment of interest to a related party for an amount in excess of the going rate.
If these misstatements are to be uncovered in the audit, their discovery must occur through tests of controls and substantive tests of transactions.

Question 2

Which of the following cycles does not affect cash in bank?

A) Capital acquisitions cycle.
B) Inventory and warehousing.
C) Payroll and personnel cycle.
D) Acquisitions and disbursements.

Answer 2

B

Question 3

Which of the following misstatements is most likely to be uncovered during an audit of a client's bank reconciliation?

A) Duplicate payment of a vendor's invoice.
B) Billing a customer at a lower price than indicated by company policy.
C) Failure to record a collection of a note receivable by the bank on the client's behalf.
D) Payment to an employee for more than the hours actually worked.

Answer 3

C

Question 4

A partial-period bank statement and the related canceled checks, duplicate deposit slips, and other documents included in bank statements, mailed by the bank directly to the CPA firm's office, is called:

A) a four-column proof of cash.
B) a year-end bank statement.
C) a cutoff bank statement.
D) a short-period bank statement.

Question 5

An imprest petty cash fund would least likely be used to pay for which of the following items?

A) Minor office supplies
B) Monthly interest expense
C) Stamps for small mailings
D) Small contributions to a local charity

Question 6

One disadvantage of using an imprest bank account is the increased time needed to reconcile bank accounts.

Question 7

When the auditor believes the year-end bank reconciliation may be intentionally misstated, it is appropriate to perform extended tests of the year-end bank reconciliation. Assuming the client has a October 31 year-end, these extended tests would not include:

A) comparing all September 30 reconciling items with canceled checks and other documents in the October bank statement.
B) comparing all canceled checks and deposit slips in the October bank statement with the October cash disbursements and receipts records.
C) carrying out all proper procedures subsequent to the end of the year with the use of the bank cutoff statement.
D) determining that all outstanding checks had cleared by the date of the bank cutoff statement.

Question 8

Which of the following is likely to be detected as part of the audit of the bank reconciliation?

A) Failure to bill a customer
B) Duplicate payment of a vendor invoice
C) Cash received by the client after year end, but included in cash receipts in the current year
D) An embezzlement of cash by intercepting cash receipts from customers before they are recorded

Question 9

Which of the following statements is correct?

A) Auditors must obtain bank confirmations on every audit.
B) Auditors obtain bank confirmations at their discretion.
C) Auditing standards do not address specific requirements regarding bank confirmations.
D) Auditing standards do not require bank confirmations except when there is an unusually large number of inactive bank accounts.

Question 10

The test of details of balances procedure that requires the auditor to foot the outstanding check list and deposits in transit is an attempt to satisfy which audit objective?

A) Cutoff.
B) Presentation and disclosure.
C) Detail tie-in.
D) Completeness.

Question 11

The general cash account is considered a significant account in almost all audits:

A) where the ending balance is material.
B) even when the ending balance is immaterial.
C) except those of not-for-profit organizations.
D) where either the beginning or ending balance is material.

Question 12

The audit objective of determining that cash in bank, as stated on the reconciliation, foots correctly and agrees with the general ledger can be tested by which of the following procedures?

A) Performing tests for kiting.
B) Receiving and testing a cutoff bank statement.
C) Footing the outstanding checks list and the list of deposits in transit.
D) Examining the minutes of the board of directors for restrictions on the use of cash.

Question 13

Examples of cash equivalents include time deposits, certificates of deposit, and marketable securities.

Question 14

Bank reconciliation audit tests are designed to detect misstatements other than through the improper payment of cash or failure to receive cash normally would not be detected as part of the tests of the bank reconciliation. List below at least THREE misstatements that are designed to be detected by bank reconciliation.

Question 15

Which of the following errors would be least likely to be discovered during the audit of the acquisitions and payments cycle?

A) Duplicate payment of a vendor's invoice.
B) Improper payments of officers' personal expenditures.
C) Payment of interest to a related party for an amount in excess of the going rate.
D) Payment for raw materials that were not received.

Question 16

Which of the following would normally be discovered as part of the audit of 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 17

Under which of the following circumstances would an auditor be most likely to intensify an examination of a $500 imprest petty cash fund?

A) Reimbursement occurs twice each week.
B) The custodian endorses reimbursement checks.
C) Reimbursement vouchers are not prenumbered.
D) The custodian occasionally uses the cash fund to cash employee checks.

Question 18

The test details of balances procedure that requires the auditor to trace the book balance on the reconciliation to the general ledger is an attempt to satisfy the audit objective of:

A) detail tie-in.
B) existence.
C) completeness.
D) accuracy.

Question 19

Describe each of the major types of cash accounts maintained by business entities.

Question 20

Which of the following is not a "cash equivalent"?

A) Time deposits
B) Certificates of deposit
C) Money market funds
D) Marketable securities

Question 21

Internal controls over year-end cash balances in the general account can be divided into two categories. List the two below.

Question 22

Which of the following balance-related objectives applies to auditing the general cash account?

A)
B)
C)
D)

Question 23

Because cash is the most desirable asset for people to steal, it has a higher:

A) control risk.
B) inherent risk.
C) detection risk.
D) liquidity risk.

Question 24

The starting point for the verification of the balance in the general bank account is to obtain:

A) a bank reconciliation from the client.
B) the client's cash account from the general ledger.
C) a cutoff bank statement directly from the bank.
D) the client's year-end bank statement and reconcile it.

Question 25

Which of the following balance-related audit objectives typically is assessed as having high inherent risk for cash?

A) Existenc
B) Cutoff
C) Detail tie-in
D) Presentation and disclosure

Question 26

If an auditor "proves" the bank statement in the month subsequent to the balance sheet date, it is primarily a test for:

A) errors.
B) omissions.
C) kiting.
D) intentional misstatements.

Question 27

If a bank does not respond to a bank confirmation request, the auditor would most likely:

A)
B)
C)
D)

Question 28

In addition to confirming bank balances of your audit client, a bank confirmation would normally contain:

A) the client's bank loans with due date, interest rate, and collateral requested.
B) the client's credit history as regards to paying back loans.
C) the client's managements bank account information.
D) the client's business prospects.

Question 29

During his examination of a January 19, 2008 cutoff bank statement, an auditor noticed that the majority of checks listed as outstanding at December 31, 2007, had not cleared the bank. This would indicate:

A) a high probability of kiting.
B) a high probability of lapping.
C) that the 2007 cash disbursements records had been closed prior to December 31, 2007.
D) that the 2007 cash disbursements records had been held open past December 31, 2007.

Question 30

The most important balance-related audit objectives in the audit of cash include all but which of the following?

A) Existence
B) Accuracy
C) Completeness
D) Occurrence

Question 31

Which of the following statements is correct?

A) Bank personnel are responsible for providing reasonable assurance that a response to a bank confirmation is accurate.
B) Bank personnel are responsible for providing complete assurance that a bank confirmation is complete.
C) Bank personnel are not responsible for searching their records for bank balances or loans beyond those included on the bank confirmation.
D) Bank personnel are not responsible for providing information related to interest on the bank confirmation.

Question 32

In an effort to satisfy the completeness objective, the auditor could perform which of the following test of details of balance procedures?

A) Trace the book balance on the reconciliation to the general ledger.
B) Trace outstanding checks to subsequent period bank statements.
C) Perform a four-column proof of cash.
D) Review financial statements to make sure that material savings accounts and certificates of deposit are disclosed separately.

Question 33

The standard bank confirmation form has been agreed upon by the:

A) SEC and FASB.
B) AICPA and the SEC.
C) SEC and the American Bankers' Association.
D) AICPA and the American Bankers' Association.

Question 34

Which of the following errors would be least likely to be discovered during the tests of the bank reconciliation?

A) Payment was made to an employee for more hours than he worked.
B) Cash received by the client subsequent to the balance sheet date was recorded as cash receipts in the current year.
C) Payments on notes payable were debited directly to the bank balance by the bank were not entered in the client's records.
D) Deposits were recorded in the cash receipts records near the end of the year, deposited in the bank, and were included in the bank reconciliation as a deposit in transit.

Question 35

Auditors tests of the client's bank reconciliation is done to verify whether the client's recorded bank balance is the same amount as the actual cash in the bank. Which of the following would not explain a difference between the company's cash balance and the bank's balance for the client?

A) Deposits in transit
B) Cash collected on a Note Receivable by the bank
C) Other reconciling items
D) Outstanding checks

Question 36

Which of the following items would not normally appear on bank reconciliations?

A) Balance per bank
B) List of deposits in transit
C) Outstanding deposits
D) Outstanding checks

Question 37

Explain what is meant by a cutoff bank statement, and discuss the purpose of the cutoff bank statement in the audit of cash.

Question 38

The direct receipt of a confirmation from every bank with which the client does business is:

A) required by auditing standards for every audit.
B) not necessary unless material fraud is suspected.
C) recommended but not required by auditing standards.
D) necessary for every audit except when there are an unusually large number of active accounts.

Question 39

The reason for testing the client's bank reconciliation is to verify whether the client's recorded bank balance is the same amount as the actual cash in bank, except for deposits in transit, checks outstanding, and other reconciling items. The information needed to complete the tests of the reconciliation are provided by the:

A) client's records and ledgers for the year under audit.
B) cutoff bank statement.
C) client's records and ledgers for the subsequent year.
D) canceled checks for the year under audit.

Question 40

The audit procedure which requires the auditor to record the last check number used on the last day of the year and subsequently trace to the outstanding checks and the cash disbursements records is performed to satisfy the audit objective of:

A) detail tie-in.
B) existence.
C) completeness.
D) cutoff.

Question 41

A proof of cash represents:

A) a test of controls and substantive test of transactions.
B) a substantive test of transactions.
C) a substantive test of transactions and test of details of balances.
D) a test of details of balances.

Question 42

The auditor must extend the audit procedures in the audit of year-end cash when there are inadequate internal controls.

Question 43

When auditing the general cash account, receipt of a standard bank confirmation is the starting point for verifying the company's general cash account balance.

Question 44

The auditor uses a proof of cash to determine whether:

A)
B)
C)
D)

Question 45

Many auditors prove the subsequent period bank statement if a cutoff statement is not received directly from the bank. Discuss the purpose of proving the subsequent period statement, and explain the audit procedures performed during the proof.

Question 46

Tracing outstanding checks to subsequent period bank statements tests the cutoff audit objective.

Question 47

When auditing the year-end cash balance, one of the areas of focus is on the accuracy objective.

Question 48

Explain the purpose of testing the client's bank reconciliation, and discuss the major audit procedures involved.

Question 49

If an unusually large portion of the checks listed as outstanding on the year-end bank reconciliation have not cleared the bank by the cutoff date, one possible cause could be that kiting is occurring.

Question 50

Auditors are not always required to obtain bank confirmations.

Question 51

If internal controls over cash-related transactions are adequate, the auditor is justified in reducing the audit tests for the year-end bank reconciliation.

Question 52

The three most important audit objectives for cash are accuracy, existence, and classification.

Question 53

Auditors are likely to prepare a proof of cash when the client has:

A) material control weaknesses in cash receipts and cash disbursements.
B) material control weaknesses in accounts receivable and revenue.
C) material control weaknesses in accounts payable and inventory.
D) material control weaknesses in payroll.

Question 54

Ordinarily, all deposits-in-transit listed on the year-end bank reconciliation should appear as deposits on the cutoff bank statement.

Question 55

The client may mail the bank confirmation requests if the auditor believes doing so will increase the likelihood that the confirmation will be returned promptly.

Question 56

The starting point for the verification of the balance in the general bank account is to obtain a bank cut-off statement.

Question 57

To test the client's list of outstanding checks on the bank reconciliation for completeness, the auditor should trace from the list to the checks included with the cutoff bank statement.

Question 58

Which of the following verifications would generally not be performed by the auditor in the month subsequent to the balance sheet date?

A) Foot the lists of all canceled checks, debit memos, deposits, and credit memos.
B) verify the bank statement balances when the footed totals are used.
C) Verify the book statement balances tie to the cash receipts and disbursements journals for the year under audit.
D) Review the items included in the footings to make sure that they were cancelled by the bank

Question 59

Auditors usually design bank confirmations that address the client's specific circumstances.

Question 60

Many of the auditor's audit procedures in the audit of cash center around the client's bank confirmations.

Question 61

Match six of the terms (a-k) with the descriptions/definitions provided below (1-6):
a. Bank reconciliation
b. Branch cash account
c. Cash equivalents
d. Cutoff bank statement
e. General cash account
f. Imprest payroll account
g. Imprest petty cash fund
h. Kiting
i. Proof of cash
j. Standard bank confirmation form
k. Lapping
________ 1. A fund of cash maintained within the company for small cash acquisitions, expenses, or to cash employees' checks.
________ 2. A form approved by the AICPA and American Bankers' Association through which the bank responds to the auditor about bank balance and loan information.
________ 3. Excess cash invested in short-term, highly liquid investments such as time deposits, certificates of deposit, and money market funds.
________ 4. The primary bank account for most organizations.
________ 5. The transfer of money from one bank account to another and improperly recording the transfer so that the amount is recorded as an asset in both accounts.
________ 6. The document usually prepared by client personnel of the differences between the cash balance recorded in the general ledger and the amount in the bank account.

Question 62

Explain kiting, and discuss how it is performed.

Question 63

Auditors will often prepare a Proof of Cash when the client has material internal control weaknesses in cash receipts and cash disbursements. The purpose of the proof of cash is to determine the client's accounting records for cash are reliable. List below the four requirements the proof of cash is designed to provide for the auditor.

Question 64

A proof of cash includes a reconciliation of cash receipts deposited in the bank with the cash disbursements records for a given period.

Question 65

Which of the following cash transfers results in a misstatement of cash on December 31, 2007?

A)
B)
C)
D)

Question 66

Discuss how an auditor can test for kiting.

Question 67

A proof of cash involves a combination of substantive tests of transactions and tests of details of balances.

Question 68

Based on the schedule of interbank transfers above, which of the cash transfers indicates an error in cash cutoff at December 31, 2007?

A) 1
B) 2
C) 3
D) 4

Question 69

Listing all bank transfers made a few days before and after the balance sheet date and tracing each to the accounting records for proper recording is a useful approach to test for:

A) kiting.
B) lapping.
C) income smoothing.
D) channel stuffing.

Question 70

The transfer of money from one bank account to another and improperly recording the transfer so that the amount is recorded as an asset in both banks is referred to as kiting.

Question 71

Based on the schedule of interbank transfers above, which of the cash transfers would not appear as an outstanding check on the December 31, 2007 bank reconciliation?

A) 1
B) 2
C) 3
D) 4

Question 72

A proof of cash is not an effective procedure for identifying which of the following types of misstatements?

A) All recorded disbursements were paid by the bank.
B) All recorded cash receipts were deposited.
C) All amounts that were paid by the bank were recorded.
D) Some checks were written for incorrect amounts.

Question 73

On the last day of the fiscal year, the cash disbursements clerk drew a company check on bank A and deposited the check in the company account in bank B to cover a previous theft of cash. The disbursement has not been recorded. The auditor will best detect this form of kiting by:

A) examining the composition of deposits in both bank A and bank B subsequent to year-end.
B) examining paid checks returned with the bank statement of the next account period after year-end.
C) preparing, from the cash disbursements records, a summary of bank transfers for one week prior to and subsequent to year-end.
D) comparing the detail of cash receipts as shown by the client's cash receipts records with the detail on the confirmed duplicate deposit tickets for three days prior to and subsequent to year-end.

Question 74

What should be audited on an interbank transfer schedule?

Question 75

The audit and accounting concern addressed in a monthly proof of cash is with:

A) adjusting account balances.
B) reconciling the amounts per books and bank.
C) determining the month-end balance.
D) identifying cash transfers.

Question 76

A major consideration in the audit of the general cash balance is the possibility of fraud. The auditor must extend his or her procedures in the audit of year-end cash to determine the possibility of a material fraud when there are:

A) large cash balances at the end of the year.
B) large cash receipts and disbursements during the year.
C) no imprest accounts used for payroll.
D) inadequate internal controls.

Question 77

A proof of cash includes four reconciliation tasks. List below at least TWO of those tasks.

Question 78

The process of transferring money from one bank account to another and improperly recording the transaction is referred to as:

A) kiting.
B) lapping.
C) scamming.
D) embezzling.

Question 79

A proof of cash is effective at identifying which of the following misstatements?

A) checks written for incorrect amounts
B) checks issued to invalid vendors
C) fraudulent checks
D) Checks recorded by the books for an amount different than the check.

Question 80

Based on the schedule of interbank transfers above, which of the cash transfers would appear as a deposit in transit on the December 31, 2007 bank reconciliation?

A) 1
B) 2
C) 3
D) 4