Question 1

Which of the following represents a typical substantive audit procedure for cash balances?

Accepted Answer

Verifying material deposits-in-transit to subsequent statements is a typical substantive audit procedure for cash balances. This involves ensuring that deposits recorded by the client but not yet processed by the bank are included in subsequent statements. This helps to detect any potential overstatement of cash balances in the period being audited. Reviewing cash confirms received by the client from the bank and foot cutoff bank statements provided by financial institutions can also be effective audit procedures for cash balances, but they are not as typical as verifying deposits-in-transit. Performing kiting techniques to transfer cash between two client accounts is an unethical and illegal practice and should not be done by auditors.

Question 2

When testing cash balances at the balance sheet date,the auditor foots the bank reconciliation and traces its reported book balance to the trial balance and its bank balance to the standard confirmation.Which of the following assertions is being tested with these procedures?

Accepted Answer

The answer of When testing cash balances at the balance...

Question 3

Which of the following best describes kiting?

Accepted Answer

Kiting involves recording deposits in transit in order to overstate cash assets at year end. This scheme is fraudulent because the deposits have not actually cleared the bank and the cash balance has been artificially inflated.

Question 4

Which of the following would not be used as part of analytical procedure for marketable securities?

Accepted Answer

Verifying ending balances prior to calculating the percent change is not a part of the analytical procedure for marketable securities as it is not necessary for developing expectations about the level of amounts or the relationship between the balances, and does not involve reviewing changes in balances, risk composition, and classification types.

Question 5

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

Accepted Answer

Confirming or examining recorded investments would be the most appropriate way for an auditor to determine the existence of investments. This would involve verifying that the amounts recorded in the accounting records match with the actual investments held by the company, and confirming that the investments are owned by the company and are correctly valued. The other choices, such as footings or recomputing interest and gains and losses, may be useful in verifying the accuracy of the investment records, but would not provide direct evidence of the existence of the investments themselves.

Question 6

The emphasis in verifying petty cash is normally on which of the following?

Accepted Answer

Controls over petty cash are crucial because they help prevent misuse and ensure that the petty cash fund is used appropriately for small, incidental expenses.

Question 7

Which of the following is the primary reason the auditor obtains and reviews a cutoff bank statement?

Accepted Answer

The primary reason an auditor reviews a cutoff bank statement is to verify the reconciling items on the year-end bank reconciliation, ensuring that the cash balances reported are accurate and that all transactions around the year-end are recorded in the correct period.

Question 8

Which of the following best describes a fraudulent cash scheme to overstate cash assets at year end by recording deposits in transit in both the account from which the cash is withdrawn and the account to which it is transferred?

Accepted Answer

This describes the kiting of cash, which involves inflating cash balances by showing deposits in transit in both accounts, thus allowing the perpetrator to write checks against both accounts until the scheme is discovered. Lapping of cash involves the theft of cash, embezzlement of cash involves the misappropriation of cash, and restrictive endorsements of cash involve limiting the negotiability of a check. None of these fully describe the scenario presented.

Question 9

When auditing marketable securities,the auditor will do which of the following?

Accepted Answer

When auditing marketable securities, the auditor will examine broker's advices to evidence purchases, recompute income to ensure accuracy, and foot (add up) the schedule to verify totals, thus encompassing all the actions listed.

Question 10

Which assertion related to investments is tested when the auditor examines the documents for any restrictions?

Accepted Answer

When an auditor examines documents related to investments, checking for any restrictions is related to the assertion of rights, i.e., whether the company has the legal right to own and use the investments. This is important to ensure that the company is properly disclosing its investments and their associated risks in the financial statements. The other assertions - existence, completeness, and valuation - may be tested through other procedures such as physical inventory counts or valuation analysis.

Question 11

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

Accepted Answer

An outstanding deposits list would not normally appear on bank reconciliations. The items that would normally appear on bank reconciliations include balance per bank, balance per books, and outstanding checks list.

Question 12

Assume that an auditor notes a large series of checks that does not clear the bank for an unusually long time after period end.Which of the following would the auditor likely suspect from this observation?

Accepted Answer

If a large series of checks does not clear the bank for an unusually long time after the period end, it could indicate the presence of held checks at period-end. This could be a red flag indicating that the company is trying to manage its cash balance and may not have sufficient funds to cover the checks that have been issued. The auditor would need to investigate further to determine the cause of the held checks and whether there is a risk of material misstatement in the financial statements due to this issue. The other choices are unlikely to be the cause of the observation.

Question 13

Which of the following is required by accounting standards for the presentation and disclosure of investments in marketable securities?

Accepted Answer

Accounting standards require that investments in marketable securities be classified as trading, available-for-sale, or held-to-maturity. This classification determines how the securities are reported on the financial statements and the level of disclosure required. The other options listed do not relate to the presentation and disclosure requirements for investments in marketable securities.

Question 14

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

Accepted Answer

The answer of Which of the following is the most...

Question 15

Investments in securities are classified as which of the following?

Accepted Answer

Investments in securities can be classified as held-to-maturity, trading securities, and available-for-sale securities. Therefore, the best choice is D, all of the above.

Question 16

How will the auditor most likely utilize the bank reconciliation as evidence in the audit of cash?

Accepted Answer

The auditor will use the bank reconciliation to test deposits-in-transit and outstanding items to other corroborating evidence, such as bank statements and client cash receipts and disbursement records. This will ensure that all cash transactions are properly recorded, and that the client's cash balance is accurate. The other options listed are not typical procedures for auditors in regards to bank reconciliations.

Question 17

The reported fair market value of securities held by the client can be verified by the auditor through which of the following procedures?

Accepted Answer

Comparing the fair values to credible publications and websites is the best choice as it provides an independent source that can validate the accuracy of the fair market value reported by the client. This method helps the auditor to obtain reliable evidence that ensures the fair representation of the financial statements.

Question 18

The auditor will send a standard bank confirmation to which of the following?

Accepted Answer

The answer of The auditor will send a standard bank...

Question 19

Which of the following procedures does the auditor typically perform when testing the existence of cash?

Accepted Answer

Sending a standard bank confirmation is a direct method auditors use to verify the existence and amount of cash reported by a company. This involves requesting confirmation from the company's bank(s) regarding cash balances and other pertinent information as of a specific date.

Question 20

The ease with which cash can be stolen is most related to which of the following risks?

Accepted Answer

The ease with which cash can be stolen is most related to inherent risk because it has to do with the nature of the asset itself (cash is inherently vulnerable to theft). Control risk, detection risk, and liquidity risk do not specifically relate to the vulnerability of cash to theft.

Quiz 10: Auditing Cash and Marketable Securities