Question 1

Anderson embezzled $20,000 from her company's account in Bank X.At year-end,she hid the shortage by making a deposit on December 31 in Bank X,drawn on Bank Y.She has not recorded the transaction on the books.This is an example of:

Accepted Answer

This is an example of kiting, which involves artificially inflating the balance in a bank account by recording deposits made from other accounts that do not have sufficient funds. In this case, Anderson has made a deposit on December 31 in Bank X, drawn on Bank Y, which will not be honored due to insufficient funds in Bank Y. By doing this, she has temporarily concealed the embezzlement from the company's books.

Question 2

Which of the following is not a control that generally is established over cash receipts?

Accepted Answer

Option B is not a control established over cash receipts. It is a control over accounts receivable records. The other options (A, C, and D) are all controls established over cash receipts. Option A prevents abstraction of cash by creating a listing of cash receipts, Option C ensures accuracy of accounts receivable records by reconciling them to the controlling account, and Option D prevents theft of cash by depositing receipts daily.

Question 3

A practical and effective audit procedure for the detection of lapping is:

Accepted Answer

Lapping occurs when an employee steals cash received from one customer and then uses cash received from another customer to cover up the theft. By comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank, an auditor can detect any discrepancies or irregularities in the timing or amounts of deposits, which could indicate lapping. The other choices may be useful audit procedures, but they are not specifically designed to detect lapping.

Question 4

Which of the following is not confirmed on the standard confirmation form used for cash balances at financial institutions?

Accepted Answer

The standard confirmation form for cash balances is used to confirm cash checking and savings account balances, as well as loans payable. Securities held for the client by the financial institution are not confirmed using this form.

Question 5

Which of the following manipulations of cash transactions would overstate the cash balance on the financial statements?

Accepted Answer

Understating outstanding checks means not accounting for checks that have been written but not yet cleared, which would make the cash balance appear higher than it actually is.

Question 6

Which of the following is the best audit procedure for the detection of lapping?

Accepted Answer

Lapping involves delaying the deposit of cash receipts and using subsequent receipts to cover the shortage. By comparing the postings of cash receipts to accounts with the details of cash deposits, an auditor can detect any discrepancies or irregularities which may indicate lapping. Confirmation, reconciliation, and preparation of proof of cash may not necessarily detect lapping.

Question 7

The auditors use a bank cutoff statement to compare:

Accepted Answer

A bank cutoff statement is used to compare checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation. This helps confirm the completeness and accuracy of the bank reconciliation and ensures that all outstanding checks have been properly accounted for. The other options listed are not typically compared using a bank cutoff statement.

Question 8

The auditors should insist that a representative of the client be present during the physical examination of securities in order to:

Accepted Answer

The presence of a client representative ensures that there is an acknowledgment of the receipt of securities returned, providing a record and reducing the risk of disputes about the handling of the securities.

Question 9

Which of the following is not a control over cash disbursements?

Accepted Answer

The correct control for preventing the reuse of documents supporting payment disbursements is to have them canceled by someone other than the person preparing the check, typically by a different individual who can verify the transaction, to ensure segregation of duties and reduce the risk of fraud.

Question 10

Which of the following statements is not correct?

Accepted Answer

Confirmation of cash should be performed at a date as close to the balance sheet date as possible, but not necessarily only as of the balance sheet date. The auditor can perform confirmation procedures after the balance sheet date but before the issuance of the audit report.

Question 11

Which of the following is not a universal rule for achieving internal control over cash?

Accepted Answer

Separating recordkeeping from accounting for cash is not a universal rule for achieving internal control over cash. The correct principle is to separate cash handling from recordkeeping to prevent any single individual from having control over both the physical cash and the accounting records, which reduces the risk of theft or embezzlement.

Question 12

Internal control over marketable securities is enhanced when:

Accepted Answer

Custody of securities by a third party such as a stockbroker or bank enhances internal control by segregating the custody of assets from the accounting and record-keeping functions, reducing the risk of theft or misuse.

Question 13

The Standard Form to Confirm Account Balances with Financial Institutions includes information on all of the following except:

Accepted Answer

The Standard Form to Confirm Account Balances with Financial Institutions includes information on the date due and interest rate of a direct liability, as well as a description of collateral if applicable. However, it does not include information on the principal amount paid on a direct liability.

Question 14

In November,two months before year-end,the bookkeeper erroneously recorded the receipt of a one year bank loan with a debit to cash and a credit to interest revenue.The most effective method for detecting this type of error is:

Accepted Answer

Sending a bank confirmation as of year-end would effectively detect the error because it involves directly confirming the bank balances and loan amounts with the bank, which would reveal the discrepancy caused by incorrectly recording the loan as interest revenue.

Question 15

Which of the following is not a control that generally is established over cash transactions?

Accepted Answer

Obtaining a receipt for every disbursement is not a control that is generally established over cash transactions, as the focus of controls is usually on the receipt of cash, rather than the disbursement of cash. However, other controls such as separating cash handling from recordkeeping, centralizing the receipt of cash, and depositing each day's receipts intact are commonly used to ensure the accuracy and security of cash transactions.

Question 16

In a manufacturing company which one of the following audit procedures would give the least assurance of the existence of the assets in the general ledger balance of investment in stocks and bonds at the audit date?

Accepted Answer

Examination of paid checks issued in payment of securities purchased provides the least assurance of the existence of the assets because it only confirms that payment was made, not whether the securities actually exist at the audit date.

Question 17

Which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees?

Accepted Answer

A bank lockbox system allows customers to send their payments directly to a special post office box managed by a bank. The bank then processes the payments and deposits them directly into the company's bank account, reducing the number of employees that handle the receipts and decreasing the risk of diversion. The other options may provide some level of control, but they do not address the issue of employee diversion of customer receipts directly.

Question 18

The auditors' count of the client's cash should be coordinated to coincide with the:

Accepted Answer

The answer of The auditors' count of the client's cash...

Question 19

Anderson embezzled $20,000 from her company's account in Bank X.At year-end,she hid the shortage by making a deposit on December 31 in Bank X,drawn on Bank Y.She has not recorded the transaction on the books.Which of the following is most likely to be effective in detecting this fraud?

Accepted Answer

A comparison of the bank cutoff statement to the cash receipts and disbursements records would reveal discrepancies between recorded transactions and actual bank activity, potentially uncovering the unrecorded deposit and embezzlement.

Question 20

By preparing a four-column bank reconciliation ("proof of cash")for the last month of the year,an auditor will generally be able to detect:

Accepted Answer

An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation will not appear on the bank statement but will be recorded in the books. This will result in a difference between the book balance and the bank balance, which will be detected by the bank reconciliation.

Quiz 10: Cash and Financial Investments