Question 1

Which of the following controls would a company most likely use to safeguard marketable securities when an independent trust agent is not employed?

Accepted Answer

Option B is the most likely control to safeguard marketable securities when an independent trust agent is not employed, as it involves two company officials being present to access the securities, which are kept in a bank safe-deposit box. This control ensures that there is more than one person responsible for the securities and that they are kept in a secure location. Option A involves periodic reviews by the investment committee, which may not be sufficient to prevent theft or misappropriation of the securities. Option C relates to tracing of transactions but does not address physical security of the securities. Option D involves verification by the chairman of the board, but it may not provide adequate physical security for the securities.

Question 2

The auditor should insist that a representative of the entity be present during the physical examination of securities in order to

Accepted Answer

The answer of The auditor should insist that a representative...

Question 3

Auditors will need to perform more substantive tests than normal to obtain sufficient appropriate evidence that a financial instrument is fairly stated if which of the following conditions exist?

Accepted Answer

If management's key assumptions are subject to volatility, it is likely that auditors will need to perform more substantive tests to obtain sufficient appropriate evidence. This is because the valuation of financial instruments can be more complex and uncertain in such situations, making it more difficult to obtain reliable evidence through other audit procedures. The other answer choices do not necessarily indicate a need for more substantive testing.

Question 4

In establishing the existence and ownership of a long-term investment in stock of a publicly traded company,an auditor should inspect the securities or

Accepted Answer

Confirming the number of shares owned that are held by an independent custodian is a direct method of verifying both the existence and the ownership of a long-term investment in stock. This approach provides reliable evidence because it involves an external confirmation from a third party who has custody of the securities.

Question 5

An entity has a large and active investment portfolio that is kept in a bank safe-deposit box.If the auditor is unable to examine and count the securities at the balance sheet date but will examine and count the securities shortly thereafter,the auditor most likely will

Accepted Answer

The answer of An entity has a large and active...

Question 6

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

Accepted Answer

Examination of canceled checks only verifies that payments were made, not that the securities exist at the audit date.

Question 7

Under which of the following circumstances would an auditor be most likely to intensify an examination of a $1,000 petty cash fund maintained on an imprest basis?

Accepted Answer

If the reimbursement of the fund from the general cash account occurs twice or more each week, it could indicate that the petty cash fund is being used for purposes other than small and incidental purchases, which violates the imprest system. This may lead to an intensification of the auditor's examination to ensure the fund is being properly maintained. The other options may also raise concerns, but they are not as significant as the frequency of reimbursement from the general cash account.

Question 8

The primary purpose of sending a standard confirmation request to financial institutions with which the entity has done business during the year is to

Accepted Answer

The primary purpose of sending a confirmation request to financial institutions is to corroborate information regarding deposit and loan balances. This helps in verifying and ensuring the accuracy of financial information presented in the entity's financial statements. While the other options may be part of the audit process, they are not the primary purpose of sending confirmation requests.

Question 9

Which of the following control activities would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments?

Accepted Answer

To ensure completeness of long-term investments, the entity can use the control activity of comparing the securities in the bank safe-deposit box with recorded investments. This is done by the internal auditor who verifies that all the securities purchased are recorded in the books and all the securities recorded in the books have been physically obtained and are held securely in the bank safe-deposit box.

Question 10

Explain the importance of the bank reconciliation to the audit and list some of the items found on the reconciliation.

Accepted Answer

The answer of Explain the importance of the bank reconciliation...

Question 11

For each assertion about cash listed below,give an example of a test of transactions for (1)cash receipts and (2)cash disbursements.
a.Classification.
b.Occurrence.
c.Authorization.
d.Completeness.

Accepted Answer

The answer of For each assertion about cash listed below,give...

Question 12

As one of the year-end audit procedures,the auditor instructed the entity's personnel to prepare a standard bank confirmation request for a bank account that had been closed during the year.After the entity's treasurer had signed the request,it was mailed to the bank by the assistant treasurer.What is the major flaw in this audit procedure?

Accepted Answer

The answer of As one of the year-end audit procedures,the...

Question 13

Examining brokers' advices for a sample of securities purchased during the year is a test for the assertion of

Accepted Answer

The answer of Examining brokers' advices for a sample of...

Question 14

Which of the following would provide the best form of evidential matter pertaining to the annual valuation of a long-term investment in which the entity owns a 45 percent voting interest?

Accepted Answer

The audited financial statements of the investee company would provide the best form of evidential matter as they are prepared using generally accepted accounting principles and are audited by an independent auditor. This would provide reasonable assurance about the reliability of the financial information presented in the statements. Market quotations, fair value, and historical costs may not necessarily reflect the true value of the investment and may not be directly relevant to the specific investment in question.

Question 15

Jones was engaged to examine the financial statements of Virginia Corporation for the year ended June 30.Having completed an examination of the investment securities,which of the following is the best method of verifying the accuracy of recorded dividend income?

Accepted Answer

The answer of Jones was engaged to examine the financial...

Question 16

Which of the following procedures would be most important in the audit of an investment valued at fair value?

Accepted Answer

Developing an independent estimate of the fair value measurement is the most important procedure in the audit of an investment valued at fair value as it provides the auditor with a benchmark against which they can compare management's estimate of the fair value. This helps the auditor in determining whether management's estimate is reasonable and reliable. While comparing the balance with the prior year (A) and reading footnote disclosures (B) are important procedures, they don't provide sufficient evidence of the accuracy of the fair value measurement. Inquiring of management (C) is also important, but it doesn't provide an independent estimate of fair value.

Question 17

Explain how cash plays a role in all business processes.

Accepted Answer

The answer of Explain how cash plays a role in...

Question 18

When an auditor is unable to inspect and count an entity's investment securities until after the balance sheet date,the bank where the securities are held in a safe-deposit box should be notified on or before the balance sheet date that it will be asked to

Accepted Answer

The answer of When an auditor is unable to inspect...

Question 19

Which of the following is not one of the auditor's primary objectives in an examination of marketable securities?

Accepted Answer

While determining whether securities are authentic may be a part of the auditor's examination, it is not one of the primary objectives. The three primary objectives are to determine ownership (whether the securities are the property of the entity), existence (whether the securities actually exist), and proper classification on the balance sheet.

Question 20

When there is a large number of negotiable securities in multiple locations,careful planning of the physical inspection and count of the securities by the auditor is necessary to guard against

Accepted Answer

The correct answer is C because when there are multiple locations with large numbers of negotiable securities, there is a risk that securities counted at one location could be moved and presented as part of the inventory at another location, misleading the auditor about the actual total holdings. This substitution could hide theft, losses, or mismanagement. Options A, B, and D are concerns in auditing securities, but the specific scenario of careful planning for physical inspection across multiple locations directly addresses the risk of substitution of securities to misrepresent holdings.

Quiz 16: Auditing the Financinginvesting Process: Cash and Investments