The auditors should count small petty cash funds at year-end to make sure that balance is not understated on the financial statements.
TRUE
FALSE
FALSE
Confirmations for cash balances should be mailed only to the financial institutions with which the client has a cash balance at year-end.
TRUE
FALSE
FALSE
A proof of cash is an audit procedure that is performed on almost every engagement.
TRUE
FALSE
FALSE
A compensating balance agreement always requires that cash be reclassified as a noncurrent asset.
TRUE
FALSE
FALSE
Verification of cash and other liquid assets on the same date may prevent substitution of one form of asset for another.
TRUE
FALSE
TRUE
An auditor's analytical procedures have revealed that the accounts receivable of a client have doubled since the end of the prior year. However, the allowance for doubtful accounts, as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor?
A. Credit standards were liberalized in the current year.
B. Twice as many accounts receivable were written off in the prior year as compared to this year.
C. A greater percentage of accounts were currently listed in the "more than 90 days overdue" category than in the prior year.
D. The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.
D
By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally be able to detect:
A. An unrecorded deposit made at the bank at the end of the month.
B. A second payment of an account payable which had already been paid in full two months earlier.
C. An embezzlement of cash receipts not recorded in the cash receipts journal before they had been deposited into the bank.
D. A receivable collected that had previously been written off as uncollectible.
A
Kiting would least likely be detected by:
A. Analyzing details of large cash deposits around year-end.
B. Comparing customer remittance advices with recorded disbursements in the cash disbursements journal.
C. Preparing a four-column bank reconciliation for all major cash accounts.
D. Preparing a schedule of interbank transfers by using the client's records and bank statements around year-end.
B
Your client left the cash receipts journal open after year-end for an extra day and included January 1 cash receipts in the 12/31/XX totals. All of those cash receipts were due to cash sales. Assuming the client uses a periodic inventory system with a 12/31/XX count of the physical inventory, which of the following is most likely to be true relating to the year XX financial statements?
A. Sales are understated.
B. Accounts receivable are understated.
C. Inventory is overstated.
D. Net income is overstated.
D
An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the best evidence on operating effectiveness?
A. Select and examine receiving reports and test whether the related canceled checks are dated no earlier than the receiving reports.
B. Select and examine receiving reports and test whether the related canceled checks are dated no later than the receiving reports.
C. Select and examine canceled checks and test whether the related receiving reports are dated no earlier than the checks.
D. Select and examine canceled checks and test whether the related receiving reports are dated no later than the checks.
D
By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally not be able to detect:
A. An unrecorded deposit made at the bank at the end of the month.
B. A second payment of an account payable which had already been paid in full two months earlier.
C. An unrecorded check cashed during that month.
D. A bank charge during the month not recorded on the books.
B
Which procedure is an auditor most likely to use to detect a check outstanding at year-end that was not recorded as outstanding on the year-end bank reconciliation?
A. Prepare a bank transfer schedule using the client's cash receipts and cash disbursements journal.
B. Receive a cutoff statement directly from the client's bank.
C. Prepare a four column bank reconciliation using the year-end bank statement.
D. Confirm the year-end balance using the standard form to confirm account balance information with financial institutions.
B
An auditor may obtain information on the December 31 month-end balance per bank in which of the following?
Standard Confirmation Form January 1-10 Cutoff Statement
A. Yes
Yes
B. Yes No
C. No Yes
D. No No
A. Option A
B. Option B
C. Option C
D. Option D
A
An auditor may obtain information on the December 31 month-end balance per bank in which of the following?
December 31 Bank Statement Schedule of Bank (Cash) Transfers
A. Yes Yes
B. Yes No
C. No Yes
D. No No
A. Option A
B. Option B
C. Option C
D. Option D
B
Which of the following is correct concerning "window dressing" for cash?
A. A segregation of duties within the cash function effectively eliminates its occurrence.
B. It generally involves manipulation of inventory.
C. It is illegal, and an audit is designed to provide reasonable assurance of its detection.
D. Many forms of it require no action by the auditors.
D
Which of the following statements is not correct?
A. Cash is important to the audit process because of its vulnerability to misappropriation, despite the fact that the balance at the balance sheet date may be immaterial.
B. Payroll cash account balances kept on an imprest basis are more easily controlled than others not so kept.
C. Confirmation of cash should only be performed as of the balance statement date because the auditor expresses an opinion as of that date.
D. Reviewing interbank transfers is important to the auditor because of the possibility that the client may be engaged in kiting.
C
The auditors use a bank cutoff statement to compare:
A. Deposits in transit on the year-end cash general ledger account to deposits in the cash receipts journal.
B. Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.
C. Deposits listed on the cutoff statement to disbursements in the cash disbursements journal.
D. Checks dated subsequent to year-end to the outstanding checks listed on the year-end bank statement.
B
A practical and effective audit procedure for the detection of lapping is:
A. Preparing an interbank transfer schedule.
B. Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank.
C. Tracing recorded cash receipts to postings in customers' ledger cards.
D. Preparing a proof of cash.
B
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:
A. An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation.
B. A cash sale which was not recorded on the books and was stolen by a bookkeeper.
C. An embezzlement of unrecorded cash receipts on receivables before they had been deposited into the bank.
D. A credit sale which has been recorded twice in the sales journal.
A
Jones embezzled $10,000 from his company's account in Bank A. At year-end, he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the transaction on the books. This is an example of:
A. Lapping.
B. Kiting.
C. Effective cash management.
D. Related party transactions.
B
Jones embezzled $10,000 from his company's account in Bank A. At year-end, he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the transaction on the books. Which of the following is most likely to be effective in detecting this fraud?
A. Bank confirmation.
B. Bank transfer schedule prepared using only the cash receipts and cash disbursements journals.
C. Comparison of bank cutoff statement to the cash receipts and disbursements records.
D. Receivable confirmation.
C
Which of the following is the best audit procedure for the detection of lapping?
A. Comparison of postings of cash receipts to accounts with the details of cash deposits.
B. Confirmation of the cash balance.
C. Reconciliation of the cash account balances.
D. Preparing a proof of cash.
A
Which of the following manipulations of cash transactions would overstate the cash balance on the financial statements?
A. Understatement of outstanding checks.
B. Overstatement of outstanding checks.
C. Understatement of deposits in transit.
D. Overstatement of bank services charges.
A
Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting?
A. Review composition of authenticated deposit slips.
B. Review subsequent bank statements and canceled checks received directly from the banks.
C. Prepare a schedule of bank transfers.
D. Prepare year-end bank reconciliations.
C
As one of the year-end audit procedures, the auditor instructed the client's personnel to prepare a confirmation request for a bank account that had been closed during the year. After the client's treasurer has signed the request, it was mailed by the assistant treasurer. What is the major flaw in this audit procedure?
A. The confirmation request was signed by the treasurer.
B. Sending the request was meaningless because the account was closed before the year-end.
C. The request was mailed by the assistant treasurer.
D. The CPA did not sign the confirmation request before it was mailed.
C
On receiving the bank cutoff statement, the auditor should trace:
A. Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal.
B. Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.
C. Deposits listed on the cutoff statement to deposits in the cash receipts journal.
D. Checks dated subsequent to year-end to the outstanding checks listed on the year-end bank reconciliation.
B
To gather evidence regarding the balance per bank in a bank reconciliation, an auditor could examine all of the following except:
A. Cutoff bank statement.
B. Year-end bank statement.
C. Bank confirmation.
D. General ledger.
D
Which of the following cash transfers is most likely to result in a misstatement of cash at December 31, 20X7?
Bank Transfer Schedule
Disbursement Receipt
Recorded
in books Paid by bank Recorded
in books Received by bank
A) 12/31/X7 1/4/X8 12/31/X7 12/31/X7
B) 1/4/X8 1/5/X8 12/31/X7 1/4/X8
C) 12/31/X7 1/5/X8 12/31/X7 1/4/X8
D) 1/4/X8 1/11/X8 1/4/X8 1/4/X8
A. Transfer A.
B. Transfer B.
C. Transfer C.
D. Transfer D.
B
For purposes of an audit of financial statements, electronic confirmation of cash balances:
A. Is acceptable when properly controlled.
B. Is acceptable, but only when combined with a non-electronic approach.
C. Is only acceptable for immaterial accounts.
D. Is not acceptable.
A
The Parmalat fraud case involved:
A. A fraudulent cash confirmation.
B. Kiting of funds between banks in India and banks in Pakistan.
C. A bank reconciliation performed by the client that systematically understated cash.
D. Major unrecorded disbursements for equipment.
A
Banks may process electronic "substitute checks" in place of customer written hard copy checks due to the:
A. Check Clearing for the 21st Century Act.
B. Public Company Accounting Oversight Board's Standard No. 2.
C. Foreign Corrupt Practices Act.
D. Sarbanes-Oxley Act.
A
Which of the following is correct relating to kiting?
A. It is ordinarily used to understate cash.
B. It is more difficult to accomplish in an electronic environment as contrasted to a non-electronic environment.
C. It is a lapping approach performed using receivable accounts.
D. It is seldom, if ever, used.
B