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Auditing Chapter 10
Audit Exam 3
| Question | Answer |
|---|---|
| In relation to its materiality, the audit of cash requires little audit time. | False |
| Designating the cashier to be custodian of the petty cash fund is more acceptable from the standpoint of internal control than making the cashier responsible for maintenance of accounts receivable records. | True |
| A salesperson who uses a cash register to record over-the-counter sales should, at the end of each workday, turn over to a supervisor the cash register tape and a corresponding amount of cash. | True |
| An employee who prepares checks and submits them with supporting documents to the official authorized to sign checks should not be responsible for mailing the signed checks. | True |
| Cash should be deposited weekly so it can be counted several times before being sent to the bank. | False |
| The "lapping" of cash receipts is most likely to occur when one person has both responsibility for record keeping for cash receipts and custody of cash. | True |
| An improper bank reconciliation designed to conceal a cash shortage is more likely to overstate than understate the amount of outstanding checks. | False |
| Auditors should never count a cash fund with the custodian present because the custodian might be able to influence the count. | False |
| The standard financial institution confirmation request used by the auditors is a means of obtaining documentary evidence about both assets and liabilities. | True |
| When the confirmation process is not performed electronically, confirmation requests should be mailed by the auditors in envelopes bearing the auditors' return address. | True |
| The audit working paper known as a "proof of cash" is a means of proving that checks paid by the bank during the test period were not in excess of authorized cash receipts during that same test period. | False |
| A cutoff bank statement addresses whether checks outstanding at year-end were included in the list of outstanding checks in the year-end bank reconciliation. | True |
| The practice of "kiting" as a means of overstating cash is possible only if the client maintains two or more bank accounts. | True |
| A client has $100,000 on deposit at year‑end. A borrowing agreement calls for minimum balance of $40,000 on deposit during the life of the bank loan. On the balance sheet, the asset cash at $60,000, the excess of the deposit over the compensating balance. | False |
| Good internal control over financial investments requires that the treasurer obtain certificates for all securities and keep them in the company safe. | False |
| The inspection of securities on hand should be coordinated with the verification of inventories because both involve counting and inspection and can conveniently be combined. | False |
| A derivative is a financial instrument that derives its value from another financial instrument, an underlying asset, or indices. | True |
| A official client stole securities from the safe and sold them. internal control, if the official purchased identical securities before the year-end and placed them in the safe deposit box, this "borrowing" would go undetected during the audit. | False |
| Auditors normally verify the amount of dividends earned on the client's security investments by writing directly to the companies that paid the dividends. | False |
| Marketable equity securities should be valued at cost. | False |
| The least crucial element of internal control over cash is: | Separation of cash receipts from preparing deposits. |
| Internal control over cash receipts is weakened when an employee who receives customer mail receipts also: | Records credits to individual accounts receivable. |
| Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: | treasurer. |
| Which of the following is a frequent control over cash disbursements? | Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations. |
| As compared to manual processing, electronic processing of cash transactions generally makes kiting: | more difficult to accomplish. |
| Under which of the following circumstances would an auditor be most likely to intensify an examination of a $500 imprest petty cash fund? | Reimbursement occurs twice each week. |
| The auditors who are engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to: | verify reconciling items on the client's bank reconciliation. |
| Which of the following audit procedures is the most appropriate when internal control over cash is weak or when a client requests an investigation of cash transactions? | Proof of cash. |
| In order to avoid the misappropriation of company-owned financial investments, which of the following is the best course of action that can be taken by the management of a company with a large portfolio of financial investments? | Require that the safekeeping function for securities be assigned to a securities broker who will act as a custodial agent. |
| The financial management of a company should take steps to see that company investment securities are protected. Which of the following is not a step that is designed to protect investment securities? | Custody of securities should be assigned to persons who have the accounting responsibility for securities. |
| Which of the following is not one of the auditors' primary objectives in an examination of investments in securities? | To determine whether all securities are in proper, secure, files at year-end. |
| A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and submission of coupons for periodic interest collections probably should be delegated to the: | treasurer. |
| "Lapping" of accounts receivable. | Tracing remittance advices to postings in the accounts receivable records. |
| Using the company’s securities during the year and replacing them prior to year-end. | Comparing securites’ serial numbers to those in the prior year’s audit working papers. |
| "Kiting" of cash. | Preparing and verifying a schedule of bank transfers. |
| Omitting several outstanding checks from the year-end bank reconciliation. | Review of the bank cutoff statement. |
| Recording fictitious cash sales throughout the year. | Preparing a “proof of cash” for the entire audit period. |
| Writing checks prior to year-end, but not mailing them until a week thereafter. | Review of the bank cutoff statement. |
| Omitting an important financial statement disclosure item related to a loan agreement obtained from a nonfinancial institution. | Confirm terms using a debt confirmation form. |
| Recording short-term outstanding debt (per debt agreement) as long term; debt is due loan agency. | Confirm terms using a debt confirmation form. |
| Altering the ending balance on the year-end bank statement. | Review of the bank cutoff statement. |
| Receiving a loan from the company’s primary banking institution and not recording the entry, but placing the cash in overseas account not recorded in the company’s accounting records. | Confirm using the standard form for use with financial institutions. |
| Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client’s employees? | A bank lock box system. |
| To provide assurance that each voucher is submitted and paid only once, the auditors most likely would examine a sample of paid vouchers and determine whether each voucher is: | Stamped “paid” by the check signer. |
| In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also: | Is responsible for mailing the checks. |
| To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except: | General Ledger |
| You have been assigned to the year-end audit of a financial institution and are planning the timing of audit procedures relating to cash. You decide that it would be preferable to: | Coordinate the count of cash with the count of marketable securities and other negotiable assets. |
| Which of the following procedures would the auditors most likely perform to test controls relating to management’s assertion about the completeness of cash receipts for cash sales at a retail outlet? | Observe the consistency of the employees’ use of cash registers and tapes. |
| Reconciliation of the bank account should not be performed by an individual who also: | Processes cash disbursements. |
| The auditors suspect that a client’s cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditors most likely would compare the: | Details of bank deposit slips with details of credits to customer accounts. |
| In order to guard against the misappropriation of company-owned marketable securities, which of the following is the best course of action that can be taken by a company with a large portfolio of marketable securities? | Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent. |
| Hall had large funds to invest temporarily. The BOD purchased securities and derivatives and assigned the future purchase and sale decisions to a responsible financial executive. The best person to make periodic reviews of the investment would be: | An investment committee of the board of directors. |
| The auditors who physically examine securities should insist that a client representative be present in order to: | Acknowledge the receipt of securities returned. |
| The best way to verify the amounts of dividend revenue received during the year is: | Verification by reference to dividend record books. |
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