Ch 10

Question 1

What are the sources of cash?

Answer 1

General checking account.
Payroll checking accounts.
Petty cash.
Savings accounts.

Question 2

What 3 cash equivalents?

Answer 2

Money market funds.
Certificates of deposit.
Savings certificates.

Question 3

use the understanding of the client and its environment to considered

Answer 3

inherent risk, including fraud risks, related to cash

Question 4

You need to obtain an understanding of __ __ over cash

Answer 4

Internal control

Question 5

Assess the risks of material misstatement of cash and design tests of controls and substantive procedures that:

Answer 5

Substantiate the existence of recorded cash and occurrence of the related transactions.
Establish the completeness of recorded cash.
Verify the cutoff and accuracy of cash transactions
Determine that the client has rights to recorded cash.
Determine that the presentation and disclosure of cash, including restricted funds, are appropriate.

Question 6

Cash typically has a small account balance, but auditors devote a more hours than justified by the balance because:

Answer 6

Liabilities, revenues, expenses and most other assets flow through cash.

Most liquid asset so greater temptation for misappropriation.

High risk account.

Question 7

Finance and accounting department work together to provide assurance that:

Answer 7

• All cash that should have been received was in fact received, recorded accurately and deposited promptly.
• Cash disbursements have been made for authorized purposes only and have been properly recorded.
• Cash balances are maintained at adequate, but not excessive, levels by forecasting.

Question 8

What are the 9 general guidelines for internal control over cash?

Answer 8

1. Do not permit any one employee to handle a transaction from beginning to end.
2. Separate cash handling from recordkeeping.
3. Centralize receiving of cash to the extent practical.
4. Record cash receipts on a timely basis.
5. Encourage customers to obtain receipts and observe cash register totals.
6. Deposit cash receipts promptly.
7. Make all disbursements by check or electronic funds transfer, with the exception of small expenditures from petty cash.
8. Have monthly bank reconciliations prepared by employees not responsible for the issuance of checks or custody of cash. The completed reconciliation should be reviewed promptly by an appropriate official.
9. Monitor cash receipts and disbursements using management review controls, including implementing data analytics software and by comparing recorded amounts to forecasted amounts.

Question 9

Give three examples of internal controls over cash sales:

Answer 9

Involvement of two or more employees.
Cash Registers.
Electronic point of sales systems.

Question 10

List out the different internal controls/steps for the collection of receivables. Just generally know them.

Answer 10

Initial listing (or input) of details of cash receipts.
Custody and depositing of cash receipts.
Maintenance of customer account records.
Reconciliation of customers’ ledgers with control accounts.
Mailing monthly statements to customers.
Collection activity and past-due accounts.
Direct receipt of funds by financial institution.
Electronic Funds Transfer.

Question 11

What are internal controls in place for cash disbursements?

Answer 11

Segregation of duties.
Payment by check or electronic funds transfer.
Pre-numbered checks.
Match of purchase order and receiving documents with vendor’s invoice.
Review of supporting documents by authorized check signer.
Cancelation of supporting documents.
Authorized check signer should mail checks.
Monthly bank reconciliations.

Question 12

Steps for the risk assessment for the audit of cash (5)

Answer 12

1. Use the understanding of the client and its environment to consider inherent risks, including fraud risks, related to cash.
2. Obtain an understanding of internal control over cash.
3. Assess the risks of material misstatement and design further audit procedures.
4. Perform further audit procedures (tests of controls)
5. Perform further audit procedures—substantive procedures for cash transactions and balances.

Question 13

Examples of controls the auditors test for further audit procedures/tests of controls are:

Answer 13

Controls over the accuracy and completeness of accounting records and bank reconciliations.

Controls over the accuracy and completeness of processing cash receipts and recording them in the accounting records.

Controls over the accuracy and completeness of cash disbursements and recording them in the accounting records.

Management review controls by evaluating the the relevance and precision of the controls. Precision is evaluated by considering the frequency of the review, the level of aggregation, and the predictability of the expectations used.

Question 14

List out the 10 substantive procedures for cash:

Answer 14

a. 1. Obtain analyses of cash balances and reconcile them to the general ledger.
b. 2. Confirm cash balances with financial institutions.
c. 3. Obtain or prepare reconciliations of bank (financial institution) accounts as of the balance sheet date and consider the need to reconcile bank activity for additional months.
d. 4. Obtain a cutoff bank statement containing transactions of at least seven business days subsequent to balance sheet date.
e. 5. Identify and investigate unusual cash receipts and disbursements.
f. 6. Count and list cash on hand.
g. 7. Verify the client’s cutoff of cash receipts and cash disbursements.
h. 8. Analyze bank transfers for the last week of audit year and the first week of following year.
i. 9. Investigate any checks representing large or unusual payments to related parties.
j. 10. Evaluate proper financial statement presentation and disclosure of cash.

Question 15

For this substantive procedure, what audit objectives/assertions is it for?

Obtain analyses of cash balances and reconcile them to general ledger.

Answer 15

Existence and accuracy

Question 16

For this substantive procedure, what audit objectives/assertions is it for?

Confirm cash balances with financial institutions.
Obtain reconciliations of bank balances and consider reconciling bank activity.
Obtain bank cutoff statement.
Identify and investigate unusual cash receipts and disbursements.
Count cash on hand.

Answer 16

Existence, occurrence, accuracy, cutoff, and rights

Question 17

For this substantive procedure, what audit objectives/assertions is it for?

Verify the client’s cutoff of cash transactions.
Analyze bank transfers occurring year-end.

Answer 17

Cutoff, existence, occurrence, rights, and completeness

Question 18

For this substantive procedure, what audit objectives/assertions is it for?

Investigate payments to related parties.
Evaluate financial statement presentation and disclosure.

Answer 18

Presentation and disclosure

Question 19

Confirmation of amounts on deposit by direct communication with financial institution officials.
Standard form agreed to by:

Answer 19

A I C P A.
American Bankers Association.
Bank Administration Institute.

Question 20

Confirmations Addresses only the client’s

In regards to cash/cash sources

Answer 20

deposit and loan balances.

Question 21

The confirmation process may be performed electronically if

Answer 21

properly controlled

Question 22

The confirmation determines what is on deposit a the bank.
Reconciliations of the accounts must be used to determine the actual amount of cash by considering:

Think about the numbers you would use for a reconciliation

Answer 22

Outstanding checks.
Deposits in transit.
Other items recorded by the bank, e.g., bank charges for services.

Question 23

Define kiting

Answer 23

Manipulations that utilize temporarily overstated bank balances to conceal cash shortage or meet short-term cash needs.

Question 24

What do kiting schemes rely upon

Answer 24

Kiting schemes rely upon the existence of a “float period” in which transactions are not processed in real time; increased electronic processing has made kiting more difficult through reducing (or eliminating the float period).

Question 25

Auditors can detect kiting by

Answer 25

preparing a schedule of bank transfers for a few days before and after balance sheet date.

Question 26

What are misstatements that auditors can look at when kiting is happening

Answer 26

Misstatements.
Date of recording per transfer per the books are from different financial statement periods.
Date the check was recorded by the bank is from financial statement period prior to books.

Question 27

The Check 21 Act (checks processed electronically) makes

Answer 27

kitting of checks very difficult because check clearing is so fast.
Checks may be processed electronically.
Electronic processing creates a substitute check – an electronic image of check.
Legal equivalent of original check for all purposes

Question 28

Audit implications of the check 21 act

Answer 28

Need to rely on substitute check for evidence of check.
Impossible for clients to kite checks (manipulate bank balances to conceal cash shortage).

Question 29

Give examples of financial investments

Answer 29

Marketable securities.
Treasury instruments.
Commercial paper.
Mortgages and trust deeds.
Cash surrender value of insurance policies.
Derivatives.

Question 30

Specialized Knowledge to Audit Financial Investments:
Identifying controls at service organizations

Answer 30

organizations that provide financial services and are part of the client’s information system.

Question 31

Specialized Knowledge to Audit Financial Investments: Obtaining an understanding of information systems

Answer 31

for securities and derivatives that are highly dependent on computer technology.

Question 32

Specialized Knowledge to Audit Financial Investments: Understanding the methods used to determine the fair values of

Answer 32

financial investments, especially those that must be valued using complex valuation models.

Question 33

Specialized Knowledge to Audit Financial Investments:Applying complex accounting principles

Answer 33

to various types of financial investments.

Question 34

Specialized Knowledge to Audit Financial Investments: Assessing inherent and control risk for

Answer 34

assertions about derivatives used in hedging activities.

Question 35

For investments: What are the three objectives for the audit of financial statements?

Not rlly objective, rather what are the first 3 steps to audit a F/S acc

Answer 35

Use their understanding of the client and its environment to assess inherent risks including fraud risks.
Obtain an understanding of internal control over investments.
Assess the risks of material misstatements of investments and design further audit procedures that.

Question 36

Assess the risks of material misstatements of investments and design further audit procedures that.

Answer 36

a. Substantiate the existence of recorded financial investments and the occurrence of investment transactions.
b. Establish the completeness of financial investments and investment transactions.
c. Verify the cutoff of investment transactions.
d. Determine that the client has rights to recorded investments.
e. Determine that the valuation of financial investments is appropriate; that is, determine that such valuation is in accordance with the cost, fair value, or equity method of accounting and that any unrealized appreciation or depreciation in value is appropriately recorded.
f. Determine that the presentation and disclosure of financial investments and realized and unrealized gains and losses are appropriate.

Question 37

List out 8 types of controls over financial investments

Answer 37

1. Establishment of formal investment policies.
2. Review and approval of investment activities by the investment committee of the board of directors.
3. Separation of duties among employees.
   a. Authorizing purchases and sales.
   b. Having custody of the securities.
   c. Maintaining records.
4. Detailed records of all securities owned and the related revenue from interest and dividends.
5. Registration in the name of the company.
6. Periodic physical inspection of securities.
7. Management reviews of the activity in investment accounts and related revenue.
8. Controls over valuation processes including the use competent personnel or appropriate outside experts.

Question 38

Give examples of potential misstatements for financial investments (6)

Answer 38

Theft of marketable securities.
Unauthorized investment transactions.
Incomplete recording of investments.
Improper valuation of investments.
Failure to properly account for derivatives.
Inadequate disclosure of the nature of investment activities.

Question 39

4. Perform further audit procedures – tests of controls. Examples of tests of controls:

Answer 39

Test controls over processing and recording investment transactions by vouching a sample of transactions or using data analytics to test transactions.
Review and test reports of investment activity prepared for the investment committee.
Inspect reports by internal auditors regarding their periodic inspection and review of securities and derivative instruments.
Test management review controls by inspecting monthly reports on securities owned, purchased, and sold and amounts of revenue earned and budgeted, and management follow-up on unusual items or relationships.
If estimates must be used to develop estimates of the fair value of investments, perform tests of the processes and controls for developing the estimates.

Question 40

Perform further audit procedures—substantive procedures for investment transactions and year-end balances.
Give examples: (11)

Answer 40

a. Obtain or prepare analyses of the investment accounts and related revenue, gain, and loss accounts and reconcile them to the general ledger.
b. Inspect securities on hand and review agreements underlying derivatives.
c. Confirm securities and derivative instruments with holders and counterparties.
d. Vouch selected purchases and sales of financial investments during the year and verify the client’s cutoff of investment transactions.
e. Review investment committee minutes and reports.
f. Perform analytical procedures.
g. Make independent computations of revenue from securities.
h. Inspect documentation of management’s intent to classify derivative transactions as hedging activities.
i. Evaluate the method of accounting for investments.
j. Test the valuation of financial investments.
k. Evaluate financial statement presentation and disclosure of financial investments.

Question 41

Give audit assertion: Obtain analysis of investments and related accounts and reconcile to ledger.

Answer 41

Existence and rights Occurrence

Question 42

Inspect securities on hand and review agreements underlying derivatives.
Confirm securities and derivative instruments with holders and counterparties.
Vouch selected purchases and sales of investments during the year.
Verify the client’s cutoff of investment transactions.

Answer 42

Existence and rights
Occurrence and accuracy
Completeness
Cutoff
Valuation

Question 43

Review investment committee minutes and reports.

Answer 43

Completeness

Question 44

Perform analytical procedures or data analytics.
Make independent computations of revenue securities.

Answer 44

Existence
Rights
Occurrence
Completeness

Question 45

Inspect documentation of management’s intent to classify derivative transactions as hedges.
Evaluate the method of accounting for investments.
Test the valuation of financial investments.

Answer 45

Valuation
Presentation

Question 46

Evaluate financial statement presentation and disclosure of financial investments.

Answer 46

Presentation

Question 47

F A S B valuation methods for investments.

Answer 47

Depends of the classification.
May use the fair value method for all investments.

Question 48

F A S B requirements for derivative instruments and hedging activities:

Answer 48

All derivative instruments valued at fair values.
Unrealized gains or losses depend on classification as hedges.

Question 49

F A S B hierarchy for market value of investments.

Answer 49

Level 1—reference to market prices.
Level 2—reference to markets for similar instruments.
Level 3—use of a valuation model.