Chapter 10 TB Flashcards
1
Q
A risk of fraud is not associated with petty cash funds because of the small amounts of money involved.
T or F?
A
FALSE
2
Q
Automated controls over cash eliminate the inherent risks associated with the cash account.
T or F?
A
FALSE
3
Q
In auditing cash accounts, auditors typically focus primarily on the existence/occurrence and completeness assertions.
T or F?
A
TRUE
4
Q
Planning analytical procedures for cash balances typically include trend analysis and ratios for comparison with the auditor’s expectations.
T or F?
A
TRUE
5
Q
The audit of the cash account is inherently risky due to volume of activity, liquidity, and the account’s susceptibility to fraud.
T or F?
A
TRUE
6
Q
The existence of debt covenants with restrictions related to cash or working capital increase the risks of material misstatement in cash accounts.
T or F?
A
TRUE
7
Q
The existence or occurrence assertion as related to cash is concerned with proper classification on the balance sheet.
T or F?
A
FALSE
The presentation and disclosure assertion as related to cash is concerned with proper classification on the balance sheet.
8
Q
A lockbox is a mailbox type of depository device that is located in front of the client’s premises, allowing customers to remit payment in a timely manner.
T or F?
A
FALSE
A lockbox system is a service provided by banks to businesses for the receipt of payment from customers. The term “lockbox” refers to a post office box that the bank operates on behalf of the business. Under this system, customers send their payments directly to the lockbox.
The bank will collect and process the customer payments. The balance paid by the customers will be reflected in the client’s checking account.
9
Q
An assessment of the client’s internal control over cash and marketable securities should take place during the performance of the substantive tests on these accounts.
T or F?
A
FALSE
Tests of controls
10
Q
Cash and cash equivalents reported on the balance sheet may include debt securities that mature less than six months from the balance sheet date.
T or F?
A
FALSE
11
Q
Skimming occurs when an employee makes a sale but does not record it and steals the cash.
T or F?
A
TRUE
A form of white-collar crime, skimming is taking cash “off the top” of the daily receipts of a business and officially reporting a lower total.
12
Q
Because substantive audit procedures are largely ineffective for cash accounts, auditors typically focus on tests of controls when the risk of material misstatement is assessed at a high level.
T or F?
A
FALSE
13
Q
Electronic funds transfers have controls built into the process and do not require further reconciliation by the client.
T or F?
A
FALSE
14
Q
The auditor’s performance of an independent reconciliation of the client’s bank accounts provides evidence as to the rights and obligations of the year-end cash balances.
T or F?
A
FALSE
15
Q
Customer checks received at the client company should be restrictively endorsed within one week of receipt.
T or F?
A
FALSE
Customer checks received at the client company should be restrictively endorsed as soon as they arrive.
16
Q
A turnaround document is an effective control because it contains information useful for further processing of a payment received from a customer.
T or F?
A
TRUE
17
Q
In assessing risk relating to fraud, auditors brainstorm about potential fraud risks.
T or F?
A
TRUE
18
Q
Auditors usually perform relatively limited substantive analytical procedures for cash accounts and instead focus on substantive tests of details.
T or F?
A
TRUE
19
Q
Client management’s review of monthly bank reconciliations prepared by employees is an example of a control over the accuracy of cash balances that the auditor might test.
T or F?
A
TRUE
20
Q
Periodic bank reconciliations should be performed by the individual who makes the client’s bank deposits.
T or F?
A
FALSE
21
Q
Internal audits are seldom an effective deterrent to the theft of cash.
T or F?
A
FALSE
22
Q
Independent reconciliations of bank statement balances with the balance on the books should identify misstatements and any unusual banking activity.
T or F?
A
TRUE
23
Q
The primary purpose of the cutoff bank statement is to verify the reconciling items on the bank reconciliation.
T or F?
A
TRUE
24
Q
Kiting is an example of a technique used to intentionally overstate cash.
T or F?
A
TRUE
25
The standard bank confirmation should be sent to all banks used by the client during the year except those banks holding client accounts with a zero balance at year-end.
| T or F?
FALSE
26
The auditor may discover evidence of kiting by preparing an interbank transfer schedule.
| T or F?
TRUE
27
The standard bank confirmation includes the confirmation of cash accounts but not liabilities with financial institutions.
| T or F?
FALSE
28
Money laundering is designed to create the appearance that large sums of cash obtained from criminal activities, such as drug trafficking, originated from legitimate business sources.
| T or F?
TRUE
29
Smurfing involves the overstatement of a bank account by transferring funds at the end of the year to another bank account and failing to record the disbursement.
| T or F?
FALSE
## Footnote
Smurfing is a money-laundering technique involving the structuring of large amounts of cash into multiple small transactions. Smurfs often spread these small transactions over many different accounts, to keep them under regulatory reporting limits and avoid detection.
30
The cutoff statement is mailed to the client for an agreed-upon date and then copied for the audit files.
| T or F?
FALSE
## Footnote
A bank cut off statement is prepared by the bank on an interim date as required by the auditor and is sent to the auditor directly.
31
The valuation/allocation and completeness assertions are usually the most relevant for auditing cash.
| T or F?
FALSE
## Footnote
The existence/occurrence and completeness assertions are usually the most relevant for auditing cash.
32
The recording of a marketable security depends, in large part, on management’s intention with the investment.
| T or F?
TRUE
33
Notes issued by major corporations are known as commercial paper.
| T or F?
TRUE
34
The auditor obtains the current market value of marketable securities by confirmation with the holder of the security.
| T or F?
FALSE
35
Commercial paper is the term applied to notes issued by major corporations with poor credit ratings.
| T or F?
FALSE
## Footnote
Commercial paper is typically issued by financially stable companies with high credit ratings.
36
Auditors test the assertion of completeness by determining if any restrictions on the use of commercial paper by an entity are disclosed in the footnotes.
| T or F?
FALSE
## Footnote
Auditors test the assertion of presentation and disclosure by determining if any restrictions on the use of commercial paper by an entity are disclosed in the footnotes.
37
The valuation assertion is most relevant to the audit of marketable securities.
| T or F?
TRUE
38
Testing debt securities and commercial paper would typically include an analysis of interest income.
| T or F?
TRUE
39
Gains and losses are not considered by auditors in testing marketable securities, as they do not need to be disclosed.
| T or F?
FALSE
40
The ending price of securities can be verified through reliable publications and websites such as the Wall Street Journal.
| T or F?
TRUE
41
All marketable securities are carried at fair market value on the balance sheet.
| T or F?
FALSE
42
Thinly traded securities have a greater inherent risk related to valuation.
| T or F?
TRUE
43
Effective internal control over the cash account requires that the person responsible for making the bank deposit does not post the increase to cash in the accounting system.
| T or F?
TRUE
44
When there is a ready market for a financial instrument, the audit procedures related to valuation and disclosures are more straightforward than when the instrument is not readily marketable.
| T or F?
TRUE
45
When auditing financial hedges, the auditor should understand the product, identify relevant risks and controls, and understand the appropriate accounting.
| T or F?
TRUE
46
Many financial instruments offer a potentially higher return for investors along with a reduced level of risk.
| T or F?
FALSE
## Footnote
High risk, High return
47
Which one of the following risks is not a risk associated with cash?
Large volume of transactions.
Importance of meeting debt covenants.
Complex valuation issues.
Easy to manipulate.
C
48
Under which of the following circumstances would the valuation assertion for cash most likely have an increased level of inherent risk?
Client has cash holdings in foreign currency in a politically unstable country.
Client has cash holdings in multiple U.S. financial institutions over a wide geographic area.
Client holds investments in complex financial instruments.
All of the above
A
49
The cash account is significant to the auditor for which of the following reasons?
The cash account balance is the culmination of a large volume of transactions.
The cash account is not as susceptible to fraud as most other accounts.
Cash is the only account that provides opportunity for fraud.
Automated systems do not possess the capability to maintain strong internal controls over cash.
A
50
Which of the following situations would normally be discovered by testing the bank reconciliation?
Failure to bill a customer.
Failure to include a deposit in transit on the bank reconciliation.
Duplicate payment of a vendor’s invoice.
Payment to an employee for more hours than she worked.
B
51
Which of the following is not a normal edit test as part of computerized control for checks?
Field checks.
Self-checking digits.
Cross-references.
Reasonableness tests.
C
## Footnote
* A FIELD CHECK determines what types of characters can be inputted into the field. The different types of characters include numbers, text, dates, symbols, etc.
* SELF-CHECKING DIGIT is where an extra digit is added to a number. The extra digit is computed from the other digits in the number. The computer program can then check input by recomputing and comparing the check digit. This is a useful control over the input of account numbers.
* A REASONABLENESS TEST is an auditing procedure that examines the validity of accounting information. It is useful at a high level for spotting inconsistencies in data.
* CROSS-REFERENCING is the act of referencing a document to eliminate the duplication of
documentation. It is not an edit test.
52
Which one of the following is not a fundamental internal control the auditor would expect to find in place for a cash processing system?
Segregation of duties.
Electronic payments.
Authorization of transactions.
Periodic internal audits.
B
53
During the testing of a year-end bank reconciliation, an auditor noticed that the majority of checks listed as outstanding at year-end did not clear the bank until the middle of the subsequent month. Which of the following is a likely explanation?
A high probability of kiting.
A high probability of lapping.
The year-end cash disbursements records had been closed prior to year-end.
Checks were issued before year-end but not mailed until the subsequent period.
D
54
As cash processing systems become more automated and integrated, which of the following is true about the general concept of segregation of duties?
Segregation of duties becomes less important.
Segregation of duties becomes more important.
The importance of segregation of duties does not change.
Segregation of duties becomes completely computerized without human involvement.
C
55
Which of the following controls would be most successful in mitigating the theft of customer checks received in the mail?
Custody of receipts by the accounts receivable manager.
Restrictive endorsements placed on checks as soon as they arrive.
Weekly deposits to a secure bank.
Reconciliation of bank accounts each month.
B
56
Which of the following controls over cash would an auditor expect to observe?
Reconciliation of the general ledger to the subsidiary ledger.
Checks permanently marked "for deposit only" with the proper routing information.
Internal audits of marketable securities held in the company's lockbox.
Authorization privileges given only to those employees using the accounting system.
B
## Footnote
If you write “for deposit only” on the back of a check made out to you and then sign your name, the check can only be deposited in your account. This is called a *“restrictive endorsement,”* and it should prevent you or any other person from cashing the check.
57
What form of evidence is used by the auditor to verify bank reconciliation items?
Cash counting observation.
General ledger.
Bank confirmation
Cutoff statement
D
58
Electronic authorization privileges for cash transactions may be best assigned to individuals based on which of the following?
Roles and activities falling within appropriate segregation of duties.
Identification cards with picture identification.
Encrypted passwords memorized by employees.
The principle of "absolute knowledge."
A
59
Which of the following describes documents that accompany customer payments to help the clerk identify the payments?
Receipts such as register tapes.
Accommodation certificates such as authenticated customer tokens.
Turnaround documents such as remittance advices.
Checks stamped with restrictive endorsements such as customer signatures.
C
60
Which of the following best describes kiting?
Theft of cash for personal use and cover-up using the bank statement.
A fraudulent scheme to overstate cash at year-end by manipulating year-end transfers between bank accounts.
Manipulation of financial reporting by increasing both cash and debt by the same amount.
Colluding to steal cash by wiring money to a fictional vendor and concealing it with customer payments.
B
61
Which of the following represents a typical substantive audit procedure for cash balances?
Verify material deposits in transit to subsequent statements.
Review cash confirmations received by the client from the bank.
Foot cutoff bank statements provided by the financial institutions.
Perform kiting techniques to transfer cash between two client accounts.
A
62
How will the auditor most likely utilize the bank reconciliation as evidence in the audit of cash?
The auditor sends the reconciliation to the bank for independent verification.
The auditor performs the reconciliation for the client to record the proper cash balance.
The auditor traces the book balance of the reconciliation to the cutoff bank statement.
The auditor tests deposits in transit and outstanding items to other corroborating evidence.
D
63
Which of the following is the primary reason the auditor obtains and reviews a cutoff bank statement?
Verify the balance of cash per the bank's general ledger at the balance sheet date.
Verify the reconciling items on the year-end bank reconciliation.
Test for intentional lapping of bank transfers.
Foot the cutoff bank statement for completeness.
B
64
The auditor will send a standard bank confirmation to which of the following?
Financial institutions of customers using the lockbox.
Financial institutions for which the client has a balance greater than $0 at the end of the year.
Financial institutions with which the client has transacted during the year.
Financial institutions used by significant shareholders.
C
65
The ease with which cash can be stolen is most related to which of the following risks?
Control risk.
Inherent risk.
Detection risk.
Liquidity risk
B
66
Which of the following best describes a fraudulent scheme to overstate cash assets at year-end by recording deposits in transit in both the account from which the cash is withdrawn and the account to which it is transferred?
Lapping of cash.
Kiting of cash.
Embezzlement of cash.
Restrictive endorsements of cash.
B
67
The emphasis in verifying petty cash is normally on which of the following?
Year-end balance.
Controls over petty cash.
Transactions for the period.
Balance sheet classification.
B
68
When auditing marketable securities, the auditor will do which of the following?
Examine broker's advices evidencing purchase of securities.
Recompute income.
Foot schedule.
Both A and B.
All of the above.
E
69
The reported fair market value of securities held by the client can be verified by the auditor through which of the following procedures?
Comparing the values to those securities held by the auditing firm.
Confirming the fair values with the client as of the close of the year.
Comparing the fair values with the fair values of similar securities.
Comparing the fair values to credible publications and websites.
D
70
Which of the following items would not normally appear on bank reconciliations?
Balance per bank.
Outstanding deposits list.
Balance per books.
Outstanding checks list.
B
## Footnote
Deposits in transit list
71
Investments in securities are classified as which of the following?
Held-to-maturity.
Trading securities.
Available-for-sale securities.
All of the above.
D
72
Which of the following is the most relevant assertion with regards to the audit of cash?
Existence
Rights and obligations.
Valuation and allocation.
Presentation and disclosure.
A
73
Which of the following would not be used as part of analytical procedures for marketable securities?
Develop expectations about the level of amounts in ending balances.
Develop expectations about the relationship between the balances.
Verify ending balances prior to calculating the percent change.
Review changes in the balances, risk composition, and classification types.
C
74
Which of the following would the auditor use to test the existence of investments?
Footing the schedule of recorded investments.
Confirming or examining recorded investments.
Reviewing a schedule of investments sold during the year.
Recomputing interest and/or gains and losses.
B
75
Which assertion related to investments is tested when the auditor examines the documents for any restrictions?
Existence.
Rights.
Completeness.
Valuation.
B
76
Which of the following types of securities is valued at amortized cost, subject to an impairment test?
Held-to-maturity securities.
Available-for-sale securities.
Cash equivalent securities.
Trading securities.
A
77
Which of the following procedures does the auditor typically perform when testing the existence of cash?
Counting cash at the depository institution.
Inquiry of management.
Sending a standard bank confirmation.
Tracing the bank reconciliation to the general ledger.
C
78
When testing cash balances at the balance sheet date, the auditor foots the bank reconciliation and traces its reported book balance to the trial balance and its bank balance to the standard confirmation. Which of the following assertions is being tested with these procedures?
Rights.
Valuation.
Existence.
All of the above.
D
79
Assume that an auditor notes a large series of checks that does not clear the bank for an unusually long time after period end. Which of the following would the auditor likely suspect from this observation?
Vendors are eager to get their payments.
The reconciliation is accurate.
Cash does not exist.
The presence of held checks at period-end.
D
## Footnote
When you deposit a cheque at a financial institution you may have to wait a certain amount of time to access the money. This is called a hold on a cheque. A financial institution may hold money you deposit by cheque to: make sure that the person or company who wrote the cheque has enough money to cover it.
80
The standard bank confirmation includes a designated place for the financial institution to report which of the following?
Loans and collateral.
A reconciliation of the lockbox.
Cash held on consignment.
Maturity dates for certificates of deposit.
A
81
Which of the following is not a common test of controls for marketable securities?
Review the minutes of the board meetings.
Review broker’s advice for accurate recording of security.
Inquire of management about its process for reclassifications.
Review reports of internal audits.
B
82
Which of the following would be used by the auditor to address the possibility of kiting?
Cut-off bank reconciliations.
Interbank transfer schedules.
Bank confirmations of account balances.
Bank confirmations of loan guarantees.
B
83
Interbank transfer schedules are used by the auditor to address which of the following concerns?
Lapping.
Kiting.
Embezzlement by omitting outstanding checks on reconciliation.
All of the above.
B
84
The cutoff bank statement is used by the auditor to address which of the following concerns?
Lapping.
Kiting.
Omitting outstanding checks on reconciliations.
All of the above.
C
85
Which of the following would not be included as part of the documentation related to the substantive procedures for marketable securities?
A schedule of marketable securities prepared by the client.
Reports of any outside valuation experts.
Calculation of any potential impairments.
Policies over purchase or sale of marketable securities.
D
86
Which of the following is not an internal control the auditor would expect to find in place for all cash processing systems?
Restrictive endorsement of checks.
Independent reconciliation.
Walkthrough.
Prenumbered cash receipt documents.
C
87
Which of the following is a cash management technique frequently used by management?
Cash management agreement with financial institutions.
Lockboxes.
Electronic funds transfers.
All of the above.
A
## Footnote
A cash management agreement is a contract between a bank and its customer used to manage the customer's funds.
88
The auditor prepares a schedule for marketable securities. Which of the following is not one of the items in the schedule related to the value of the securities?
Cost.
Year-end market value.
Carrying value for debt instruments.
Interest and dividends.
D
89
Which of the following types of financial instruments is a contract between a buyer and a seller in which the buyer has the right (but not the obligation) to **buy** an agreed quantity of a specified commodity or financial instrument at a certain time for a certain price.
Put option.
Call option.
Hedge.
Collateralized purchase option.
B
## Footnote
Call options are financial contracts that give the option buyer the right but not the obligation to buy a stock, bond, commodity, or other asset or instrument at a specified price within a specific period.
90
Which of the following is a risk associated with complex financial instruments?
Management’s objectives in entering into such transactions may relate to misstating the financial statements.
Management and/or those charged with corporate governance may lack experience with complex financial instruments.
Management may enter into such transactions without proper oversight from those charged with corporate governance.
All of the above are risks.
D
