Chapter 13

Question 1

What is the audit objective for the Occurrence assertion for cash transactions?

Answer 1

Recorded receipts and payments represent actual cash inflows and outflows during the period.

Question 2

What is the audit objective for the Completeness assertion for cash transactions?

Answer 2

All cash receipts and payments made during the period have been recorded.

Question 3

What is the audit objective for the Accuracy assertion for cash transactions?

Answer 3

All cash receipts and payments are accurately recorded.

Question 4

What is the audit objective for the Cut-off assertion for cash transactions?

Answer 4

All cash receipts and payments before and after the period end are recorded in the correct period.

Question 5

What is the audit objective for the Classification, Presentation, and Disclosure assertion for cash transactions?

Answer 5

All cash receipts and payments are properly classified and presented; all required disclosures are included in the financial statements.

Question 6

What is the audit objective for the Existence assertion for cash balances?

Answer 6

Recorded cash balances exist.

Question 7

What is the audit objective for the Rights and Obligations assertion for cash balances?

Answer 7

The entity has legal title to all recorded cash balances.

Question 8

What is the audit objective for the Completeness assertion for cash balances?

Answer 8

Recorded cash balances include all cash inflows and outflows that occurred during the period.

Question 9

What is the audit objective for the Valuation assertion for cash balances?

Answer 9

Recorded cash balances are realizable at the amounts recorded.

Question 10

What is the audit objective for the Classification, Presentation, and Disclosure assertion for cash balances?

Answer 10

Cash is correctly presented, and all disclosures (e.g., lines of credit, loan guarantees, restrictions) are included in the financial statements.

Question 11

What does “cash” include in an audit context?

Answer 11

Cash balances at banks or similar institutions, cash on hand, and cash equivalents.

Question 12

What are the key assertions for auditing cash?

Answer 12

Existence, Rights and Obligations, Completeness, and Disclosure.

Question 13

Why is cash considered qualitatively material even if the balance is small?

Answer 13

Because of its high susceptibility to theft and fraud.

Question 14

What control procedures are typically used by clients to manage cash?

Answer 14

Independent bank reconciliations and bank imprest accounts (e.g., for payroll/dividends).

Question 15

What type of audit strategy is usually applied to cash?

Answer 15

A substantive audit approach.

Question 16

What is the purpose of cash cut-off testing?

Answer 16

To ensure that cash receipts and payments are recorded in the correct period, typically tested using the subsequent period’s bank statement.

Question 17

What is the purpose of tracing bank transfers?

Answer 17

To verify proper recording of inter-bank transfers and ensure no manipulation of timing (e.g., covering cash shortfalls).

Question 18

What is kiting in the context of cash auditing?

Answer 18

Fraudulently overstating cash by recording a bank transfer in both accounts before the cheque clears.

Question 19

How does the auditor confirm cash balances?

Answer 19

By sending bank confirmations directly to the client’s financial institutions.

Question 20

What other information is requested in a bank confirmation besides cash balance?

Answer 20

Overdraft arrangements, loans payable, and contingent liabilities.

Question 21

Why are bank confirmations always sent in audits?

Answer 21

It’s considered highly unusual not to send one — it’s a standard and critical audit procedure.

Question 22

What is the auditor verifying when auditing a bank reconciliation?

Answer 22

That the balance confirmed by the bank agrees with the client’s books after reconciling outstanding items and timing differences.

Question 23

What is the first step in auditing a bank reconciliation?

Answer 23

Check the mathematical accuracy and agree the bank balance per the reconciliation to the general ledger.

Question 24

How is the bank confirmation used in auditing a bank reconciliation?

Answer 24

The balance per the bank confirmation is agreed to the bank balance in the reconciliation.

Question 25

How does the auditor verify outstanding deposits and cheques?

Answer 25

By tracing them to the subsequent period’s bank statement to ensure they cleared shortly after year-end.

Question 26

How are bank charges or errors on the reconciliation verified?

Answer 26

By comparing to the bank statement or other supporting documentation.

Question 27

What is a red flag if outstanding cheques have not cleared shortly after year-end?

Answer 27

Possible window dressing — delaying the issuance of cheques to overstate cash and understate liabilities.

Question 28

What is window dressing in the context of cash audits?

Answer 28

Writing cheques on the last day of the period but delaying their issuance, which boosts the working capital ratio and misstates solvency.

Question 29

What is lapping in the context of cash audits?

Answer 29

Lapping occurs when an employee steals a customer’s payment and then uses another customer’s payment to cover up the missing funds.

Question 30

What condition often enables lapping to occur?

Answer 30

When the same person handles both cash receipts and the accounts receivable ledger.

Question 31

How might a fraudster further conceal lapping?

Answer 31

By manipulating the accounts receivable ledger, such as making adjustments or misapplying payments.

Question 32

What is the audit objective for the Occurrence assertion for investment transactions?

Answer 32

Recorded purchases and sales represent investments bought or sold during the period. Revenues, gains, and losses recorded resulted from actual transactions and relate to the entity.

Question 33

What is the audit objective for the Completeness assertion for investment transactions?

Answer 33

All investment transactions (purchases, sales, revenues, gains, and losses) that occurred during the period have been recorded.

Question 34

What is the audit objective for the Accuracy assertion for investment transactions?

Answer 34

All investment transactions are accurately recorded at proper amounts.

Question 35

What is the audit objective for the Cut-off assertion for investment transactions?

Answer 35

All investment transactions before and after the period end are recorded in the correct period.

Question 36

What is the audit objective for the Classification, Presentation, and Disclosure assertion for investment transactions?

Answer 36

Transactions are recorded in the correct accounts and appropriately presented. All required disclosures are included in the financial statements.

Question 37

What is the audit objective for the Existence assertion for investment balances?

Answer 37

Recorded investment balances exist at period-end.

Question 38

What is the audit objective for the Rights and Obligations assertion for investments?

Answer 38

The entity holds legal title to all recorded investment balances.

Question 39

What is the audit objective for the Completeness assertion for investments?

Answer 39

Investment balances reflect the effects of all investment transactions during the period.

Question 40

What is the audit objective for the Valuation assertion for investments?

Answer 40

Investment balances are realizable at the amounts recorded.

Question 41

What is the audit objective for the Classification, Presentation, and Disclosure assertion for investments?

Answer 41

Investments are properly classified, and all necessary disclosures (e.g., fair value, type of security, restrictions) are included in the FS.

Question 42

What are examples of equity and debt investment instruments?

Answer 42

Equity: Preferred or common shares Debt: Corporate debentures or government bonds

Question 43

Why might an entity hold investments?

Answer 43

To invest surplus funds For future obligations (e.g., sinking fund) To gain influence or control over another entity (subsidiary, associate, joint venture)

Question 44

What are the main types of investment transactions?

Answer 44

Purchases, disposals, and investment income (interest/dividends)

Question 45

What are the key audit assertions for investments?

Answer 45

Existence, Rights and Obligations, Classification, Valuation, and Disclosure

Question 46

What is the biggest inherent risk for non-strategic investments?

Answer 46

Improper valuation — especially for unlisted investments where market values are not readily available

Question 47

What accounting challenge arises with strategic investments?

Answer 47

Assessing significant influence or control to determine the proper method (cost vs. equity)

Question 48

What is the typical audit approach for investments?

Answer 48

Substantive, due to low volume but high-value transactions

Question 49

Should the auditor understand internal controls over investments?

Answer 49

Yes, even if a substantive strategy is used — understanding controls is part of audit planning

Question 50

Who should approve purchases and sales of investments?

Answer 50

Management; strategic investments must also be approved by those charged with governance.

Question 51

What should be done with interest and dividends received?

Answer 51

They should be promptly deposited, and the completeness of recorded income should be independently verified.

Question 52

What is a key control over investment transaction recording?

Answer 52

Transactions should be based on supporting documentation, and segregation of duties between recording and custody should be maintained.

Question 53

How should securities be physically secured?

Answer 53

Stored in safes or vaults, with access restricted to authorized personnel.

Question 54

How should recorded balances be verified periodically?

Answer 54

Investment documents should be independently compared with recorded balances.

Question 55

What should management do regarding changes in investment classification or value?

Answer 55

Perform periodic reviews to reassess classification and analyze changes in value or circumstances.

Question 56

What kind of reviews should management perform to detect investment issues?

Answer 56

Performance reviews to detect poor returns or errors in reporting.

Question 57

How does the auditor verify purchases and sales of investments?

Answer 57

By vouching to broker advices and checking for appropriate approval.

Question 58

How does the auditor verify interest and dividend income?

Answer 58

By vouching to remittance advices, public dividend registers, or the investee’s financial statements.

Question 59

How does the auditor test investment balances at period-end?

Answer 59

Inspecting or confirming recorded investments Verifying related income Checking the market value of investments

Question 60

What analytical procedures are used when auditing investments?

Answer 60

Compare interest/dividend income to recorded investment balances, and follow up on unexpected variances with management.