Question 1

A compensating balance agreement always requires that cash be reclassified as a noncurrent asset.

Accepted Answer

A) True 
 B)False  False

Question 2

Which of the following is not a control that generally is established over cash transactions?

Accepted Answer

A)  Separating cash handling from recordkeeping. 
B)  Centralizing the receipt of cash. 
C)  Depositing each day's receipts intact. 
D)  Obtaining a receipt for every disbursement. 
A)  Separating cash handling from recordkeeping. 
B)  Centralizing the receipt of cash. 
C)  Depositing each day's receipts intact. 
D)  Obtaining a receipt for every disbursement. D

Question 3

For investments in securities accounted for by the equity method, the auditors are primarily concerned with verifying the fair value of the investments.

Accepted Answer

A) True 
 B)False  False

Question 4

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?

Accepted Answer

A)  Sales are understated. 
B)  Accounts receivable are understated. 
C)  Inventory is overstated. 
D)  Net income is overstated. 
A)  Sales are understated. 
B)  Accounts receivable are understated. 
C)  Inventory is overstated. 
D)  Net income is overstated.

Question 5

On receiving the bank cutoff statement, the auditor should trace:

Accepted Answer

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. 
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.

Question 6

The auditors use a bank cutoff statement to compare:

Accepted Answer

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. 
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.

Question 7

Jones was engaged to audit the financial statements of Gamma Corporation for the year ended June 30, 200X. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income?

Accepted Answer

A)  Tracing recorded dividend income to cash receipts records and validated deposit slips. 
B)  Utilizing analytical techniques and statistical sampling. 
C)  Comparing recorded dividends with amounts appearing on federal information form 1099s. 
D)  Comparing recorded dividends with a standard financial reporting service's record of dividends. 
A)  Tracing recorded dividend income to cash receipts records and validated deposit slips. 
B)  Utilizing analytical techniques and statistical sampling. 
C)  Comparing recorded dividends with amounts appearing on federal information form 1099s. 
D)  Comparing recorded dividends with a standard financial reporting service's record of dividends.

Question 8

In the audit of a client's financial statements, the auditors must be concerned with the possibility that client personnel might be engaged in kiting or lapping.
a. Define lapping and describe an audit procedure that might detect lapping.
b. Define kiting and describe an audit procedure that might detect kiting.

Accepted Answer

a. Lapping is the concealment of a cash

Question 9

An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that:

Accepted Answer

A)  Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year. 
B)  Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities. 
C)  The annual provision for uncollectible accounts expense was inadequate because of worsening economic conditions. 
D)  Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year. 
A)  Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year. 
B)  Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities. 
C)  The annual provision for uncollectible accounts expense was inadequate because of worsening economic conditions. 
D)  Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year.

Question 10

A company's decision to use the fair value option for valuation of marketable securities is most likely to affect which of the following assertions the most?

Accepted Answer

A)  Completeness. 
B)  Existence. 
C)  Fairness. 
D)  Presentation and Disclosure. 
A)  Completeness. 
B)  Existence. 
C)  Fairness. 
D)  Presentation and Disclosure.

Question 11

To gather evidence regarding the balance per bank in a bank reconciliation, an auditor could examine all of the following except:

Accepted Answer

A)  Cutoff bank statement. 
B)  Year-end bank statement. 
C)  Bank confirmation. 
D)  General ledger. 
A)  Cutoff bank statement. 
B)  Year-end bank statement. 
C)  Bank confirmation. 
D)  General ledger.

Question 12

When a client engages in transactions involving derivatives, the auditor should:

Accepted Answer

A)  Develop an understanding of the economic substance of each derivative. 
B)  Confirm with the client's broker whether the derivatives are for trading purposes. 
C)  Notify the audit committee about the risks involved in derivative transactions. 
D)  Add an explanatory paragraph to the auditor's report describing the risks associated with each derivative. 
A)  Develop an understanding of the economic substance of each derivative. 
B)  Confirm with the client's broker whether the derivatives are for trading purposes. 
C)  Notify the audit committee about the risks involved in derivative transactions. 
D)  Add an explanatory paragraph to the auditor's report describing the risks associated with each derivative.

Question 13

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?

Accepted Answer

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. 
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.

Question 14

Which of the following is correct concerning "window dressing" for cash?

Accepted Answer

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. 
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.

Question 15

Internal control over marketable securities is enhanced when:

Accepted Answer

A)  Securities are held by the cashier. 
B)  Securities are registered in the name of the custodian. 
C)  Detailed records of securities are maintained by the custodian of the securities. 
D)  Securities are held under joint control of two or more officials. 
A)  Securities are held by the cashier. 
B)  Securities are registered in the name of the custodian. 
C)  Detailed records of securities are maintained by the custodian of the securities. 
D)  Securities are held under joint control of two or more officials.

Question 16

A practical and effective audit procedure for the detection of lapping is:

Accepted Answer

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. 
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.

Question 17

Since financial investments are assets with a high degree of inherent risk, companies must establish effective internal control over their investments.
a. Describe the functions that should be segregated to provide good internal control over financial investments.
b. Describe two other internal control policies that should be established for financial investments.

Accepted Answer

a. The functions that should be segregat

Question 18

An auditor may obtain information on the December 31 month-end balance per bank in which of the following? $$\begin{array} { | c | c | c | } 
\hline & \begin{array} { c } 
\text { December } \
\text { 31 Bank } \
\text { Statement }
\end{array} & \begin{array} { c } 
\text { Schedule } \
\text { of Bank } \
\text { (Cash) } \
\text { Transfers }
\end{array} \
\hline \text { A. } & \text { Yes } & \text { Yes } \
\hline \text { B. } & \text { Yes } & \text { No } \
\hline \text { C. } & \text { No } & \text { Yes } \
\hline \text { D. } & \text { No } & \text { No } \
\hline
\end{array}$$

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 19

Mailroom personnel of a company should prepare a control listing of incoming cash receipts and deposit them intact daily.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department?

Accepted Answer

A)  Comparing the vendor's invoice with the receiving report. 
B)  Canceling supporting documentation after payment. 
C)  Verifying the mathematical accuracy of the vendor's invoice. 
D)  Preparing the check for signature by an authorized person. 
A)  Comparing the vendor's invoice with the receiving report. 
B)  Canceling supporting documentation after payment. 
C)  Verifying the mathematical accuracy of the vendor's invoice. 
D)  Preparing the check for signature by an authorized person.

A compensating balance agreement always requires that cash be reclassified as a noncurrent asset.

Which of the following is not a control that generally is established over cash transactions?

For investments in securities accounted for by the equity method, the auditors are primarily concerned with verifying the fair value of the investments.

On receiving the bank cutoff statement, the auditor should trace:

The auditors use a bank cutoff statement to compare:

Jones was engaged to audit the financial statements of Gamma Corporation for the year ended June 30, 200X. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income?

An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that:

A company's decision to use the fair value option for valuation of marketable securities is most likely to affect which of the following assertions the most?

To gather evidence regarding the balance per bank in a bank reconciliation, an auditor could examine all of the following except:

When a client engages in transactions involving derivatives, the auditor should:

Which of the following is correct concerning "window dressing" for cash?

Internal control over marketable securities is enhanced when:

A practical and effective audit procedure for the detection of lapping is:

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

Mailroom personnel of a company should prepare a control listing of incoming cash receipts and deposit them intact daily.

Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department?

The Role of the Public Accountant in the American Economy

Professional Standards

Professional Ethics

Legal Liability of Cpas

Audit Evidence and Documentation

Planning the Audit; Linking Audit Procedures to Risk

Internal Control

Consideration of Internal Control in an Information Technology Environment

Audit Sampling

Accounts Receivable, Notes Receivable, and Revenue

Inventories and Cost of Goods Sold

Property, Plant, and Equipment: Depreciation and Depletion

Accounts Payable and Other Liabilities

Debt and Equity Capital

Auditing Operations and Completing the Audit

Auditors Report

Integrated Audits of Public Companies

Additional Assurance Services: Historical Financial Information

Additional Assurance Services: Other Information

Internal, Operational, and Compliance Auditing

Filters

Exam 10: Cash and Financial Investments

A compensating balance agreement always requires that cash be reclassified as a noncurrent asset.

Which of the following is not a control that generally is established over cash transactions?

For investments in securities accounted for by the equity method, the auditors are primarily concerned with verifying the fair value of the investments.

On receiving the bank cutoff statement, the auditor should trace:

The auditors use a bank cutoff statement to compare:

Jones was engaged to audit the financial statements of Gamma Corporation for the year ended June 30, 200X. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income?

An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that:

A company's decision to use the fair value option for valuation of marketable securities is most likely to affect which of the following assertions the most?

To gather evidence regarding the balance per bank in a bank reconciliation, an auditor could examine all of the following except:

When a client engages in transactions involving derivatives, the auditor should:

Which of the following is correct concerning "window dressing" for cash?

Internal control over marketable securities is enhanced when:

A practical and effective audit procedure for the detection of lapping is:

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

Mailroom personnel of a company should prepare a control listing of incoming cash receipts and deposit them intact daily.

Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department?

The Role of the Public Accountant in the American Economy

Professional Standards

Professional Ethics

Legal Liability of Cpas

Audit Evidence and Documentation

Planning the Audit; Linking Audit Procedures to Risk

Internal Control

Consideration of Internal Control in an Information Technology Environment

Audit Sampling

Accounts Receivable, Notes Receivable, and Revenue

Inventories and Cost of Goods Sold

Property, Plant, and Equipment: Depreciation and Depletion

Accounts Payable and Other Liabilities

Debt and Equity Capital

Auditing Operations and Completing the Audit

Auditors Report

Integrated Audits of Public Companies

Additional Assurance Services: Historical Financial Information

Additional Assurance Services: Other Information

Internal, Operational, and Compliance Auditing

Filters