Question 1

Explain the importance of the bank reconciliation to the audit and list some of the items found on the reconciliation.

Accepted Answer

The completion of a monthly bank reconciliation is an important control that affects the audit of the cash. The reconciliation ensures that the entity's books reflect the same amount of cash as the bank's after the consideration of reconciling items. A proper reconciliation can reduce the amount of audit time spent on cash. The reconciliation contains the balance per the entity's books and the balance per the bank, as well as reconciling items such as outstanding checks and deposits in transit. It may also include bank service charges and checks returned because the customer did not have sufficient cash in his account to cover the payment of the check.

Question 2

Which of the following pairs of accounts would an auditor most likely analyze on the same working paper?

Accepted Answer

A)  Notes receivable and interest income.
B)  Accrued interest receivable and accrued interest payable.
C)  Notes payable and notes receivable.
D)  Interest income and interest expense. A

Question 3

You are auditing cash for Moonbeam, Inc. In meeting with the CFO during the planning stages of the audit, she indicated that there was a high risk of misstatement due to fraud in the cash account, given the lack of proper segregation of duties. As the auditor, what tests could you perform to detect fraudulent activities in the cash account?

Accepted Answer

There are three tests used for detecting fraud in the cash accounts. The first is extended bank reconciliation procedures. The auditor examines disposition of the reconciling items included on the prior months' reconciliations and the reconciling items included in the current bank reconciliation. These procedures can locate a fraud that used reconciling items to cover a cash defalcation.
A second test is a proof of cash. A proof of cash reconciles the cash receipts and disbursements recorded on the entity's books with the cash deposited into and disbursed from the entity's bank account for a specific time period. Its primary purpose is to ensure that all cash receipts recorded in the entity's cash receipts journal were deposited in the entity's bank account, to ensure that all cash disbursements recorded in the cash disbursements journal have cleared the bank account, and to ensure that no bank transactions have been omitted from the entity's accounting records. It can detect cash stolen after being recorded on the entity's books.
A third test is a test for kiting. Kiting is the process of covering a cash shortage by transferring money from one bank account to another and recording the transactions improperly on the entity's books. A test for kiting is completed through the use of an inter-transfer schedule that lists all the transfers made between cash accounts. Each transfer is followed through from one account to another, noting the dates recorded on the entity's book and the dates on the bank statements.

Question 4

A company has additional temporary funds to invest. The Board of Directors decided to purchase marketable securities and assigned the future purchase and sale decisions to a responsible financial executive. The best person(s)to make periodic reviews of the investment activity authorized by that executive should be:

Accepted Answer

A)  an investment committee of the Board of Directors.
B)  the chief operating officer.
C)  the corporate controller.
D)  the treasurer.

Question 5

The general cash account is normally the principal account used to disburse payroll.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following procedures would be important in the audit of an investment valued at fair value?

Accepted Answer

A)  Compare the balance in the investment account to the prior year.
B)  Read the footnote disclosure related to the investment.
C)  Inquire of management's regarding the accuracy and reliability of the underlying data.
D)  Develop an independent estimate of the fair value measurement.

Question 7

What should an auditor look for when testing for proper classification and presentation of securities?

Accepted Answer

The answer of What should an auditor look for when...

Question 8

Which of the following is not one of the auditor's primary objectives in an examination of marketable securities?

Accepted Answer

A)  To determine whether securities are authentic.
B)  To determine whether securities are the property of the entity.
C)  To determine whether securities actually exist.
D)  To determine whether securities are properly classified on the balance sheet.

Question 9

Match the segregation of duties for investments with the misstatement (due to error or fraud)it can help prevent. 
-Custody of the securities is separate from accounting for the securities

Accepted Answer

A)  An individual can improperly record securities values or not report the values to management
B)  An individual can conceal a theft of securities
C)  An individual can conceal any defalcation that would normally be detected by reconciliation of subsidiary records with general ledger control accounts
D)  An individual can make fictitious transactions

Question 10

For each assertion about cash listed below, give an example of a test of transactions for (1)cash receipts and (2)cash disbursements.
a. Classification.
b. Occurrence.
c. Authorization.
d. Completeness.

Accepted Answer

The answer of For each assertion about cash listed below,...

Question 11

When there is a large number of negotiable securities in multiple locations, careful planning of the physical inspection and count of the securities by the auditor is necessary to guard against:

Accepted Answer

A)  unauthorized negotiation of the securities before they are counted.
B)  unrecorded sales of securities after they are counted.
C)  substitution of securities already counted at one location for other securities that should be on hand at a different location but are not.
D)  substitution of authentic securities with counterfeit securities.

Question 12

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

Accepted Answer

A)  cutoff bank statement.
B)  year-end bank statement.
C)  bank confirmation.
D)  general ledger.

Question 13

Match the type of bank account with its definition: 
-This account is typically immaterial in amount and is used for paying certain types of expenses and transactions

Accepted Answer

A)  Petty cash account
B)  Branch account
C)  Imprest cash account
D)  General cash account

Question 14

To satisfy the valuation assertion when auditing an investment, an auditor most likely would:

Accepted Answer

A)  inspect the stock certificates evidencing the investment.
B)  examine the audited financial statements of the investee company.
C)  review the broker's advice or canceled check for the investment's acquisition.
D)  obtain market quotations from financial newspapers, periodicals, or electronic outlets.

Question 15

Auditors will need to perform more substantive tests than normal to obtain sufficient appropriate evidence that a financial instrument is fairly stated if which of the following conditions exist?

Accepted Answer

A)  Management is objective and transparent in their assumptions.
B)  Management's key assumptions are subject to volatility.
C)  The entity's portfolio is composed of only stocks issued by Fortune 100 firms traded in an active market.
D)  The entity does not have control weaknesses in its valuation processes.

Question 16

Kiting is an audit procedure used to test the accuracy of the cash receipts.

Accepted Answer

A) True 
 B)False

Question 17

A major control that directly affects the audit of cash is the bank reconciliation prepared by the auditor.

Accepted Answer

A) True 
 B)False

Question 18

In a manufacturing company, which one of the following audit procedures would give the least assurance for the existence of the general ledger balance of investment in stocks and bonds at the audit date?

Accepted Answer

A)  Confirmation from the broker.
B)  Inspection and count of stocks and bonds.
C)  Reconciling information contained in the broker confirmation with the entity's investment record.
D)  Examination of canceled checks issued in payment of securities purchased.

Question 19

Identify 3 of the 6 tests an auditor uses on the bank reconciliation.
(Only 3 are required for the student's answer)

Accepted Answer

The answer of Identify 3 of the 6 tests an...

Question 20

Match the segregation of duties for investments with the misstatement (due to error or fraud)it can help prevent. 
-The initiation function is separate from the final approval function

Accepted Answer

A)  An individual can improperly record securities values or not report the values to management
B)  An individual can conceal a theft of securities
C)  An individual can conceal any defalcation that would normally be detected by reconciliation of subsidiary records with general ledger control accounts
D)  An individual can make fictitious transactions

Exam 16: Auditing the Financinginvesting Process: Cash and Investments

Explain the importance of the bank reconciliation to the audit and list some of the items found on the reconciliation.

Which of the following pairs of accounts would an auditor most likely analyze on the same working paper?

The general cash account is normally the principal account used to disburse payroll.

Which of the following procedures would be important in the audit of an investment valued at fair value?

What should an auditor look for when testing for proper classification and presentation of securities?

Which of the following is not one of the auditor's primary objectives in an examination of marketable securities?

Match the segregation of duties for investments with the misstatement (due to error or fraud) it can help prevent. -Custody of the securities is separate from accounting for the securities

For each assertion about cash listed below, give an example of a test of transactions for (1)cash receipts and (2)cash disbursements. a. Classification. b. Occurrence. c. Authorization. d. Completeness.

When there is a large number of negotiable securities in multiple locations, careful planning of the physical inspection and count of the securities by the auditor is necessary to guard against:

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

Match the type of bank account with its definition: -This account is typically immaterial in amount and is used for paying certain types of expenses and transactions

To satisfy the valuation assertion when auditing an investment, an auditor most likely would:

Auditors will need to perform more substantive tests than normal to obtain sufficient appropriate evidence that a financial instrument is fairly stated if which of the following conditions exist?

Kiting is an audit procedure used to test the accuracy of the cash receipts.

A major control that directly affects the audit of cash is the bank reconciliation prepared by the auditor.

In a manufacturing company, which one of the following audit procedures would give the least assurance for the existence of the general ledger balance of investment in stocks and bonds at the audit date?

Identify 3 of the 6 tests an auditor uses on the bank reconciliation. (Only 3 are required for the student's answer)

Match the segregation of duties for investments with the misstatement (due to error or fraud) it can help prevent. -The initiation function is separate from the final approval function