Audit Test Bank Chapter 10

Chapter 10
Cash and Financial Investments

True / False Questions
1. The auditors should count small petty cash funds at year-end to make sure that
balance is not understated on the financial statements.
True
False
2. Control over the receipt of cash sales is best achieved when two or more employees
participate in each transaction.
True
False
3. Mailroom personnel of a company should prepare a control listing of incoming cash

receipts and deposit them intact daily.
True
False
4. Signed checks should be returned to the cash disbursements clerk for mailing.
True
False
5. Lapping of accounts receivable by an employee is not possible when there is

adequate segregation of duties with respect to cash disbursements.
True
False
6. Confirmations for cash balances should be mailed only to the financial institutions
with which the client has a cash balance at year-end.
True
False
7. A proof of cash is an audit procedure that is performed on almost every

engagement.
True
False
8. A compensating balance agreement always requires that cash be reclassified as a

noncurrent asset.
True
False
9. Verification of cash and other liquid assets on the same date may prevent
substitution of one form of asset for another.
True
False
10-1
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
10. For investments in securities accounted for by the equity method, the auditors are
primarily concerned with verifying the fair value of the investments.
True
False
Multiple Choice Questions

11. 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?
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.
12. By preparing a four-column bank reconciliation ("proof of cash") at year-end, an
auditor will generally be able to detect:
A. An unrecorded deposit made at the bank at the end of the month.
B. A second payment of an account payable which had already been paid in full two
months earlier.
C. An embezzlement of cash receipts not recorded in the cash receipts journal
before they had been deposited into the bank.
D. A receivable collected that had previously been written off as uncollectible.
13. Kiting would least likely be detected by:
A. Analyzing details of large cash deposits around year-end.
B. Comparing customer remittance advices with recorded disbursements in the cash
disbursements journal.
C. Preparing a four-column bank reconciliation for all major cash accounts.
D. Preparing a schedule of interbank transfers by using the client's records and bank
statements around year-end.
10-2
14. 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?
A.
B.
C.
D.
Sales are understated.

Accounts receivable are understated.
Inventory is overstated.
Net income is overstated.
15. An internal control questionnaire indicates that an approved receiving report is

required to accompany every check request for payment of merchandise. Which of
the following procedures provides the best evidence on operating effectiveness?
A. Select and examine receiving reports and test whether the related canceled checks
are dated no earlier than the receiving reports.
B. Select and examine receiving reports and test whether the related canceled checks
are dated no later than the receiving reports.
C. Select and examine canceled checks and test whether the related receiving
reports are dated no earlier than the checks.
D. Select and examine canceled checks and test whether the related receiving
reports are dated no later than the checks.
16. By preparing a four-column bank reconciliation ("proof of cash") at year-end, an
auditor will generally not be able to detect:
B. A second payment of an account payable which had already been paid in full two
months earlier.
C. An unrecorded check cashed during that month.
D. A bank charge during the month not recorded on the books.
17. Which procedure is an auditor most likely to use to detect a check outstanding at
year-end that was not recorded as outstanding on the year-end bank reconciliation?
A. Prepare a bank transfer schedule using the client's cash receipts and cash
B. Receive a cutoff statement directly from the client's bank.
C. Prepare a four column bank reconciliation using the year-end bank statement.
D. Confirm the year-end balance using the standard form to confirm account balance
information with financial institutions.
10-3
18.
An auditor may obtain information on the December 31 month-end balance per bank
in which of the following?
Standard Confirmation Form
January 1-10 Cutof

Statement
A.
Yes
Yes
B.
Yes
No
C.
No
Yes
D.
No
No
A.
B.
C.
D.
Option A
Option B
Option C
Option D
19.
An auditor may obtain information on the December 31 month-end balance per bank
in which of the following?
December 31 Bank Statement

A.
Yes
B.
Yes
C.
No
D.
No
A.
B.
C.
D.
Option A
Option B
Option C
Option D
10-4
Schedule of Ba
20. Which of the following is correct concerning "window dressing" for cash?
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.
21. Which of the following statements is not correct?
A. Cash is important to the audit process because of its vulnerability to
misappropriation, despite the fact that the balance at the balance sheet date may
be immaterial.
B. Payroll cash account balances kept on an imprest basis are more easily controlled
than others not so kept.
C. Confirmation of cash should only be performed as of the balance statement date
because the auditor expresses an opinion as of that date.
D. Reviewing interbank transfers is important to the auditor because of the possibility
that the client may be engaged in kiting.
22. The auditors use a bank cutoff statement to compare:
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
D. Checks dated subsequent to year-end to the outstanding checks listed on the yearend bank statement.
23. A practical and effective audit procedure for the detection of lapping is:
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.
24. Which of the following is not a control that generally is established over cash
transactions?
A.
B.
C.
D.
Separating cash handling from recordkeeping.

Centralizing the receipt of cash.
Depositing each day's receipts intact.
Obtaining a receipt for every disbursement.
10-5
25. Which of the following controls would be most likely to reduce the risk of diversion of
customer receipts by a company's employees?
A.
A bank lockbox system.
B. Approval of all disbursements by an individual independent of cash receipts.
C.
Monthly bank cutoff statements.
D.
Prenumbered remittance advices.
26. Which of the following is not a control that generally is established over cash
receipts?
A. To prevent abstraction of cash, a control listing of cash receipts should be prepared
by mailroom personnel.
B. To insure accurate posting, the accounts receivable clerk should post the
customers' receipts from customers' checks.
C. To insure accuracy of the accounts receivable records, the records should be
reconciled monthly to the accounts receivable controlling account.
D. To prevent theft of cash, receipts should be deposited daily.
27. By preparing a four-column bank reconciliation ("proof of cash") for the last month of
the year, an auditor will generally be able to detect:
A. An unrecorded check written at the beginning of the month which was cashed
during the period covered by the reconciliation.
B. A cash sale which was not recorded on the books and was stolen by a bookkeeper.
C. An embezzlement of unrecorded cash receipts on receivables before they had
been deposited into the bank.
D. A credit sale which has been recorded twice in the sales journal.
28. In October, three months before year-end, the bookkeeper erroneously recorded the
receipt of a one year bank loan with a debit to cash and a credit to miscellaneous
revenue. The most effective method for detecting this type of error is:
A.
B.
C.
D.
Foot the cash receipts journal for October.

Send a bank confirmation as of year-end.
Prepare a bank reconciliation as of year-end.
Prepare a bank transfer schedule as of year-end.
29. Jones embezzled $10,000 from his company's account in Bank A. At year-end, he hid
the shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He
has not recorded the transaction on the books. This is an example of:
A.
B.
C.
D.
Lapping.
Kiting.
Effective cash management.
Related party transactions.
10-6
30. Jones embezzled $10,000 from his company's account in Bank A. At year-end, he hid
the shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He
has not recorded the transaction on the books. Which of the following is most likely
to be effective in detecting this fraud?
A.
Bank confirmation.
B. Bank transfer schedule prepared using only the cash receipts and cash
disbursements journals.
C. Comparison of bank cutoff statement to the cash receipts and disbursements
records.
D.
Receivable confirmation.
31. Which of the following is not a universal rule for achieving internal control over cash?
A. Separate recordkeeping from accounting for cash to the extent possible.

B.
Deposit each day's cash receipts intact.
C.
Separate cash handling from recordkeeping.
D. Have monthly bank reconciliations prepared by employees not responsible for the
issuance of checks.
32. Which of the following is not a control over cash disbursements?
A.
Disbursements should be made by check.
B.
A check protecting machine should be used.
C. Documents supporting the payment of a disbursement should be canceled by the
person preparing the check to prevent reuse.
D. Voided checks should be defaced and filed with paid checks.
33. Which of the following is the best audit procedure for the detection of lapping?
A. Comparison of postings of cash receipts to accounts with the details of cash
deposits.
B.
Confirmation of the cash balance.
C.
Reconciliation of the cash account balances.
D.
34. Which of the following manipulations of cash transactions would overstate the cash
balance on the financial statements?
A.
B.
C.
D.
Understatement of outstanding checks.

Overstatement of outstanding checks.
Understatement of deposits in transit.
Overstatement of bank services charges.
10-7
35. Which of the following is not confirmed on the standard confirmation form used for
cash balances at financial institutions?
A.
B.
C.
D.
Cash checking account balances.

Cash savings account balances.
Loans payable.
Securities held for the client by the financial institution.
36. Internal control over marketable securities is enhanced when:

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.
37. In a manufacturing company which one of the following audit procedures would give
the least assurance of the existence of the assets in the general ledger balance of
investment in stocks and bonds at the audit date?
A.
Confirmation from the broker.
B.
Inspection of year-end brokers' statements.
C. Vouching all changes during the year to brokers' advises and statements.
D. Examination of paid checks issued in payment of securities purchased.
38. The Standard Form to Confirm Account Balances with Financial Institutions includes
information on all of the following except:
A.
B.
C.
D.
Date due of a direct liability.

The principal amount paid on a direct liability.
Description of collateral for a direct liability.
The interest rate of a direct liability.
39. The auditors should insist that a representative of the client be present during the
physical examination of securities in order to:
A.
B.
C.
D.
Lend authority of the auditor's directives.

Detect forged securities.
Coordinate the return of all securities to proper locations.
Acknowledge the receipt of securities returned.
40. The auditors' count of the client's cash should be coordinated to coincide with the:
A. Consideration of the internal controls with respect to cash.
B. Close of business on the balance sheet date.
C.
Count of investment securities.
D.
Count of inventories.
10-8
41. The auditors compare information on canceled checks with information contained in
the cash disbursement journal. The objective of this test is to determine that:
A. Recorded cash disbursement transactions are properly authorized.
B. Proper cash purchase discounts have been recorded.
C. Cash disbursements are for goods and services actually received.
D. No discrepancies exist between the data on the checks and the data in the journal.
42. 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?
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.
43. Which of the following is one of the better auditing techniques that might be used by
an auditor to detect kiting?
A. Review composition of authenticated deposit slips.
B. Review subsequent bank statements and canceled checks received directly from
the banks.
C.
Prepare a schedule of bank transfers.
D.
Prepare year-end bank reconciliations.
44. Which one of the following would the auditor consider to be an incompatible
operation if the cashier receives remittances from the mailroom?
A.
The cashier prepares the daily deposit.
B. The cashier makes the daily deposit at a local bank.
C. The cashier posts the receipts to the accounts receivable subsidiary ledger.
D.
The cashier endorses the checks.
45. As one of the year-end audit procedures, the auditor instructed the client's personnel
to prepare a confirmation request for a bank account that had been closed during the
year. After the client's treasurer has signed the request, it was mailed by the
assistant treasurer. What is the major flaw in this audit procedure?
A. The confirmation request was signed by the treasurer.
B. Sending the request was meaningless because the account was closed before the
year-end.
C. The request was mailed by the assistant treasurer.
D. The CPA did not sign the confirmation request before it was mailed.
10-9
46. On receiving the bank cutoff statement, the auditor should trace:
A. Deposits in transit on the year-end bank reconciliation to deposits in the cash
receipts journal.
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 yearend bank reconciliation.
47. To gather evidence regarding the balance per bank in a bank reconciliation, an
auditor could examine all of the following except:
A.
B.
C.
D.
Cutoff bank statement.

Year-end bank statement.
Bank confirmation.
General ledger.
48. Contact with banks for the purpose of opening company bank accounts should
normally be the responsibility of the corporate:
A.
B.
C.
D.
Board of Directors.
Treasurer.
Controller.
Executive Committee.
10-10
49.
Which of the following cash transfers is most likely to result in a misstatement of cash
at December 31, 20X7?
Bank Transfer Schedule

Disbursement
Record
ed
in
books
Receipt
Paid by bank
Record Receiv
ed
ed by
in
bank
books
A 12/31/X
)
7
1/4/X8
12/31/X 12/31/X
7
7
B
)
1/5/X8
12/31/X
7
1/4/X8
1/5/X8
12/31/X
7
1/4/X8
1/11/X8
1/4/X8
1/4/X8
1/4/X8
C 12/31/X
)
7
D
)
A.
B.
C.
D.
1/4/X8
Transfer A.
Transfer B.
Transfer C.
Transfer D.
50. For purposes of an audit of financial statements, electronic confirmation of cash

balances:
A.
Is acceptable when properly controlled.
B. Is acceptable, but only when combined with a non-electronic approach.
C.
Is only acceptable for immaterial accounts.
D.
Is not acceptable.
51. Properly designed internal control will permit the same employee to:
A. Receive and deposit checks, and also approve write-offs of customer accounts.
B. Approve vouchers for payment, and also receive and deposit cash.
C. Reconcile the bank statements, and also receive and deposit cash.
D. Sign checks, and also cancel supporting documents.
10-11
52. Which of the following procedures in the cash disbursements cycle should not be
performed by the accounts payable department?
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.
53. The Parmalat fraud case involved:
A.
A fraudulent cash confirmation.
B. Kiting of funds between banks in India and banks in Pakistan.
C. A bank reconciliation performed by the client that systematically understated
cash.
D. Major unrecorded disbursements for equipment.
54. Banks may process electronic "substitute checks" in place of customer written hard
copy checks due to the:
A.
Check Clearing for the 21st Century Act.
B. Public Company Accounting Oversight Board's Standard No. 2.
C.
Foreign Corrupt Practices Act.
D.
Sarbanes-Oxley Act.
55. When a client engages in transactions involving derivatives, the auditor should:
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.
56. 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?
A.
B.
C.
D.
Completeness.
Existence.
Fairness.
Presentation and Disclosure.
10-12
57. 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. 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.
58. Which of the following is correct relating to kiting?
A.
It is ordinarily used to understate cash.
B. It is more difficult to accomplish in an electronic environment as contrasted to a
non-electronic environment.
C. It is a lapping approach performed using receivable accounts.
D.
It is seldom, if ever, used.
Essay Questions
10-13
59. You are working on the Bemco audit. Assume that each of the four sections of this
question are unrelated. Bill Wedman, another staff member, has given you the
following list of what he refers to as "internal control deficiencies" and has asked you
to review each point and make sure that you agree that each is an internal control
deficiency.
1. Voided checks are torn up and destroyed.

2. Separate sequences of prenumbered checks are used for each bank account.
3.
The purchasing department manager and assistant manager are the authorized check
signers.
4. No checks are made payable to cash.

5. The authorized check signers reconcile bank accounts.
6.
All cash receipts (checks) received through the mail are prelisted by the two individuals who
open the mail.
7. All cash receipts received through the mail are restrictively endorsed when received.
8.
When a disbursement is made based on paper supporting documents, those supporting

documents are canceled by the individual who signs the check.
10-14
60. Flemco has made a series of transfers between bank accounts near year-end, some
through inter-bank wired transfers and some through checks. You have audited the
wired transfers and agree that they have been properly stated and now have the
following schedule of transfers between cash accounts made using checks. You may
assume that dates per bank are correct, and that dates per books are the dates the
transactions were recorded in the books.
Bank accounts
Check
number
From
4040
1st Nat.
Suburban
3270
Valley
Midburg
4041
1st Nat.
Capital
3271
Valley
0700
Midburg
To
Date disbursed per:

Amount Books
Bank
$112,000 12/31
1/5
62,500 12/31
1/3
121,000 1/2
1/4
Suburban
16,500 1/3
1/5
Suburban
15,800 12/30
1/5
Analyze each of the above transfers and determine whether you believe each causes
total cash to most likely be correct, overstated, or understated as of year-end.
10-15
As a
result
of the
transf
er,
total
cash a
t Dece
mber
31
appea
rs to
be
Q
u
e
s
ti
o
n
#
C
h
e
c C
k o
n r
u r
me
b c
e t
r
O
v
er
st
at
e
d
U
n
d
er
st
at
e
d
4
1 0
. 4
0
3
2 2
. 7
0
4
3 0
. 4
1
3
4 2
. 7
1
0
5 7
. 0
0
10-16
61. Listed below are four interbank cash transfers, indicated by the letters a, b, c and d,
of a client for late December 20X1, and early January 20X2. Your answer choice for
the next two questions should be selected from this list.
Bank Account One

Disbursing Date
(Month/Day)
Bank Account Two

Receiving Date
(Month/Day)
Per Bank
Per Books
Per Bank
Per Books
a.
1/02
12/30
12/31
12/30
b.
1/04
12/31
1/02
12/31
c.
1/03
12/31
1/02
1/02
d.
1/02
1/02
12/31
1/02
For each of transfers a through d indicate whether cash is understated, unaffected,

or overstated by the transfer and provide a brief example of what could cause the
situation in which cash is either understated or overstated.
62. 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.
10-17
63. 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.
64. In many financial statements audits, auditing financial investments involves complex
tasks requiring specialized skill and knowledge.
a. List three audit tasks related to the audit of financial investments that may require
specialized skill or knowledge.
b. Define the term "financial derivative."
c. List the two general purposes why a client might acquire a financial derivative.
10-18
Chapter 10 Cash and Financial Investments Answer Key

True / False Questions
1.
The auditors should count small petty cash funds at year-end to make sure that
balance is not understated on the financial statements.
FALSE
AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-06 Assess the risks of material misstatement of cash and design further audit
procedures, including tests of controls and substantive procedures, to address the risks.
Topic: Audit of Cash
2.
Control over the receipt of cash sales is best achieved when two or more
employees participate in each transaction.
TRUE

AICPA: BB Industry
AICPA: FN Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-03 Explain the nature of the cash receipts and disbursements cycles, and describe the
fundamental controls over the business processes related to cash.
Topic: Cash
3.
Mailroom personnel of a company should prepare a control listing of incoming cash

receipts and deposit them intact daily.
FALSE

AICPA: BB Industry
Blooms: Understand
Difficulty: 2 Medium
Topic: Cash
4.
Signed checks should be returned to the cash disbursements clerk for mailing.
FALSE
AICPA: BB Industry
Blooms: Understand
10-19
Topic: Cash
5.
Lapping of accounts receivable by an employee is not possible when there is

adequate segregation of duties with respect to cash disbursements.
FALSE
AICPA: BB Industry
Blooms: Understand
Learning Objective: 10-04 Use the understanding of the client and its environment to consider inherent risks,
including fraud risks, related to cash.
6.
Confirmations for cash balances should be mailed only to the financial institutions
with which the client has a cash balance at year-end.
FALSE
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
7.
A proof of cash is an audit procedure that is performed on almost every

engagement.
FALSE
AICPA: BB Industry
Blooms: Understand
8.
A compensating balance agreement always requires that cash be reclassified as a

noncurrent asset.
FALSE
AICPA: BB Industry
Blooms: Understand
10-20
9.
Verification of cash and other liquid assets on the same date may prevent
substitution of one form of asset for another.
TRUE
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
10.
For investments in securities accounted for by the equity method, the auditors are
primarily concerned with verifying the fair value of the investments.
FALSE
AICPA: BB Industry
Blooms: Understand
Learning Objective: 10-10 Describe tests of controls and substantive procedures used to audit financial
investments.
Topic: Audit of Financial Investments
Multiple Choice Questions

11.
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?
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.
AICPA: BB Industry
Blooms: Understand
Source: AICPA
10-21
12.
By preparing a four-column bank reconciliation ("proof of cash") at year-end, an

auditor will generally be able to detect:
B. A second payment of an account payable which had already been paid in full
two months earlier.
C. An embezzlement of cash receipts not recorded in the cash receipts
journal before they had been deposited into the bank.
D. A receivable collected that had previously been written off as uncollectible.
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
13.
Kiting would least likely be detected by:

A. Analyzing details of large cash deposits around year-end.
B. Comparing customer remittance advices with recorded disbursements in the
cash disbursements journal.
C. Preparing a four-column bank reconciliation for all major cash accounts.
D. Preparing a schedule of interbank transfers by using the client's records and
bank statements around year-end.
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
14.
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?
A.
B.
C.
D.
Sales are understated.

Accounts receivable are understated.
Inventory is overstated.
Net income is overstated.
AICPA: BB Industry
10-22
Blooms: Understand
15.
An internal control questionnaire indicates that an approved receiving report is

required to accompany every check request for payment of merchandise. Which of
the following procedures provides the best evidence on operating effectiveness?
A. Select and examine receiving reports and test whether the related canceled
checks are dated no earlier than the receiving reports.
B. Select and examine receiving reports and test whether the related canceled
checks are dated no later than the receiving reports.
C. Select and examine canceled checks and test whether the related receiving
reports are dated no earlier than the checks.
D. Select and examine canceled checks and test whether the related receiving
reports are dated no later than the checks.
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
16.
By preparing a four-column bank reconciliation ("proof of cash") at year-end, an

auditor will generally not be able to detect:
B. A second payment of an account payable which had already been paid in full
two months earlier.
C.
An unrecorded check cashed during that month.
D. A bank charge during the month not recorded on the books.
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
10-23
17.
Which procedure is an auditor most likely to use to detect a check outstanding at

year-end that was not recorded as outstanding on the year-end bank
reconciliation?
A. Prepare a bank transfer schedule using the client's cash receipts and cash
B. Receive a cutoff statement directly from the client's bank.
C. Prepare a four column bank reconciliation using the year-end bank statement.
D. Confirm the year-end balance using the standard form to confirm account
balance information with financial institutions.
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
18.
An auditor may obtain information on the December 31 month-end balance per
bank in which of the following?
Standard Confirmation Form
January 1-10 Cutof

Statement
A.
Yes
Yes
B.
Yes
No
C.
No
Yes
D.
No
No
A.
B.
C.
D.
Option A
Option B
Option C
Option D
AICPA: BB Industry
Blooms: Understand
10-24
19.
An auditor may obtain information on the December 31 month-end balance per
bank in which of the following?
December 31 Bank Statement

A.
Yes
B.
Yes
C.
No
D.
No
A.
B.
C.
D.
Schedule of Ba
Option A
Option B
Option C
Option D
AICPA: BB Industry
Blooms: Understand
20.
Which of the following is correct concerning "window dressing" for cash?

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.
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
10-25
21.
Which of the following statements is not correct?

A. Cash is important to the audit process because of its vulnerability to
misappropriation, despite the fact that the balance at the balance sheet date
may be immaterial.
B. Payroll cash account balances kept on an imprest basis are more easily
controlled than others not so kept.
C. Confirmation of cash should only be performed as of the balance statement
date because the auditor expresses an opinion as of that date.
D. Reviewing interbank transfers is important to the auditor because of the
possibility that the client may be engaged in kiting.
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
22.
The auditors use a bank cutoff statement to compare:

A. Deposits in transit on the year-end cash general ledger account to deposits in
the cash receipts journal.
C. Deposits listed on the cutoff statement to disbursements in the cash
D. Checks dated subsequent to year-end to the outstanding checks listed on the
year-end bank statement.
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
23.
A practical and effective audit procedure for the detection of lapping is:
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.
AICPA: BB Industry
Blooms: Apply
10-26
Difficulty: 3 Hard
24.
Which of the following is not a control that generally is established over cash
transactions?
A.
B.
C.
D.
Separating cash handling from recordkeeping.

Centralizing the receipt of cash.
Depositing each day's receipts intact.
Obtaining a receipt for every disbursement.

AICPA: BB Industry
Blooms: Understand
Topic: Cash
25.
Which of the following controls would be most likely to reduce the risk of diversion
of customer receipts by a company's employees?
A.
A bank lockbox system.
B. Approval of all disbursements by an individual independent of cash receipts.
C.
Monthly bank cutoff statements.
D.
Prenumbered remittance advices.

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
Topic: Cash
26.
Which of the following is not a control that generally is established over cash
receipts?
A. To prevent abstraction of cash, a control listing of cash receipts should be
prepared by mailroom personnel.
B. To insure accurate posting, the accounts receivable clerk should post the
customers' receipts from customers' checks.
C. To insure accuracy of the accounts receivable records, the records should be
reconciled monthly to the accounts receivable controlling account.
D. To prevent theft of cash, receipts should be deposited daily.
AICPA: BB Industry
Blooms: Understand
10-27
Topic: Cash
27.
By preparing a four-column bank reconciliation ("proof of cash") for the last month
of the year, an auditor will generally be able to detect:
A. An unrecorded check written at the beginning of the month which was cashed
during the period covered by the reconciliation.
B. A cash sale which was not recorded on the books and was stolen by a
bookkeeper.
C. An embezzlement of unrecorded cash receipts on receivables before they had
been deposited into the bank.
D. A credit sale which has been recorded twice in the sales journal.
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
28.
In October, three months before year-end, the bookkeeper erroneously recorded

the receipt of a one year bank loan with a debit to cash and a credit to
miscellaneous revenue. The most effective method for detecting this type of error
is:
A.
B.
C.
D.
Foot the cash receipts journal for October.

Send a bank confirmation as of year-end.
Prepare a bank reconciliation as of year-end.
Prepare a bank transfer schedule as of year-end.

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
Topic: Cash
29.
Jones embezzled $10,000 from his company's account in Bank A. At year-end, he

hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank
B. He has not recorded the transaction on the books. This is an example of:
A.
B.
C.
D.
Lapping.
Kiting.
Effective cash management.
Related party transactions.
10-28
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
30.
Jones embezzled $10,000 from his company's account in Bank A. At year-end, he

hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank
B. He has not recorded the transaction on the books. Which of the following is
most likely to be effective in detecting this fraud?
A.
Bank confirmation.
B. Bank transfer schedule prepared using only the cash receipts and cash
disbursements journals.
C. Comparison of bank cutoff statement to the cash receipts and disbursements
records.
D.
Receivable confirmation.
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
31.
Which of the following is not a universal rule for achieving internal control over
cash?
A. Separate recordkeeping from accounting for cash to the extent possible.
B.
Deposit each day's cash receipts intact.
C.
Separate cash handling from recordkeeping.
D. Have monthly bank reconciliations prepared by employees not responsible for
the issuance of checks.

AICPA: BB Industry
Blooms: Understand
Topic: Cash
10-29
32.
Which of the following is not a control over cash disbursements?

A.
Disbursements should be made by check.
B.
A check protecting machine should be used.
C. Documents supporting the payment of a disbursement should be canceled by
the person preparing the check to prevent reuse.
D. Voided checks should be defaced and filed with paid checks.

AICPA: BB Industry
Blooms: Understand
Topic: Cash
33.
Which of the following is the best audit procedure for the detection of lapping?
A. Comparison of postings of cash receipts to accounts with the details of cash
deposits.
B.
Confirmation of the cash balance.
C.
Reconciliation of the cash account balances.
D.
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
34.
Which of the following manipulations of cash transactions would overstate the

cash balance on the financial statements?
A.
B.
C.
D.
Understatement of outstanding checks.

Overstatement of outstanding checks.
Understatement of deposits in transit.
Overstatement of bank services charges.
AICPA: BB Industry
Blooms: Understand
10-30
35.
Which of the following is not confirmed on the standard confirmation form used for
cash balances at financial institutions?
A.
B.
C.
D.
Cash checking account balances.

Cash savings account balances.
Loans payable.
Securities held for the client by the financial institution.

AICPA: BB Industry
Blooms: Understand
investments.
36.
Internal control over marketable securities is enhanced when:

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.
AICPA: BB Industry
Blooms: Understand
Learning Objective: 10-09 Describe typical internal controls over the business processes related to financial
investments.
Topic: Financial Investments
37.
In a manufacturing company which one of the following audit procedures would

give the least assurance of the existence of the assets in the general ledger
balance of investment in stocks and bonds at the audit date?
A.
Confirmation from the broker.
B.
Inspection of year-end brokers' statements.
C. Vouching all changes during the year to brokers' advises and statements.
D. Examination of paid checks issued in payment of securities purchased.
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
investments.
Source: AICPA
10-31
38.
The Standard Form to Confirm Account Balances with Financial Institutions includes
information on all of the following except:
A.
B.
C.
D.
Date due of a direct liability.

The principal amount paid on a direct liability.
Description of collateral for a direct liability.
The interest rate of a direct liability.

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
investments.
Source: AICPA
39.
The auditors should insist that a representative of the client be present during the
physical examination of securities in order to:
A.
B.
C.
D.
Lend authority of the auditor's directives.

Detect forged securities.
Coordinate the return of all securities to proper locations.
Acknowledge the receipt of securities returned.

AICPA: BB Industry
Blooms: Understand
investments.
Source: AICPA
40.
The auditors' count of the client's cash should be coordinated to coincide with the:
A.
B.
C.
D.
Consideration of the internal controls with respect to cash.

Close of business on the balance sheet date.
Count of investment securities.
Count of inventories.

AICPA: BB Industry
Blooms: Understand
investments.
Source: AICPA
10-32
41.
The auditors compare information on canceled checks with information contained

in the cash disbursement journal. The objective of this test is to determine that:
A. Recorded cash disbursement transactions are properly authorized.
B.
Proper cash purchase discounts have been recorded.
C. Cash disbursements are for goods and services actually received.
D. No discrepancies exist between the data on the checks and the data in the
journal.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
investments.
Source: AICPA
42.
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?
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.
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
investments.
Source: AICPA
43.
Which of the following is one of the better auditing techniques that might be used
by an auditor to detect kiting?
A.
Review composition of authenticated deposit slips.
B. Review subsequent bank statements and canceled checks received directly
from the banks.
C.
Prepare a schedule of bank transfers.
D.
Prepare year-end bank reconciliations.
AICPA: BB Industry
10-33

Blooms: Understand
Source: AICPA
44.
Which one of the following would the auditor consider to be an incompatible

operation if the cashier receives remittances from the mailroom?
A.
The cashier prepares the daily deposit.
B.
The cashier makes the daily deposit at a local bank.
C. The cashier posts the receipts to the accounts receivable subsidiary ledger.
D.
The cashier endorses the checks.

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
Source: AICPA
Topic: Cash
45.
As one of the year-end audit procedures, the auditor instructed the client's
personnel to prepare a confirmation request for a bank account that had been
closed during the year. After the client's treasurer has signed the request, it was
mailed by the assistant treasurer. What is the major flaw in this audit procedure?
A.
The confirmation request was signed by the treasurer.
B. Sending the request was meaningless because the account was closed before
the year-end.
C.
The request was mailed by the assistant treasurer.
D. The CPA did not sign the confirmation request before it was mailed.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
Source: AICPA
10-34
46.
On receiving the bank cutoff statement, the auditor should trace:

A. Deposits in transit on the year-end bank reconciliation to deposits in the cash
receipts journal.
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.
AICPA: BB Industry
Blooms: Understand
Source: AICPA
47.
To gather evidence regarding the balance per bank in a bank reconciliation, an

auditor could examine all of the following except:
A.
B.
C.
D.
Cutoff bank statement.

Year-end bank statement.
Bank confirmation.
General ledger.
AICPA: BB Industry
Blooms: Understand
Source: AICPA
48.
Contact with banks for the purpose of opening company bank accounts should
normally be the responsibility of the corporate:
A.
B.
C.
D.
Board of Directors.
Treasurer.
Controller.
Executive Committee.

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
Source: AICPA
10-35
Topic: Cash
49.
Which of the following cash transfers is most likely to result in a misstatement of
cash at December 31, 20X7?
Bank Transfer Schedule

Disbursement
Record
ed
in
books
Receipt
Paid by bank
Record Receiv
ed
ed by
in
bank
books
A 12/31/X
)
7
1/4/X8
12/31/X 12/31/X
7
7
B
)
1/5/X8
12/31/X
7
1/4/X8
1/5/X8
12/31/X
7
1/4/X8
1/11/X8
1/4/X8
1/4/X8
1/4/X8
C 12/31/X
)
7
D
)
A.
B.
C.
D.
1/4/X8
Transfer A.
Transfer B.
Transfer C.
Transfer D.
AICPA: BB Industry
Blooms: Understand
Source: AICPA
50.
For purposes of an audit of financial statements, electronic confirmation of cash

balances:
A.
Is acceptable when properly controlled.
B. Is acceptable, but only when combined with a non-electronic approach.
C.
Is only acceptable for immaterial accounts.
D.
Is not acceptable.
AICPA: BB Industry
10-36
Blooms: Apply
Difficulty: 3 Hard
51.
Properly designed internal control will permit the same employee to:
A. Receive and deposit checks, and also approve write-offs of customer accounts.
B. Approve vouchers for payment, and also receive and deposit cash.
C. Reconcile the bank statements, and also receive and deposit cash.
D. Sign checks, and also cancel supporting documents.

AICPA: BB Industry
Blooms: Understand
Source: AICPA
Topic: Cash
52.
Which of the following procedures in the cash disbursements cycle should not be
performed by the accounts payable department?
A.
B.
C.
D.
Comparing the vendor's invoice with the receiving report.

Canceling supporting documentation after payment.
Verifying the mathematical accuracy of the vendor's invoice.
Preparing the check for signature by an authorized person.

AICPA: BB Industry
Blooms: Understand
Source: AICPA
Topic: Cash
53.
The Parmalat fraud case involved:

A.
A fraudulent cash confirmation.
B. Kiting of funds between banks in India and banks in Pakistan.
C. A bank reconciliation performed by the client that systematically understated
cash.
D.
Major unrecorded disbursements for equipment.
AICPA: BB Industry
Blooms: Understand
10-37
54.
Banks may process electronic "substitute checks" in place of customer written

hard copy checks due to the:
A.
B.
C.
D.
Check Clearing for the 21st Century Act.

Public Company Accounting Oversight Board's Standard No. 2.
Foreign Corrupt Practices Act.
Sarbanes-Oxley Act.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
55.
When a client engages in transactions involving derivatives, the auditor should:

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.
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
investments.
Source: AICPA
56.
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?
A.
B.
C.
D.
Completeness.
Existence.
Fairness.
Presentation and Disclosure.

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
investments.
10-38
57.
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. 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.
AICPA: BB Industry
Blooms: Understand
Learning Objective: 10-08 Identify the auditors' objectives in the audit of financial investments.
Source: AICPA
58.
Which of the following is correct relating to kiting?

A.
It is ordinarily used to understate cash.
B. It is more difficult to accomplish in an electronic environment as contrasted to a
non-electronic environment.
C. It is a lapping approach performed using receivable accounts.
D.
It is seldom, if ever, used.
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
Essay Questions
10-39
59.
You are working on the Bemco audit. Assume that each of the four sections of this
question are unrelated. Bill Wedman, another staff member, has given you the
following list of what he refers to as "internal control deficiencies" and has asked
you to review each point and make sure that you agree that each is an internal
control deficiency.
1. Voided checks are torn up and destroyed.

2. Separate sequences of prenumbered checks are used for each bank account.
3.
The purchasing department manager and assistant manager are the authorized check
signers.
4. No checks are made payable to cash.

5. The authorized check signers reconcile bank accounts.
6.
All cash receipts (checks) received through the mail are prelisted by the two individuals
who open the mail.
7. All cash receipts received through the mail are restrictively endorsed when received.
8.
When a disbursement is made based on paper supporting documents, those supporting

documents are canceled by the individual who signs the check.
1. Agree. Voided checks should be so marked (defaced) and retained so as to allow

one to know that they have been voided and are not outstanding.
2. Disagree. One expects separate sequences of numbers of the various accounts,
as one overall sequence for various bank accounts is, at best, unwieldy;
establishing control over each sequence is generally adequate.
3. Agree. Since the purchasing department employees approve purchases they
should not also sign checks.
4. Disagree. Checks should not be made payable to cash as they may be cashed
by anyoneproperly or improperly.
5. Agree. The authorized signers disburse funds and effective oversight of those
disbursements requires account reconciliation by another individual.
6. Disagree. Cash receipts should be so prelisted.
7. Disagree. A policy of restrictively endorsing such receipts (e.g., endorsing the
checks as "pay only to Bemco") is a control, not a control deficiency.
8. Disagree. The person signing the check should be the person who perforates
(defaces) the checks so as to eliminate the possibility of that support being used
again to improperly support another disbursement.
AICPA: BB Industry
Blooms: Understand
Difficulty: 3 Hard
Topic: Cash
10-40
10-41
10-42
60.
Flemco has made a series of transfers between bank accounts near year-end,
some through inter-bank wired transfers and some through checks. You have
audited the wired transfers and agree that they have been properly stated and
now have the following schedule of transfers between cash accounts made using
checks. You may assume that dates per bank are correct, and that dates per books
are the dates the transactions were recorded in the books.
Bank accounts
Check
number
From
4040
1st Nat.
Suburban
3270
Valley
Midburg
4041
1st Nat.
Capital
3271
Valley
0700
Midburg
To
Date disbursed per:

Amount Books
Bank
$112,000 12/31
1/5
62,500 12/31
1/3
121,000 1/2
1/4
Suburban
16,500 1/3
1/5
Suburban
15,800 12/30
1/5
Analyze each of the above transfers and determine whether you believe each
causes total cash to most likely be correct, overstated, or understated as of yearend.
10-43
As a
result
of the
transf
er,
total
cash a
t Dece
mber
31
appea
rs to
be
Q
u
e
s
ti
o
n
#
C
h
e
c C
ko
n r
u r
me
bc
e t
r
O
v
e
rs
t
a
t
e
d
U
n
d
er
st
at
e
d
4
1 0
. 4
0
3
2 2
. 7
0
4
3 0
. 4
1
3
4 2
. 7
1
0
5 7
. 0
0
1. Understated. The entry is recorded as having been disbursed on December 31,

yet it is not recorded as a deposit on the books until January 3. Accordingly, the
cash is recorded in neither account as of year-end.
2. Correct. An example here is a check written in the Valley account on December
31, and deposited on that same day in the Midburg bank account. Valley bank will
not record it as a disbursement until it is presented for payment several days later.
10-44
3. Overstated. Because the entry is recorded as deposited on the books on 12/31,

but not recorded as a cash disbursement in the books until January 2, at December
31 the cash is recorded on the books in both accounts.
4. Overstated. The cash is recorded as a deposit per the bank on 12/30, but the
receipt and disbursement is not recorded until January 3 on the books. In essence,
this type of treatment may be used to hide a shortage in cash (perhaps due to
embezzlement of cash).
5. Correct. An example here is recording a transfer, and processing this transfer
through the mailaccordingly, both banks receive the information later.
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
61.
Listed below are four interbank cash transfers, indicated by the letters a, b, c and
d, of a client for late December 20X1, and early January 20X2. Your answer choice
for the next two questions should be selected from this list.
Bank Account One

Disbursing Date
(Month/Day)
Bank Account Two

Receiving Date
(Month/Day)
Per Bank
Per Books
Per Bank
Per Books
a.
1/02
12/30
12/31
12/30
b.
1/04
12/31
1/02
12/31
c.
1/03
12/31
1/02
1/02
d.
1/02
1/02
12/31
1/02
For each of transfers a through d indicate whether cash is understated,

unaffected, or overstated by the transfer and provide a brief example of what
could cause the situation in which cash is either understated or overstated.
a. Unaffected.
b. Unaffected.
c. Understated. Although there are a number of possible situations, one is that in
which a check is written on the disbursing bank on the last day of December with a
credit to cash, and an associated debit to some expense account so as to decrease
reported profits (and taxes) for the year.
d. Overstated. One situation is that in which an employee has misappropriated
funds during the year, and draw a check transferring funds to the account with the
shortage so as to cover the shortage. As of December 31, the shortage is replaced,
with no reduction as yet recorded in the account on which it is drawn.
AICPA: BB Industry
10-45

Blooms: Apply
Difficulty: 3 Hard
62.
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.
a. Lapping is the concealment of a cash shortage by delaying the recording of cash

receipts. It involves posting receipts to the wrong account.
Procedures for detecting lapping include (only one required):
Details of cash receipts may be compared to postings to the accounts receivable
subsidiary records, preferably on a surprise basis.
Confirmation of accounts receivable.
b. Kiting is manipulation causing an amount of cash to be included simultaneously
in the balance of two or more bank accounts.
To detect kiting, the auditors prepare and verify a schedule of bank transfers.
AICPA: BB Industry
Blooms: Understand
10-46
63.
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.
a. The functions that should be segregated with respect to financial investments

are:
1. Authorization of purchases and sales;
2. Custody of the securities; and
3. Maintaining records of investments.
b. Other internal controls include (only two required):
Establishing formal investment policies.
Maintaining a complete detailed record of investments and revenue from
investments.
Registration of securities in the name of the company.
Periodic physical inspection.
Joint control over securities, or use of an independent custodian.
Preparation of a budget of investment revenue.
Determination of appropriate accounting by competent personnel.
AICPA: BB Industry
Blooms: Understand
Learning Objective: 10-08 Identify the auditors' objectives in the audit of financial investments.
10-47
64.
In many financial statements audits, auditing financial investments involves

complex tasks requiring specialized skill and knowledge.
a. List three audit tasks related to the audit of financial investments that may
require specialized skill or knowledge.
b. Define the term "financial derivative."
c. List the two general purposes why a client might acquire a financial derivative.
a. Audit tasks requiring specialized skill or knowledge (only three required):

Identifying controls at service organizations that provide financial services for
the client.
Obtaining an understanding of information systems for securities and
derivatives that are highly dependent on computer technology.
Applying complex accounting principles.
Understanding the methods of determining fair values of financial investments.
Assessing inherent risk and control risk for assertions about derivatives used for
hedging.
b. Derivatives are financial instruments that "derive" their value from other
financial instruments, underlying assets, or indices.
c. Clients engage in financial derivative transactions for two major purposes:
Hedging-to hedge changes in value of an existing asset or liability or of a
prospective future transaction.
Speculating-to bet on the change in value of another financial instrument, an
asset, or an index.
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
investments.
10-48

Audit Test Bank Chapter 10

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Audit Test Bank Chapter 10

Uploaded by

Copyright:

Available Formats

Chapter 10

Cash and Financial Investments

3. Mailroom personnel of a company should prepare a control listing of incoming cash

5. Lapping of accounts receivable by an employee is not possible when there is

7. A proof of cash is an audit procedure that is performed on almost every

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

Multiple Choice Questions

Sales are understated.

15. An internal control questionnaire indicates that an approved receiving report is

Standard Confirmation Form

January 1-10 Cutof

December 31 Bank Statement

Separating cash handling from recordkeeping.

Foot the cash receipts journal for October.

A. Separate recordkeeping from accounting for cash to the extent possible.

Understatement of outstanding checks.

Cash checking account balances.

36. Internal control over marketable securities is enhanced when:

Date due of a direct liability.

Lend authority of the auditor's directives.

Cutoff bank statement.

Bank Transfer Schedule

50. For purposes of an audit of financial statements, electronic confirmation of cash

1. Voided checks are torn up and destroyed.

4. No checks are made payable to cash.

When a disbursement is made based on paper supporting documents, those supporting

Date disbursed per:

Bank Account One

Bank Account Two

For each of transfers a through d indicate whether cash is understated, unaffected,

Chapter 10 Cash and Financial Investments Answer Key

AACSB: Analytical Thinking

Mailroom personnel of a company should prepare a control listing of incoming cash

AACSB: Analytical Thinking

Lapping of accounts receivable by an employee is not possible when there is

A proof of cash is an audit procedure that is performed on almost every

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

Multiple Choice Questions

An auditor's analytical procedures have revealed that the accounts receivable of a

Topic: Audit of Cash

By preparing a four-column bank reconciliation ("proof of cash") at year-end, an

Kiting would least likely be detected by:

Sales are understated.

An internal control questionnaire indicates that an approved receiving report is

By preparing a four-column bank reconciliation ("proof of cash") at year-end, an

Which procedure is an auditor most likely to use to detect a check outstanding at

Standard Confirmation Form

January 1-10 Cutof

December 31 Bank Statement

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

Which of the following statements is not correct?

The auditors use a bank cutoff statement to compare:

Separating cash handling from recordkeeping.

AACSB: Analytical Thinking

AACSB: Analytical Thinking

In October, three months before year-end, the bookkeeper erroneously recorded

Foot the cash receipts journal for October.

AACSB: Analytical Thinking

Jones embezzled $10,000 from his company's account in Bank A. At year-end, he

Jones embezzled $10,000 from his company's account in Bank A. At year-end, he

AACSB: Analytical Thinking

Which of the following is not a control over cash disbursements?

AACSB: Analytical Thinking

Which of the following manipulations of cash transactions would overstate the