Test bank principles of auditing and other assurance principles chapter 10 cash and financial investments

Chapter 10 - Cash and Financial Investments

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

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Chapter 10 - Cash and Financial Investments

8. A compensating balance agreement generally requires that cash be reclassified as a
noncurrent asset.
True False

9. Verification of cash and other liquid assets be verified on the same date may prevent
substitution of one form of asset for another.
True False

10. For investments in securities accounted for by the equity method, the auditors are
primarily concerned with verifying the market 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.

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Chapter 10 - Cash and Financial Investments

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.

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. Sales are understated.

B. Accounts receivable are understated.
C. Inventory is overstated.
D. 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:
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 unrecorded check cashed during that month.
D. A bank charge during the month not recorded on the books.

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Chapter 10 - Cash and Financial Investments

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 disbursements
journal.
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.

18. An auditor may obtain information on the December 31 month end balance per bank in
which of the following?

A. Option A
B. Option B
C. Option C
D. Option D

19. An auditor may obtain information on the December 31 month end balance per bank in
which of the following?

A. Option A
B. Option B
C. Option C
D. Option D

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Chapter 10 - Cash and Financial Investments

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 disbursements journal.
D. Checks dated subsequent to year-end to the outstanding checks listed on the year-end 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.

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Chapter 10 - Cash and Financial Investments

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

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. Tracing recorded sales transactions in the sales journal to the shipping documents (bills of

lading) provides evidence about the:
A. Completeness of recording of sales transactions.
B. Occurrence of sales transactions.
C. Billing of all sales transactions.
D. Presentation of payables.

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Chapter 10 - Cash and Financial Investments

28. 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.

29. 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. Select the
most effective method for detecting this type of error.
A. Foot the cash receipts journal for October.
B. Send a bank confirmation as of year-end.
C. Prepare a bank reconciliation as of year-end.
D. Prepare a bank transfer schedule as of year-end.

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. This is an example of:
A. Lapping.
B. Kiting.
C. Effective cash management.
D. Related party transactions.

31. 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.

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Chapter 10 - Cash and Financial Investments

32. 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.

33. 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.

34. 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. Preparing a proof of cash.

35. Which of the following manipulations of cash transactions would overstate the cash
balance on the financial statements?
A. Understatement of outstanding checks.
B. Overstatement of outstanding checks.
C. Understatement of deposits in transit.
D. Overstatement of bank services charges.

36. Which of the following is not confirmed on the standard form used for cash balances at
financial institutions?
A. Cash checking account balances.
B. Cash savings account balances.
C. Loans payable.
D. Securities held for the client by the financial institution.

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Chapter 10 - Cash and Financial Investments

37. 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.

38. 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.

39. The Standard Form to Confirm Account Balances with Financial Institutions includes
information on all of the following except:
A. Date due of a direct liability.
B. The principal amount paid on a direct liability.
C. Description of collateral for a direct liability.
D. The interest rate of a direct liability.

40. The auditors should insist that a representative of the client be present during the physical
examination of securities in order to:
A. Lend authority of the auditor's directives.
B. Detect forged securities.
C. Coordinate the return of all securities to proper locations.
D. Acknowledge the receipt of securities returned.

41. 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.

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Chapter 10 - Cash and Financial Investments

42. 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.

43. 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.

44. 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.

45. 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.

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Chapter 10 - Cash and Financial Investments

46. 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.

47. 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.
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.

48. To gather evidence regarding the balance per bank in a bank reconciliation, an auditor
could examine all of the following except
A. Cutoff bank statement.
B. Year-end bank statement.
C. Bank confirmation.
D. General ledger.

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Chapter 10 - Cash and Financial Investments

49. Which of the following cash transfers is most likely to result in a misstatement of cash at
December 31, 19X7?

A. Transfer A
B. Transfer B
C. Transfer C
D. Transfer D

50. Contact with banks for the purpose of opening company bank accounts should normally
be the responsibility of the corporate:
A. Board of Directors.
B. Treasurer.
C. Controller.
D. Executive Committee.

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.

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.

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Chapter 10 - Cash and Financial Investments

53. The Parmalat fraud case apparently 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 21stCentury 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 affects which of the following assertions the most?
A. Completeness.
B. Existence.
C. Fairness.
D. Presentation and Disclosure

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Chapter 10 - Cash and Financial Investments

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.

Essay Questions

58. 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.

59. 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.

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Chapter 10 - Cash and Financial Investments

60. 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.

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.

61. 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 that a client might acquire a financial derivative.

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Chapter 10 - Cash and Financial Investments

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

Difficulty: Easy

2. Control over the receipt of cash sales is best achieved when two or more employees
participate in each transaction.
TRUE

Difficulty: Easy

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

Difficulty: Medium

4. Signed checks should be returned to the cash disbursements clerk for mailing.
FALSE

Difficulty: Medium

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Chapter 10 - Cash and Financial Investments

5. Lapping of accounts receivable by an employee is not possible when there is adequate
segregation of duties with respect to cash disbursements.
FALSE

Difficulty: Medium

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

Difficulty: Hard

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

Difficulty: Medium

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

noncurrent asset.
FALSE

Difficulty: Medium

9. Verification of cash and other liquid assets be verified on the same date may prevent
substitution of one form of asset for another.
TRUE

Difficulty: Easy

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Chapter 10 - Cash and Financial Investments

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

Difficulty: Medium

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.

Difficulty: Medium
Source: AICPA

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.

Difficulty: Hard

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Chapter 10 - Cash and Financial Investments

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.

Difficulty: 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. Sales are understated.
B. Accounts receivable are understated.
C. Inventory is overstated.
D. Net income is overstated.

Difficulty: Medium

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.

Difficulty: Hard

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Chapter 10 - Cash and Financial Investments

16. By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor
will generally not 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 unrecorded check cashed during that month.
D. A bank charge during the month not recorded on the books.

Difficulty: Hard

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 disbursements
journal.
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.

Difficulty: Hard

18. An auditor may obtain information on the December 31 month end balance per bank in
which of the following?

A. Option A
B. Option B
C. Option C
D. Option D

Difficulty: Medium

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Chapter 10 - Cash and Financial Investments

19. An auditor may obtain information on the December 31 month end balance per bank in
which of the following?

A. Option A
B. Option B
C. Option C
D. Option D

Difficulty: Medium

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.

Difficulty: Hard

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.

Difficulty: Hard

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Chapter 10 - Cash and Financial Investments

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 disbursements journal.
D. Checks dated subsequent to year-end to the outstanding checks listed on the year-end bank
statement.

Difficulty: 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. Preparing a proof of cash.

Difficulty: Hard

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

Difficulty: Medium

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.

Difficulty: Hard

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Chapter 10 - Cash and Financial Investments

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.

Difficulty: Medium

27. Tracing recorded sales transactions in the sales journal to the shipping documents (bills of
lading) provides evidence about the:
A. Completeness of recording of sales transactions.
B. Occurrence of sales transactions.
C. Billing of all sales transactions.
D. Presentation of payables.

Difficulty: Medium

28. 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.

Difficulty: Hard

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Chapter 10 - Cash and Financial Investments

29. 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. Select the
most effective method for detecting this type of error.
A. Foot the cash receipts journal for October.
B. Send a bank confirmation as of year-end.
C. Prepare a bank reconciliation as of year-end.
D. Prepare a bank transfer schedule as of year-end.

Difficulty: 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. This is an example of:
A. Lapping.
B. Kiting.
C. Effective cash management.
D. Related party transactions.

Difficulty: Hard

31. 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.

Difficulty: Hard

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Chapter 10 - Cash and Financial Investments

32. 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.

Difficulty: Medium

33. 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.

Difficulty: Medium

34. 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. Preparing a proof of cash.

Difficulty: Hard

35. Which of the following manipulations of cash transactions would overstate the cash
balance on the financial statements?
A. Understatement of outstanding checks.
B. Overstatement of outstanding checks.
C. Understatement of deposits in transit.
D. Overstatement of bank services charges.

Difficulty: Medium

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