3) A proof of cash represents
A) a test of controls and substantive test of transactions.
B) a substantive test of transactions.
C) a substantive test of transactions and test of details of balances.
D) a test of details of balances.
4) A major consideration in the audit of the general cash balance is the possibility of fraud. The
auditor must extend his or her procedures in the audit of year-end cash to determine the
possibility of a material fraud when there are
A) large cash balances at the end of the year.
B) large cash receipts and disbursements during the year.
C) no imprest accounts used for payroll.
D) inadequate internal controls.
5) The audit and accounting concern addressed in a monthly proof of cash is with
A) adjusting account balances.
B) reconciling the amounts recorded in the books with the amounts included in the bank
statement.
C) determining the month-end balance.
D) identifying cash transfers.
6) A proof of cash is effective at identifying which of the following misstatements?
A) checks written for an improper amount
B) checks issued to invalid vendors
C) fraudulent checks
D) checks recorded in the books for an amount different from that on the check
7) The process of transferring money from one bank account to another and improperly
recording the transaction is referred to as
A) kiting.
B) lapping.
C) scamming.
D) embezzling.
8) Which of the following is a correct statement?
A) The proof of cash receipts is a test of the balance in the cash account at a point in time.
B) The proof of cash disbursements is effective for discovering a check written for the incorrect
amount for which the dollar amount in cash disbursements is also incorrect.
C) It is extremely difficult for an auditor to detect thefts of cash, especially omitted transactions
and account balances.
D) Segregation of duties is not an important control procedure for cash in a small business.
The following information applies to the questions below:
Listed below are four interbank cash transfers, indicated by the numbers 1, 2, 3, and 4, of a client
for late December 2015 and early January 2016:
Bank Account One
Disbursing Date
(Month/Day)
Per Bank Per Books
1. 12/31 12/30
2. 1/2 12/30
3. 1/3 12/31
4. 1/3 12/31
Bank Account Two
Receiving Date
(Month/Day)
Per Bank Per Books
12/31 12/30
12/31 12/31
1/2 1/2
1/2 12/31
9) Based on the schedule of interbank transfers above, which of the cash transfers indicates an
error in cash cutoff at December 31, 2015?
A) 1
B) 2
C) 3
D) 4
10) Based on the schedule of interbank transfers above, which of the cash transfers would appear
as a deposit in transit on the December 31, 2015 bank reconciliation?
A) 1
B) 2
C) 3
D) 4
11) Based on the schedule of interbank transfers above, which of the cash transfers would not
appear as an outstanding check on the December 31, 2015 bank reconciliation?
A) 1
B) 2
C) 3
D) 4
12) A proof of cash is not an effective procedure for identifying which of the following types of
misstatements?
A) All recorded disbursements were paid by the bank.
B) All recorded cash receipts were deposited.
C) All amounts that were paid by the bank were recorded.
D) Some checks were written for incorrect amounts.
13) Listing all bank transfers made a few days before and after the balance sheet date and tracing
each to the accounting records for proper recording is a useful approach to test for
A) kiting.
B) lapping.
C) income smoothing.
D) channel stuffing.
14) Procedures that may uncover fraud in the cash receipts area include
A) confirmation of accounts payable.
B) comparison of purchase orders to invoices.
C) tests performed to detect lapping.
D) all of the above.
15) Which of the following should be audited on the interbank transfer schedule?
A) Receipts on the interbank transfer schedule should be correctly included in or excluded from
year-end bank reconciliations as deposits in transit.
B) Disbursements on the interbank transfer schedule must always be shown as outstanding
checks.
C) The interbank transfers cannot be recorded in both the receiving and disbursing banks.
D) All transfers that occurred for the month before and the month after the year-end must be
included on the interbank transfer schedule.
16) On the last day of the fiscal year, the cash disbursements clerk drew a company check on
bank A and deposited the check in the company account in bank B to cover a previous theft of
cash. The disbursement has not been recorded. The auditor will best detect this form of kiting by
A) examining the composition of deposits in both bank A and bank B subsequent to year-end.
B) examining paid checks returned with the bank statement of the next account period after year-
end.
C) preparing, from the cash disbursements records, a summary of bank transfers for one week
prior to and subsequent to year-end.
D) comparing the detail of cash receipts as shown by the client’s cash receipts records with the
detail on the confirmed duplicate deposit tickets for three days prior to and subsequent to year-
end.
17) When the auditor believes the year-end bank reconciliation may be intentionally misstated, it
is appropriate to perform extended tests of the year-end bank reconciliation. Assuming the client
has a October 31 year-end, these extended tests would not include
A) comparing all September 30 reconciling items with canceled checks and other documents in
the October bank statement.
B) comparing all canceled checks and deposit slips in the October bank statement with the
October cash disbursements and receipts records.
C) carrying out all proper procedures subsequent to the end of the year with the use of the bank
cutoff statement.
D) determining that all outstanding checks had cleared by the date of the bank cutoff statement.
18) Auditors will often prepare a proof of cash when the client has material internal control
weaknesses in cash receipts and cash disbursements. The purpose of the proof of cash is to
determine the client’s accounting records for cash are reliable. List below the four requirements
the proof of cash is designed to provide for the auditor.
19) A proof of cash includes four reconciliation tasks. List below two of those tasks.
20) What should be audited on an interbank transfer schedule?
21) Explain kiting, and discuss how it is performed.
22) Match six of the terms (a-k) with the descriptions/definitions provided below (1-6):
a. bank reconciliation
b. branch cash account
c. cash equivalents
d. cutoff bank statement
e. general cash account
f. imprest payroll account
g. imprest petty cash fund
h. kiting
i. proof of cash
j. standard bank confirmation form
k. lapping
________ 1. a fund of cash maintained within the company for small cash acquisitions,
expenses, or to cash employees’ checks
________ 2. a form approved by the AICPA and American Bankers’ Association through which
the bank responds to the auditor about bank balance and loan information
________ 3. excess cash invested in short-term, highly liquid investments such as time deposits,
certificates of deposit, and money market funds
________ 4. the primary bank account for most organizations
________ 5. the transfer of money from one bank account to another and improperly recording
the transfer so that the amount is recorded as an asset in both accounts
________ 6. the document usually prepared by client personnel of the differences between the
cash balance recorded in the general ledger and the amount in the bank account
23) A proof of cash involves a combination of substantive tests of transactions and tests of
details of balances.
24) A proof of cash includes a reconciliation of cash receipts deposited in the bank with the cash
disbursements records for a given period.
25) The transfer of money from one bank account to another and improperly recording the
transfer so that the amount is recorded as an asset in both banks is referred to as kiting.
26) Tests for kiting are performed using only a schedule of intrabank transfers.
27) A proof of cash helps the auditor determine whether all recorded cash receipts were
deposited in the bank and whether all recorded cash disbursements were paid by the bank.
28) A proof of cash receipts is not useful for uncovering the theft of cash receipts or the
recording and deposit of an improper amount of cash.
29) A proof of cash disbursements is not effective for discovering checks written for an
improper amount, fraudulent checks, or misstatements in which the dollar amount appearing in
the cash disbursements records is incorrect.
30) The auditor must extend the audit procedures in the audit of year-end cash when there are
inadequate internal controls.
31) Only tests of details of cash balances are useful when auditors are specifically testing for
fraud.
1) Which of the following is not a correct statement regarding business risk and financial
instruments?
A) Business risks associated with financial instruments will vary depending of the
aggressiveness of a company’s investing activity.
B) Business risk will be higher for companies investing in less liquid securities.
C) Financial services firms are exposed to very little risk with their financial instruments.
D) Business risk for a company will be higher when investments represent a greater proportion
of total assets.
2) Factors that impact inherent risk of financial instruments do not include
A) management’s objectives related to investment activity.
B) the complexity of the securities.
C) the cost of the securities.
D) the company’s prior experience with certain investments.
3) The use of unobservable inputs such as a pricing model or discounted cash flow is an example
of a level ________ estimate.
A) 1
B) 2
C) 3
D) 1 and 3
4) The majority of financial instruments are valued using
A) cost.
B) fair value estimates.
C) lower of cost or market.
D) realizable value.
5) When an audit client uses a service organization to manage their investment activity,
A) the auditor can always rely on the internal controls of the service organization.
B) the auditor must state in their audit opinion that the client uses a service organization.
C) the auditor can rely on the internal controls of the service organization if the service
organization’s auditor issues a report on their internal control.
D) the auditor must rely on the service organization to determine the fair level 1, 2, and 3
estimates.
6) As part of their internal control procedures, management needs to have procedures in place to
properly classify financial instruments as trading, available-for-sale, or held-to-maturity, based
on
A) cost.
B) intent.
C) maturity.
D) probable future gain or loss.
7) Prices in an active market for identical assets is a level ________ fair value estimate.
A) 1
B) 2
C) 3
D) 4
8) When auditing financial instruments,
A) the auditor usually performs more extensive substantive testing to reduce reliance on controls.
B) analytical procedures are critical in assessing the year-end balances for financial instruments.
C) the auditor relies on statements and broker’s advices from investment managers to test
purchases and sales as long as controls were deemed effective.
D) tests of transactions are generally not performed.
9) When auditing financial instruments, analytical procedures can be used to
A) test the reasonableness of interest and dividend income.
B) test the year-end balance.
C) determine if the financial instruments were properly valued.
D) determine if the gain or loss on the sales were properly computed.
10) Which is not an important objective for financial instruments?
A) existence
B) cutoff
C) accuracy
D) realizable value
11) Level ________ estimates use observable inputs other than quoted prices.
A) 1
B) 2
C) 3
D) 4
12) A schedule of investment activity will include all of the following except
A) the purchases and sales.
B) ending balances.
C) the gains and losses.
D) the opinion of management as to the suitability of the investment to the company.
13) When auditing financial instruments, a confirmation is sent to the broker-dealer
A) only if the client has poor internal controls.
B) to confirm interest and dividends.
C) to provide assurance on realizable value.
D) to confirm year-end holdings.
14) The auditor is testing for the balance-related audit objective of detail tie-in when they
A) prove the schedule of investment activity as to additions and subtractions.
B) perform a physical inspection of the security.
C) verify the quoted market prices.
D) test management’s assumptions related to valuation.
15) When the auditor sends a confirmation to the broker-dealer, they are testing the balance-
related audit objective of
A) detail tie-in.
B) existence.
C) cutoff.
D) rights.
16) When dealing with financial instruments, the most difficult balance-related audit objective to
test is
A) existence.
B) accuracy.
C) rights.
D) realizable value.
17) An auditor is reviewing the minutes of board meetings to determine whether any securities
are pledged as collateral. This test of the detail of balances relates to the audit objective of
A) rights.
B) cutoff.
C) realizable value.
D) classification.
18) Determining if the financial instruments included in the schedule of investment activity at
year-end are stated at appropriate amounts in accordance with accounting standards is the
balance-related audit objective of
A) materiality.
B) realizable value.
C) consistency.
D) classification.
19) List two common tests of details of balances procedures the auditor would perform when
testing for the balance-related audit objective of realizable value.
20) The majority of financial instruments are valued at the lower of cost or market.
21) Business risks associated with financial instruments are the same for all companies.
22) The starting point for testing the ending balance of financial instruments accounts is to obtain
a gain or loss schedule for the year.
23) The auditor needs to have an understanding of the client’s internal controls over determining
fair value estimates.
24) A factor that increases inherent risk for financial instruments is the complexity of the
relevant accounting standards.
25) Level 1 estimates require more management judgment than level 2 or level 3 estimates.
26) There is significant potential for misstatements and misclassification of financial
instruments.
27) Assessing internal controls related to financial instruments may be necessary in order to
reduce audit risk to an acceptable level.
28) When auditing financial instruments, interest income and dividends can be recomputed and
compared to a public source.
29) Analytical procedures may be used to assess the year-end balances for financial instruments.
30) Completeness is an important objective for derivative financial instruments.
31) The most important objectives for financial instruments are existence and consistency.
32) Presentation and disclosure objectives are important when auditing financial instruments.
33) Tests related to realizable value will vary according to the type of security and the associated
accounting standard.
34) Auditing guidance is provided for auditing accounting estimates specifically for fair values
estimates as considerable auditor judgment is involved.
35) Cutoff is more important in testing transactions as a client may want to record a gain or a
loss on the sale at the end of the year.
36) When an auditor is verifying quoted market prices, they are concerned about the balance-
related audit objective of accuracy.
37) Securities and contracts will typically be held by the broker-dealer.
38) When auditing financial instruments, the most difficult objective to test is existence.