Auditing and Assurance Services, 16e (Arens/Elder/Beasley)
Chapter 23 Audit of Cash and Financial Instruments
23.1 Learning Objective 23-1
1) Which of the following is not a “cash equivalent”?
A) time deposits
B) certificates of deposit
C) money market funds
D) marketable securities
2) An imprest petty cash fund would least likely be used to pay for which of the following items?
A) minor office supplies
B) monthly interest expense
C) stamps for small mailings
D) small contributions to a local charity
3) An imprest petty cash fund
A) is a bank account.
B) is used for large, unusual purchases.
C) is usually reimbursed at least once a week for good internal control.
D) is being replaced by pre-approved purchase cards in many companies.
4) Financial instruments
A) include debt securities and money market funds.
B) such as derivatives can be used as a way of hedging.
C) must be classified as held-to-maturity securities.
D) All of the above are correct.
5) Describe each of the major types of cash accounts maintained by business entities.
6) Companies may purchase marketable securities as a way to temporarily invest excess cash.
7) Examples of cash equivalents include time deposits, certificates of deposit, and marketable
securities.
8) Branch bank accounts are useful for building banking relations in local communities.
1) Which of the following misstatements is most likely to be uncovered during an audit of a
client’s bank reconciliation?
A) duplicate payment of a vendor’s invoice
B) billing a customer at a lower price than indicated by company policy
C) failure to record a collection of a note receivable by the bank on the client’s behalf
D) payment to an employee for more than the hours actually worked
2) Which of the following is likely to be detected as part of the audit of the bank reconciliation?
A) failure to bill a customer
B) duplicate payment of a vendor invoice
C) cash received by the client after year-end, but included in cash receipts in the current year
D) an embezzlement of cash by intercepting cash receipts from customers before they are
recorded
3) Which of the following would normally be discovered as part of the audit of the bank
reconciliation?
A) failure to bill a customer
B) failure to include a deposit in transit on the bank reconciliation
C) duplicate payment of a vendor’s invoice
D) payment to an employee for more hours than she worked
4) The general cash account is considered a significant account in almost all audits
A) where the ending balance is material.
B) even when the ending balance is immaterial.
C) except those of not-for-profit organizations.
D) where either the beginning or ending balance is material.
5) Which of the following is an accurate statement regarding cash?
A) The amount of cash flowing into and out of the cash account is often larger than that for any
other account in the financial statements.
B) The susceptibility of cash to embezzlement is greater than that for other types of assets.
C) Auditors must verify whether recorded cash in the general ledger correctly reflects all cash
transactions that took place during the year.
D) All of the above are accurate statements.
6) Which of the following cycles does not affect cash in bank?
A) capital acquisitions cycle
B) inventory and warehousing
C) payroll and personnel cycle
D) acquisitions and disbursements
7) List at least three misstatements that are designed to be detected by a bank reconciliation.
8) “Failure to bill a customer” is an example of an error that results in the failure to receive cash,
but would not be discovered as part of the audit of the bank reconciliation. State three other
examples of errors or irregularities that result in the improper payment of, or failure to receive,
cash, but that would not be discovered during the audit of the bank reconciliation. How are these
types of misstatements normally uncovered in the audit?
9) The general cash account will not be audited if the ending balance is immaterial.
23.3 Learning Objective 23-3
1) The test of details of balances procedure that requires the auditor to foot the outstanding check
and electronic payment list and deposits in transit is an attempt to satisfy which audit objective?
A) cutoff
B) presentation and disclosure
C) detail tie-in
D) completeness
2) The audit objective of determining that cash in bank, as stated on the reconciliation, foots
correctly and agrees with the general ledger can be tested by which of the following procedures?
A) performing tests for kiting
B) receiving and testing a cutoff bank statement
C) proving the bank reconciliation as to additions and subtractions, including all reconciling
items
D) examining the minutes of the board of directors for restrictions on the use of cash
3) The test of details of balances procedure that requires the auditor to trace the book balance on
the reconciliation to the general ledger is an attempt to satisfy the audit objective of
A) detail tie-in.
B) existence.
C) completeness.
D) accuracy.
4) Which of the following statements is correct?
A) Auditors must obtain bank confirmations for audits of nonpublic entities.
B) Auditors are required to obtain bank confirmations under international auditing standards.
C) Auditing standards do not address specific requirements regarding bank confirmations.
D) Auditing standards do not require bank confirmations.
5) A partial-period bank statement and the related copies of or digital access to cancelled checks,
duplicate deposit slips, and other documents included in bank statements, mailed by the bank
directly to the CPA firm’s office, is called
A) a four-column proof of cash.
B) a year-end bank statement.
C) a cutoff bank statement.
D) a short-period bank statement.
6) Which of the following statements is correct?
A) Bank personnel are responsible for providing reasonable assurance that a response to a bank
confirmation is accurate.
B) Bank personnel are responsible for providing complete assurance that a bank confirmation is
complete.
C) Bank personnel are not responsible for searching their records for bank balances or loans
beyond those included on the bank confirmation.
D) Bank personnel are not responsible for providing information related to interest on the bank
confirmation.
7) In addition to confirming bank balances of your audit client, a bank confirmation would
normally contain
A) the client’s bank loans with due date, interest rate, and collateral requested.
B) the client’s credit history as regards to paying back loans.
C) the client’s managements bank account information.
D) the client’s business prospects.
8) Which of the following balance-related audit objectives typically is assessed as having high
inherent risk for cash?
A) existence
B) cutoff
C) detail tie-in
D) presentation and disclosure
9) Because cash is the most desirable asset for people to steal, it has a higher
A) control risk.
B) inherent risk.
C) detection risk.
D) liquidity risk.
10) The starting point for the verification of the balance in the general bank account is to obtain
A) a bank reconciliation from the client.
B) the client’s cash account from the general ledger.
C) a cutoff bank statement directly from the bank.
D) the client’s year-end bank statement.
11) In an effort to satisfy the completeness objective, the auditor could perform which of the
following test of details of balance procedures?
A) Trace the book balance on the reconciliation to the general ledger.
B) Trace outstanding checks to subsequent period bank statements.
C) Perform a four-column proof of cash.
D) Review financial statements to make sure that material savings accounts and certificates of
deposit are disclosed separately.
12) The audit procedure which requires the auditor to record the last check number used on the
last day of the year and subsequently trace to the outstanding checks and the cash disbursements
records is performed to satisfy the audit objective of
A) detail tie-in.
B) existence.
C) completeness.
D) cutoff.
13) The direct receipt of a confirmation from every bank with which the client does business is
A) required by auditing standards for every audit.
B) not necessary unless material fraud is suspected.
C) recommended but not required by auditing standards.
D) necessary for every audit except when there are an unusually large number of active accounts.
14) The reason for testing the client’s bank reconciliation is to verify whether the client’s
recorded bank balance is the same amount as the actual cash in bank, except for deposits in
transit, checks outstanding, and other reconciling items. The information needed to complete the
tests of the reconciliation is provided by the
A) client’s records and ledgers for the year under audit.
B) cutoff bank statement.
C) client’s records and ledgers for the subsequent year.
D) canceled checks for the year under audit.
15) Which of the following items would not normally appear on bank reconciliations?
A) balance per bank
B) list of deposits in transit
C) outstanding deposits
D) outstanding checks
16) If a bank does not respond to a bank confirmation request, the auditor would most likely
A)
Perform alternative
procedures
Send a second
request
Ask the client to
communicate with the bank
to ask them to complete and
return the confirmation
No
Yes
Yes
B)
Perform alternative
procedures
Send a second
request
Ask the client to
communicate with the bank
to ask them to complete and
return the confirmation
No
No
Yes
C)
Perform alternative
procedures
Send a second
request
Ask the client to
communicate with the bank
to ask them to complete and
return the confirmation
Yes
No
Yes
D)
Perform alternative
procedures
Send a second
request
Ask the client to
communicate with the bank
to ask them to complete and
return the confirmation
Yes
Yes
No
17) The most important balance-related audit objectives in the audit of cash include all except
which of the following?
A) existence
B) accuracy
C) completeness
D) occurrence
18) The bank reconciliation
A) must be done on a daily basis if the client uses electronic banking.
B) should be performed by someone independent of the handling or recording of cash receipts.
C) should be performed by someone who handles cash disbursements.
D) ensures that no cash has been embezzled.
19) ________ is an automated fraud detection tool offered by most banks.
A) Positive pay
B) A bank confirmation
C) Fraud buster
D) Check matching
20) Which of the following balance-related objectives applies to auditing the general cash
account?
A)
Rights
Classification
Realizable value
Yes
No
Yes
B)
Rights
Classification
Realizable value
No
Yes
No
C)
Rights
Classification
Realizable value
Yes
Yes
Yes
D)
Rights
Classification
Realizable value
No
No
No
21) The standard bank confirmation form has been agreed upon by the
A) SEC and FASB.
B) AICPA and the SEC.
C) SEC and the American Bankers’ Association.
D) AICPA and the American Bankers’ Association.
22) The auditors test the client’s monthly bank reconciliation to verify whether the client’s
recorded bank balance is the same amount as the actual cash in the bank. Which of the following
would not explain a difference between the company’s cash balance and the bank’s balance for
the client?
A) deposits in transit
B) Checks are written by the client in the same month the checks clear the bank.
C) other reconciling items
D) outstanding checks
23) If an auditor waits until the subsequent period bank statement is available to verify
reconciling items, it is primarily a test for
A) errors.
B) omissions.
C) kiting.
D) intentional misstatements.
24) Which of the following verifications would generally not be performed by the auditor in the
month subsequent to the balance sheet date?
A) Foot the lists of all canceled checks, debit memos, deposits, and credit memos.
B) Verify the bank statement balances when the footed totals are used.
C) Verify the book statement balances tie to the cash receipts and disbursements journals for the
year under audit.
D) Review the items included in the footings to make sure that they were cancelled by the bank.
25) When assessing risks affecting cash,
A) if a business defers preparing bank reconciliations for long periods, the value of the control is
reduced and may affect the auditor’s assessment of control risk for cash.
B) most companies are likely to have significant client business risks affecting their cash
balances.
C) there is a low inherent risk for the existence and completeness objectives for cash.
D) all of the above are accurate statements.
26) Internal controls over year-end cash balances in the general account can be divided into two
categories. List the two below.
27) Explain what is meant by a cutoff bank statement, and discuss the purpose of the cutoff bank
statement in the audit of cash.
28) Explain the purpose of testing the client’s bank reconciliation, and discuss the major audit
procedures involved.
29) Instead of receiving a cutoff bank statement or if online access to client bank account
information is not available to the auditor, auditors can wait until the subsequent period bank
statement is available to verify reconciling items. Discuss the purpose of reviewing the
subsequent period bank statement and list the verifications the auditor performs on this bank
statement.
30) The bank reconciliation control is enhanced when a qualified employee reviews the monthly
reconciliation as soon as possible after its completion.
31) Many of the auditor’s audit procedures in the audit of cash center around the client’s bank
confirmations.
32) Tracing outstanding checks to subsequent period bank statements tests the cutoff audit
objective.
33) When auditing the year-end cash balance, one of the areas of focus is on the accuracy
objective.
34) The three most important audit objectives for cash are accuracy, existence, and classification.
35) The starting point for the verification of the balance in the general bank account is to obtain a
bank cut-off statement.
36) When auditing the general cash account, receipt of a standard bank confirmation is the
starting point for verifying the company’s general cash account balance.
37) To test the client’s list of outstanding checks on the bank reconciliation for completeness, the
auditor should trace from the list to the checks included with the cutoff bank statement.
38) The client may mail the bank confirmation requests if the auditor believes doing so will
increase the likelihood that the confirmation will be returned promptly.
39) Auditors usually design bank confirmations that address the client’s specific circumstances.
40) Ordinarily, all deposits-in-transit listed on the year-end bank reconciliation should appear as
deposits on the cutoff bank statement.
41) Auditors are not always required to obtain bank confirmations.
42) The auditor is generally concerned about the realizable value and the rights to cash.
43) A statement near the bottom of the standard bank confirmation form requires the bank to
inform auditors of open lines of credit and compensating balance requirements.
23.4 Learning Objective 23-4
1) Auditors are likely to prepare a proof of cash when the client has
A) material internal control weaknesses in cash.
B) material internal control weaknesses in accounts receivable and revenue.
C) material internal control weaknesses in accounts payable and inventory.
D) material internal control weaknesses in payroll.
2) The auditor uses a proof of cash to determine whether
A)
All recorded cash disbursements
were paid by the bank.
All amounts that were paid by the
bank were recorded.
Yes
Yes
B)
All recorded cash disbursements
were paid by the bank.
All amounts that were paid by the
bank were recorded.
No
No
C)
All recorded cash disbursements
were paid by the bank.
All amounts that were paid by the
bank were recorded.
Yes
No
D)
All recorded cash disbursements
were paid by the bank.
All amounts that were paid by the
bank were recorded.
No
Yes