Chapter 10 – Auditing Cash and Marketable Securities
1. An imprest payroll account should never reach a zero balance.
a.
True
b.
False
False
1
AUDT.JOHN.16.133 – Accounts, Disclosures, and Relevant Assertions
2. Automated controls over cash eliminate the inherent risks associated with the cash account.
a.
True
b.
False
False
1
AUDT.JOHN.16.10-02 – LO: 10-02
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Identify and Assess Inherent Risks in Cash Accounts
3. Cash flow is often managed by organizations through the use of lockboxes and outsourced cash management
arrangements with banks.
a.
True
b.
False
4. The risk of the company issuing checks near year-end and mailing them subsequently is not important to the
auditor because the action does not affect cash balances.
a.
True
b.
False
5. The audit of the cash account is inherently risky due to volume of activity, liquidity and the account’s
susceptibility to fraud.
a.
True
Chapter 10 – Auditing Cash and Marketable Securities
b.
False
6. Working capital may be tied to certain debt covenants causing cash to be considered significant for audit
purposes.
a.
True
b.
False
7. The existence or occurrence assertion as related to cash is concerned with proper classification on the balance
sheet.
a.
True
b.
False
False
AUDT.JOHN.16.133 – Accounts, Disclosures, and Relevant Assertions
United States – AK – AICPA BB-Critical thinking
8. A lockbox is a mailbox type of depository device that is located in front of the client’s premises, allowing
customers to remit payment in a timely manner.
a.
True
b.
False
9. An analysis of the client’s internal control over cash and marketable securities should take place during the
performance of the substantive tests on these accounts.
a.
True
b.
False
10. The deposit of cash directly at the bank to speed collections often involves the use of a lockbox.
a.
True
b.
False
11.
When a lockbox is used, the financial institution records the deposit and then forwards customer transaction
data to the client to update cash and accounts receivable records.
a.
True
b.
False
12. The auditor is responsible for auditing the necessary disclosures when material lines of credit and
compensating balance arrangements have been made by the client with a lender.
a.
True
b.
False
True
1
AUDT.JOHN.16.136 – Substantive Audit Procedures
United States – AK – AICPA BB-Critical thinking
13. Electronic Funds Transfers have controls built into the process and do not require further reconciliation by
the client.
a.
True
b.
False
AUDT.JOHN.16.134 – Control Risks
United States – AK – AICPA BB-Critical thinking
14.
The auditor’s performance of an independent reconciliation of the client’s bank accounts provides evidence as
to the rights and obligations of the year-end cash balances.
a.
True
b.
False
15. Customer checks received at the client company should be restrictively endorsed within one week of receipt
in the mail.
a.
True
b.
False
16. A turnaround document is an effective control because it lists useful information for further processing of
the collection on account.
a.
True
b.
False
17. In assessing risk relating to fraud, auditors brainstorm about potential fraud risks.
a.
True
b.
False
18. Auditors usually perform relatively limited substantive analytics for cash accounts and instead focus on
substantive tests of details.
a.
True
Chapter 10 – Auditing Cash and Marketable Securities
b.
False
True
1
AUDT.JOHN.16.136 – Substantive Audit Procedures
19. The cash balance that a financial institution requires its customer to maintain in a non-interest-bearing
account to offset a line of credit is a compensating balance.
a.
True
b.
False
True
1
AUDT.JOHN.16.133 – Accounts, Disclosures, and Relevant Assertions
United States – AK – AICPA BB-Critical thinking
20. Bank reconciliations should be performed by the individual who makes bank deposits.
a.
True
b.
False
False
1
AUDT.JOHN.16.10-04 – LO: 10-04
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Identify and Assess Control Risk in Cash Accounts
21. Internal audits are seldom an effective deterrent to the theft of cash.
a.
True
b.
False
22. An independent bank reconciliation provides evidence of the correctness of the year-end cash balance.
a.
True
b.
False
23. The primary purpose of the cutoff bank statement is to verify the reconciling items on the bank
reconciliation.
a.
True
b.
False
24. Kiting is an example of a technique used to intentionally and materially overstate cash.
a.
True
b.
False
25. The standard bank confirmation is used by the auditor to test for lapping.
a.
True
b.
False
False
1
AUDT.JOHN.16.136 – Substantive Audit Procedures
United States – AK – AICPA BB-Critical thinking
26. The standard bank confirmation should be sent to all banks used by the client during the year except those
with a zero balance.
a.
True
b.
False
False
1
AUDT.JOHN.16.136 – Substantive Audit Procedures
27. The auditor may discover evidence of lapping by preparing an interbank transfer schedule.
AUDT.JOHN.16.134 – Control Risks
United States – AK – AICPA BB-Critical thinking
Chapter 10 – Auditing Cash and Marketable Securities
a.
True
b.
False
False
1
AUDT.JOHN.16.136 – Substantive Audit Procedures
United States – AK – AICPA BB-Critical thinking
28. The standard bank confirmation includes the confirmation of cash accounts but not liabilities with financial
institutions.
a.
True
b.
False
False
1
AUDT.JOHN.16.136 – Substantive Audit Procedures
United States – AK – AICPA BB-Critical thinking
29. Kiting fraudulently places the company’s marketable securities in the name of the officers.
a.
True
b.
False
30. Kiting involves the overstatement of a bank account by transferring funds at the end of the year to another
bank account and failing to record the disbursement.
a.
True
b.
False
31. The cutoff statement is mailed to the client for an agreed upon-date and then copied for the audit files.
a.
True
b.
False
Chapter 10 – Auditing Cash and Marketable Securities
United States – AK – AICPA BB-Critical thinking
32. The valuation/allocation and completeness assertions are usually the most relevant for auditing cash.
a.
True
b.
False
False
1
AUDT.JOHN.16.10-01 – LO: 10-01
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Significant Accounts, Disclosures and Assertions in Auditing Cash
33. The recording of a marketable security depends, in large part, on management’s intention with the
investment.
a.
True
b.
False
True
1
AUDT.JOHN.16.139 – Audits of Marketable Securities
34. Notes issued by major corporations are known as commercial paper.
a.
True
b.
False
True
1
AUDT.JOHN.16.139 – Audits of Marketable Securities
United States – AK – AICPA BB-Critical thinking
35. The auditor obtains the current market value of marketable securities by confirmation with the holder of the
security.
a.
True
b.
False
False
1
AUDT.JOHN.16.139 – Audits of Marketable Securities
36. Commercial paper is the term applied to notes issued by those major corporations with poor credit ratings.
a.
True
b.
False
False
1
AUDT.JOHN.16.139 – Audits of Marketable Securities
37. Auditors test the assertion of completeness by determining if any restrictions on the use of commercial
paper by an entity are disclosed in the footnotes.
a.
True
b.
False
False
1
AUDT.JOHN.16.139 – Audits of Marketable Securities
United States – AK – AICPA BB-Critical thinking
38. The valuation assertion is most relevant to the audit of marketable securities.
a.
True
b.
False
True
1
AUDT.JOHN.16.139 – Audits of Marketable Securities
United States – AK – AICPA BB-Critical thinking
39. Testing debt securities and commercial paper would typically include an analysis of interest income.
a.
True
b.
False
True
1
AUDT.JOHN.16.139 – Audits of Marketable Securities
United States – AK – AICPA BB-Critical thinking
40. Gains and losses are not considered in audit testing, as they do not need to be disclosed.
a.
True
b.
False
41. The ending price of securities can be verified through reliable publications and websites such as the Wall
Street Journal.
a.
True
b.
False
True
1
AUDT.JOHN.16.139 – Audits of Marketable Securities
United States – AK – AICPA BB-Critical thinking
42. All marketable securities are carried at fair market value on the balance sheet.
a.
True
b.
False
43. Thinly traded securities have a greater inherent risk related to valuation.
a.
True
b.
False
44. Effective internal control over the cash account requires that the person responsible for making the bank
deposit does not post the increase to cash in the accounting system.
a.
True
b.
False
AUDT.JOHN.16.139 – Audits of Marketable Securities
United States – AK – AICPA BB-Critical thinking
45. Which one of the following risks is not a risk associated with cash?
a.
The large volume of transactions.
b.
Importance of meeting debt covenants.
c.
Valuation issues are typically complex.
d.
Easy to manipulate.
1
AUDT.JOHN.16.10-02 – LO: 10-02
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Identify and Assess Inherent Risks in Cash Accounts
46. Which of the following is a cash management arrangement with a bank whereby the organization’s
customers send payments directly to the client’s bank, which deposits the remittance to the client’s account?
a.
Lockbox.
b.
Bank transfer.
c.
Imprest bank account.
d.
Imprest Account.
47. The cash account is significant to the auditor for which of the following reasons?
a.
The cash account is the culmination of a large volume of transactions.
b.
The cash account is not as susceptible to fraud as most other accounts.
c.
Cash is the only account that provides opportunity for fraud.
d.
Automated systems do not possess the capability to maintain strong internal controls over cash.
1
AUDT.JOHN.16.133 – Accounts, Disclosures, and Relevant Assertions
United States – AK – AICPA BB-Critical thinking
48. Which of the following situations would normally be discovered as part of the test of the bank
reconciliation?
a.
Failure to bill a customer.
b.
Failure to include a deposit in transit on the bank reconciliation.
United States – AK – AICPA BB-Critical thinking
Chapter 10 – Auditing Cash and Marketable Securities
c.
Duplicate payment of a vendor’s invoice.
d.
Payment to an employee for more hours than she worked.
49. Management has developed cash management techniques for which of the following reasons?
a.
Increase the time to collect billings.
b.
Reduce the amount of volume of cash transactions.
c.
Automate the cash management process.
d.
Increase the liquidity of cash balances.
50. Lockbox arrangements for the collection of cash have which of the following advantages?
a.
The manual processing associated with maintaining control of the receipts is now shifted to a
computer.
b.
Cash is deposited directly into the bank.
c.
The bank usually establishes only one lockbox geographically next to the client to minimize delay in
collections.
d.
Eliminates the customer decision for the due date of payment.
51. A company must do which of the following, if a company maintains a material compensating balance of
cash?
a.
Disclose the compensating account arrangement in financial statements.
b.
Close out the balance prior to year-end.
c.
Tie balances to debt covenants.
d.
Provide a lockbox for appropriate line-of-credit draws.
52. A compensating balance arrangement usually results in which of the following for a company?
a.
Increase its interest income.
b.
Increase the effective interest rate on corporate borrowing.
c.
Decrease the effective interest rate on corporate borrowing.
d.
Exhibit no change in the effective interest rate on corporate borrowing.
53. Which one of the following is not a fundamental internal control the auditor would expect to find in place
for a cash processing system?
a.
Segregation of duties
b.
Electronic payments
c.
Authorization of transactions
d.
Periodic internal audits
54. During the testing of a year end bank reconciliation, an auditor noticed that the majority of checks listed as
outstanding at year-end had not cleared the bank. Which of the following is a likely explanation?
a.
A high probability of kiting.
b.
A high probability of lapping.
c.
The year-end cash disbursements records had been closed prior to year-end.
d.
The year-end cash disbursements records had been held open past year-end.
55. As cash processing systems become more automated and integrated, which of the following is true about the
general concept of segregation of duties?
a.
Segregation of duties becomes less important.
b.
Segregation of duties becomes more important.
United States – AK – AICPA BB-Critical thinking
Identify Significant Accounts, Disclosures, and Assertions in Auditing Cash
Chapter 10 – Auditing Cash and Marketable Securities
c.
The importance of segregation of duties does not change.
d.
Segregation of duties becomes completely computerized without human involvement.
56. Which of the following controls would be most successful in mitigating the theft of customer checks
received in the mail?
a.
Custody of receipts by the accounts receivable manager.
b.
Restricted endorsements placed on the check as soon as it arrives.
c.
Weekly deposits to a secure bank.
d.
Reconciliation of bank accounts each month.
57. Which of the following controls over cash would an auditor expect to observe?
a.
Reconciliation of the general ledger to the subsidiary ledger.
b.
Checks permanently marked “for deposit only” with the proper routing information.
c.
Internal audits of marketable securities held in the company’s lockbox.
d.
Authorization privileges given only to those employees using the accounting system.
58. What form of evidence is used by the auditor to verify bank reconciliation items?
a.
Cash counting observation.
b.
General ledger.
c.
Bank confirmation
d.
Cutoff statement.