Auditing, 12e (Arens)
Chapter 14 Audit of Cash Balances
14.1 Identify the different types of cash accounts
1) The general cash account is considered significant in almost all audits
A) where the ending balance is material.
B) where either the beginning or ending balance is material.
C) even when the ending balance is immaterial.
D) except those of not-for-profit organizations.
2) From an audit perspective, an imprest bank account at a client can
A) require less time for the audit of general cash.
B) increase audit risk.
C) result in an increase in control risk.
D) improve client internal controls.
3) A branch bank account is helpful for
A) limiting the impact of a fraud.
B) improving internal controls.
C) empowering the different branches of the company.
D) building public relations in local communities.
4) When are short-term investments that are readily converted to cash included in the cash
account in the financial statements?
A) If they are held in local currencies (i.e. Canadian dollars)
B) When there is little risk of change in value
C) When they are under the control of the treasury department
D) If interest has been paid up to the year end date
5) There is a greater risk of defalcation for cash than for other types of assets because
A) it is easier to steal.
B) most other assets must be converted to cash to make them usable.
C) companies usually have weak internal controls surrounding cash.
D) most employees have access to cash.
6) During the audit of cash, the focus of the audit is to
A) do substantive tests of payments for supplies.
B) conduct control tests of sales transactions.
C) verify the bank reconciliation.
D) conduct control tests over payments.
7) A significant part of the total audit, that relates to cash , is the audit of
A) physical inventory on hand using an inventory count.
B) assessment of the accounting policies in use.
C) substantive testing of the ending accounts payable balance.
D) sales and collections, payables payments and payroll payments.
8) Certain types of misstatements that affect cash may be detected in the audit of tests of
controls. Which of the following misstatements would be detected in the audit of the sales and
collection cycle?
A) A defalcation of cash hidden by an unauthorized write off of a bad debt
B) Accidental duplicate payment of a vendor’s invoice
C) Payment for raw materials that were not received
D) Payment to an employee at an incorrect wage rate
9) Certain types of misstatements that affect cash may be detected in the audit of tests of
controls. Which of the following misstatements would be detected in the audit of the acquisition
and payment cycle?
A) Failure to bill a customer for goods shipped
B) Billing a customer at the incorrect price
C) Improper reimbursement of an officers’ personal expenses
D) Paying an employee at the incorrect wage rate
10) Which of the following misstatements in the payroll cycle could be detected during the audit
of payroll transactions (but would not be discovered as part of the audit of the bank
reconciliation)?
A) failure to include outstanding payroll cheques on the outstanding cheque list
B) overpayment of Receiver General payments received after the year end but recorded as cash
receipts in the current year
C) unclaimed payroll cheques recorded as a deposit near the end of the year, but reconciled as
deposits in transit
D) payment to fictitious employees that had been set up by the payroll supervisor
11) Which one of the following misstatements could be detected as part of the tests of a bank
reconciliation?
A) Payment of interest to a related party at an incorrect rate
B) Exclusion of mortgage interest receivable from the balance sheet
C) Deposits recorded as cash receipts at the end of year, but included as outstanding deposits
(deposits in transit)
D) A defalcation of cash by interception of collections before they are recorded
12) The auditor has determined exchange rates used by the client to present cash in foreign
currencies and has recalculated the amounts. Which audit assertion is associated with this audit
procedure?
A) existence
B) valuation
C) allocation
D) classification
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13) A) Describe each of the major types of cash accounts maintained by business entities.
B) Discuss the advantages of using an imprest bank account for payroll transactions.
14) A) “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 would not be discovered during the audit of the bank reconciliation. How are these
types of misstatements normally uncovered in the audit?
B) State three examples of errors or irregularities that normally would be uncovered during the
audit of the bank reconciliation.
15) A) Distinguish between (i) risks of error, (ii) risks of fraud, and (iii) risks of inadequate
presentation or disclosure of financial information.
B) For each of the three types of risks described in (A), provide three examples of major risks of
error or fraud in the cash cycle.
14.2 Link the audit of cash to corporate governance and control processes
1) Toasted Tomato is a restaurant in Ottawa. You walk by this restaurant frequently and noticed
it is usually empty. When you came in to do the audit, you were surprised to see that they had a
large cash balance and high sales. Toasted Tomato might
A) have a going concern issue.
B) be engaging in money laundering.
C) have lower business risk than initially anticipated.
D) have weak internal controls.
2) Sandra is analyzing the cash cycle of her audit client. Which of the following indicator could
lead to a liquidity problem?
A) Obsolete inventory
B) High level of inventory
C) Inventory on consignment
D) Backordered inventory
3) Which of the following statements best describes the position of cash on the balance sheet at
most organizations that utilize effective cash management practices? It is usually
A) immaterial.
B) highly material.
C) dispersed among many different accounts.
D) affected by many different capital asset accounts.
4) Because cash is the most desirable asset for people to steal, it has a higher
A) inherent risk.
B) control risk.
C) detection risk.
D) materiality.
5) Which of the following is an essential internal control in the cash cycle?
A) Use of two signatures on payroll cheques and payables cheques
B) Independent receipt of the bank statement from the bank
C) Careful accounting of the continuity of cheques returned from the bank
D) Independent preparation of bank reconciliations
6) Which of the following situations would indicate a susceptibility at the client to the potential
of fraud that pertains to theft of cash?
A) lack of segregation of duties between the handling of cash and the recording of cash
B) cash disbursements cheques requiring only one authorizing signature
C) payroll rates being approved by the corporate controller
D) customer master file changes being handled by the controller’s executive assistant
7) What is an important benefit of independent preparation of bank reconciliations?
A) An opportunity to independently check that cheques have two signatures
B) The client being able to check that the bank is processing transactions correctly
C) The ability to internally verify cash receipts and disbursements transactions
D) The best time to carefully serially account for cheques issued
8) What is the best way to prevent potential alteration, deletion or addition of cancelled cheques,
duplicate deposit slips or other documents provided with the bank statement? Have the
A) bank statements provided unopened to an independent reconciler.
B) person responsible for recording cash receipts does the bank reconciliation.
C) signing officer(s) review the bank reconciliation.
D) bank statements are provided to the accounts payable supervisor.
9) Which of the following is a common analytical procedure that may detect misstatements in
cash?
A) Calculation of inventory turnover and gross profit
B) Review of amounts included in the earnings per share calculations
C) Comparison of outstanding cheques and deposits in transit with the prior year bank
reconciliation
D) Comparison of gross sales on a month by month basis with the prior year
10) Bank reconciliations are normally verified on a 100-percent basis. Testing the reasonableness
of the cash balance is therefore
A) less important than for most other audit areas.
B) more important than for other audit areas.
C) equally important than for other audit areas.
D) less important than for the audit of other assets, but more important than the audit of
liabilities.
11) Jane works for Middle Co. She is responsible for opening the mail, and preparing the bank
deposit for cheques received, which she then gives to the owner. After the owner has deposited
the cash, he gives Jane the stamped bank deposit slip, which she uses to record the cash received
in the accounts receivable records. How does this allocation of responsibilities affect the audit
process? The auditor should
A) increase control testing with respect to the accuracy assertion.
B) do substantive tests (compare the deposit slip to the accounts receivable records).
C) consider the possibility of material fraud.
D) increase control testing with respect to the completeness assertion.
12) The starting point for the verification of the balance in the general bank account is to obtain
A) the client’s December bank statement and reconcile it.
B) a bank reconciliation from the client.
C) a cutoff bank statement directly from the bank.
D) the client’s cash account balance from the general ledger.
13) 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 cheques to subsequent period bank statements.
C) Obtain and test a cut-off bank statement.
D) Review financial statements to make sure that material savings accounts and certificates of
deposit are disclosed separately.
14) Which of the following audit tests pertains to the accuracy assertion?
A) prepare proof of cash
B) test a cut-off bank statement
C) examine minutes and loan agreements
D) read the notes to the financial statements
15) The test of balances procedure that requires the auditor to trace the unadjusted 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.
16) The audit procedure which requires the auditor to record the last cheque number used on the
last day of the year and subsequently trace to the outstanding cheques and the cash
disbursements journal is performed to satisfy the audit objective of
A) detail tie-in.
B) existence.
C) completeness.
D) allocation.
17) During his examination of a January 19, 2013 cutoff bank statement, an auditor noticed that
the majority of cheques listed as outstanding at December 31, 2012 had not cleared the bank.
This would indicate
A) a high probability of lapping.
B) a high probability of kiting.
C) that the cash disbursements journal had been held open past December 31, 2012.
D) that the cash disbursements journal had been closed prior to December 31, 2012.
18) The auditor has examined the financial statements, particularly the cash flow statement, and
the notes to the financial statements to determine that all relevant information is presented
clearly. Which audit assertion is associated with this audit test?
A) classification
B) allocation
C) understandability
D) valuation
19) After the bank confirmation has been received by the auditor, the auditor should
A) recalculate the bank reconciliation in its entirety.
B) verify that cash cutoff was correct for that bank account.
C) trace the general ledger cash account balance to the amount confirmed.
D) trace the bank reconciliation cash amount to the amount confirmed.
20) A partial-period bank statement and the related cancelled cheques, duplicate deposit slips,
and other documents included in bank statements, mailed by the bank directly to the public
accounting firm’s office, is called a
A) four-column proof of cash.
B) bank statement.
C) cutoff bank statement.
D) short-period bank statement.
21) 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 the bank, except for deposits in
transit, cheques outstanding, and other reconciling items. The information needed to complete
the tests of the reconciliation are provided by the
A) journals and ledgers of client for the year under audit.
B) cutoff bank statement.
C) journals and ledgers of client for the subsequent year.
D) cancelled cheques for the year under audit.
22) An auditor who is engaged to examine the financial statements of a business enterprise will
request a cutoff bank statement primarily in order to
A) verify the cash balance reported on the bank confirmation inquiry form.
B) verify reconciling items on the client’s bank reconciliation.
C) detect lapping.
D) detect kiting.
23) If the auditor does not obtain a cut-off statement directly from the bank for testing, an
alternative procedure that the auditor can use is to
A) account for a continuity of cheques that covers the year end.
B) reconcile cash paid to the cash disbursements journal for the last month of the year.
C) reconcile cash received to the cash receipts journal for the last month of the year.
D) prove the bank statement for the period after the year end.
24) After testing the bank reconciliation and inspecting the cut-off bank statement received from
the bank, the auditor has determined that there are two outstanding cheques from the list on the
bank reconciliation that have still not cleared the bank. The auditor’s next step should be to
A) trace the details of the two cheques to the cash disbursements journal.
B) trace the details of the two cheques to their associated expense accounts.
C) reperform the calculations in the bank reconciliation.
D) compare the total of the bank reconciliation to the bank confirmation.