Chapter 16 – Auditing the Financing/Investing Process: Cash and Investments
42. The auditor should insist that a representative of the client be present during the physical
examination of securities in order to
43. Which of the following is not one of the auditor’s primary objectives in an examination of
marketable securities?
Chapter 16 – Auditing the Financing/Investing Process: Cash and Investments
44. Jones was engaged to examine the financial statements of Virginia Corporation for the year
ended June 30. Having completed an examination of the investment securities, which of the
following is the best method of verifying the accuracy of recorded dividend income?
45. A client has a large and active investment portfolio that is kept in a bank safe-deposit box. If
the auditor is unable to examine and count the securities at the balance sheet date but will
examine and count the securities shortly thereafter, the auditor most likely will
Chapter 16 – Auditing the Financing/Investing Process: Cash and Investments
46. In establishing the existence and ownership of a long-term investment in stock of a publicly
traded company, an auditor should inspect the securities or
47. Examining brokers’ advices for a sample of securities purchased during the year is a test for
the assertion of
Chapter 16 – Auditing the Financing/Investing Process: Cash and Investments
48. Under which of the following circumstances would an auditor be most likely to intensify an
examination of a $1,000 petty cash fund maintained on an imprest basis?
49. As one of the year-end audit procedures, the auditor instructed the client’s personnel to
prepare a standard bank confirmation request for a bank account that had been closed during the
year. After the client’s treasurer had signed the request, it was mailed to the bank by the
assistant treasurer. What is the major flaw in this audit procedure?
Chapter 16 – Auditing the Financing/Investing Process: Cash and Investments
50. The primary purpose of sending a standard confirmation request to financial institutions
with which the client has done business during the year is to
51. Which of the following control activities would an entity most likely use to assist in
satisfying the completeness assertion related to long-term investments?
Chapter 16 – Auditing the Financing/Investing Process: Cash and Investments
52. Which of the following controls would a company most likely use to safeguard marketable
securities when an independent trust agent is not employed?
53. When there is a large number of negotiable securities in multiple locations, careful planning
of the physical inspection and count of the securities by the auditor is necessary to guard
against
Chapter 16 – Auditing the Financing/Investing Process: Cash and Investments
54. When an auditor is unable to inspect and count a client’s investment securities until after the
balance sheet date, the bank where the securities are held in a safe-deposit box should be
notified on or before the balance sheet date that it will be asked to
55. Which of the following would provide the best form of evidential matter pertaining to the
annual valuation of a long-term investment in which the independent auditor’s client owns a 45
percent voting interest?
Chapter 16 – Auditing the Financing/Investing Process: Cash and Investments
56. Which of the following procedures would be most important in the audit of an investment
valued at fair value?
57. Auditors will need to perform more substantive tests than normal to obtain sufficient
appropriate evidence that a financial instrument is fairly stated if which of the following
conditions exist?
Chapter 16 – Auditing the Financing/Investing Process: Cash and Investments
58. Explain how cash plays a role in all business processes.
Chapter 16 – Auditing the Financing/Investing Process: Cash and Investments
59. For each assertion about cash listed below, give an example of a test of transactions for (1)
cash receipts and (2) cash disbursements.
a. Classification.
b. Occurrence.
c. Authorization.
d. Completeness.
Chapter 16 – Auditing the Financing/Investing Process: Cash and Investments
60. Explain the importance of the bank reconciliation to the audit and list some of the items
found on the reconciliation.
61. Identify 3 of the 6 tests an auditor uses on the bank reconciliation.
(Only 3 are required for the student’s answer)
Chapter 16 – Auditing the Financing/Investing Process: Cash and Investments
62. You are auditing cash for your client Moonbeam, Inc. In meeting with the CFO during the
planning stages of the audit, she indicated that there was a high risk of misstatement due to
fraud in the cash account, given the lack of proper segregation of duties. As the auditor, what
tests could you perform to detect fraudulent activities in the cash account?
Chapter 16 – Auditing the Financing/Investing Process: Cash and Investments
63. The first step in auditing petty cash is to gain an understanding of the client’s controls over
petty cash. Describe some important controls a client should have over its petty cash fund.
64. For each test of transactions and each test of account balances for investments listed below,
identify the assertion for which the test provides evidence.
1. Determine whether there has been any permanent impairment in the value of the cost basis of
an individual security.
2. Inspect securities if they are maintained by the client or obtain a confirmation from an
independent custodian.
3. Search for purchases of securities by examining transactions for a few days after year-end.
4. Examine brokers’ advices for a sample of securities purchased during the year.
Chapter 16 – Auditing the Financing/Investing Process: Cash and Investments
65. What should an auditor look for when testing for proper classification of securities?
Chapter 16 – Auditing the Financing/Investing Process: Cash and Investments
66. What are the factors that must be considered to determine if a permanent decline in the
value of an investment security has occurred?
Chapter 16 – Auditing the Financing/Investing Process: Cash and Investments
67. Match the type of bank account with its definition:
Petty cash
2. This account is a separate cash account maintained at the
General cash
3. This account contains a stipulated amount of cash and is
Branch
4. This account is typically immaterial in amount and is used
Imprest cash
68. Match the segregation of duties for investments with the misstatement (due to error or
fraud) it can help prevent.
1. The initiation function is
separate from the final approval
An individual can make fictitious
2. The valuation-monitoring
function is separate from the
An individual can improperly record
securities values or not report the values to
3. Custody of the securities is
separate from accounting for the
defalcation that would normally be detected
by reconciliation of subsidiary records with
4. The maintenance of the
securities ledger is separate from
An individual can conceal a theft of