AUD 4.3 - Cash Cycle

Question 1

What are two common cash fraud schemes?

Answer 1

Lapping and kiting

Question 2

A fraud scheme in which todays cash receipts cover yesterdays theft

Answer 2

Lapping

Question 3

When an employee withholds funds received by a customer for personal use and fails to apply these receipts of cash or checks to the customers receivable balance. The unrecorded receipt is covered by applying a subsequent receipt.

Answer 3

Lapping

Question 4

Safeguards against lapping include:

Answer 4

Comparison of recorded cash receipts with funds actually deposited
Separation of incoming receipts from receivable remittance advices
Comparison of the details of bank deposits and the details of remittance credits
Provision of timely statements
Confirmations sent to customers

Question 5

The best method to guard against lapping is

Answer 5

A lock box system

Question 6

This system has customers send payments directly to the bank which prevents company employees from having access to payments received:

Answer 6

Lockbox system

Question 7

A cash fraud in which cash recorded in two places at once

Answer 7

Kiting

Question 8

Occurs when a check drawn on one bank is deposited in another bank and no record is made of the disbursement in the balance of the first bank until after year-end. It results in an overstatement of cash in the financials as the cash is simultaneously reflected in two different bank accounts.

Answer 8

Kiting

Question 9

The detect kiting effectively:

Answer 9

A bank transfer schedule should be prepared

Question 10

To ensure that kiting has not occurred:

Answer 10

Evidence should exist that all deposits in transit and outstanding checks listed on the bank reconciliation at year end cleared in the next period

Question 11

What assertions are tested when auditing the cash balance?

Answer 11

Completeness
Valuation and allocation
Existence

Question 12

When auditing completes, valuation and allocation, and existence for the cash balance, the auditor should:

Answer 12

Send a bank confirmation to all banks the client has done business with during the year
And
Obtain a year end bank reconciliation

Question 13

What assertions are tested when auditing for cash receipts and cash disbursements?

Answer 13

Completeness
Cutoff
Valuation, allocation, and accuracy
Existence and occurrence
Understandability and classification

Question 14

When testing the completeness for cash receipts and cash disbursements, the auditor should:

Answer 14

Cash receipts: Trace a sample of remittance advices to the cash receipts journal and deposit slips
Cash disbursements: trace a sample of canceled checks to the cash disbursement journal

Question 15

When testing the cutoff for cash receipts and cash disbursements, the auditor should:

Answer 15

Verify the cutoff of cash receipts and disbursements shortly before and after year end for recording in the proper period

Question 16

When testing the valuation, allocation, and accuracy for cash receipts and cash disbursements, the auditor should:

Answer 16

Cash receipts: sample daily deposits and foot the remittance advices and entries on the deposit slip and agree to the cash receipts journal and bank statement
Cash disbursements: sample voucher packets and agree the PO, receiving report, invoice, cancelled check and disbursement journal

Question 17

When testing the existence and occurrence for cash receipts and cash disbursements, the auditor should:

Answer 17

Cash receipts: Vouch a sample of entries in the cash receipts journal to the remittance advices, deposit slips, ad bank statement
Cash disbursements: Vouch a sample of entries from the cash disbursements journal to canceled checks, the voucher packet, and the bank statement

Question 18

When testing the understandability and classification of cash receipts and cash disbursements, the auditor should:

Answer 18

Examine a sample of remittance advices and canceled checks for recording in the proper account