Audit of Cash and Cash Equivalents

Question 1

A client maintains two bank accounts. One of the bank accounts, Bank A, has an overdraft of 100,000. The other account, Bank B, has a positive balance of 50,000. To conceal the overdraft from the auditor, the client may decide to
a. Draw a check for 100,000 on Bank B for deposit in Bank A. Record the disbursement but not the receipt. List the disbursement as outstanding check, but do not list the receipt as deposit in transit. Record the receipt at the beginning of the following period
b. Draw a check for at least 100,000 om Bank B for deposit in Bank A. Record the receipt but not the disbursement and list the receipt as deposit in transit. Record the disbursement at the beginning of the following year
c. Draw a check for at least 100,000 on Bank A for deposit in Bank B. Record the receipt but not the disbursement and list the receipt as a deposit in transit. Record the disbursement at the beginning of the following year
d. Draw a check for at least 100,000 on Bank A for deposit in Bank B. Record the disbursement but not the receipt and list the disbursement as an outstanding check. Record the receipt at the beginning of the following year

Answer 1

b. Draw a check for at least 100,000 om Bank B for deposit in Bank A. Record the receipt but not the disbursement and list the receipt as deposit in transit. Record the disbursement at the beginning of the following period

Question 2

In validating a client-prepared December bank reconciliation statement, the auditor should primarily trace back outstanding checks to the
a. Cut-off bank statement of January.
b. Bank statement for December.
c. Cancelled checks returned by the bank for December.
d. Accounts payable voucher.

Answer 2

a. Cut-off bank statement of January.

Question 3

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because
a. Negative confirmations do not produce evidence that is statistically quantifiable.
b. Some recipients may report incorrect balances that require extensive follow-up.
c. The auditor cannot infer that all nonrespondents have verified their account information.
d. A majority of recipients usually lack the willingness to respond objectively.

Answer 3

c. The auditor cannot infer that all nonrespondents have verified their account information.

Question 4

Postdated checks received by mail in settlement of customer’s accounts should be
a. Deposited immediately by the cashier
b. Stamped with restrictive endorsement
c. Returned to customer
d. Deposited the day after together with cash receipts

Answer 4

b. Stamped with restrictive endorsement

Question 5

On receiving the bank cutoff statement, the auditor should trace
a. Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation
b. Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal
c. Checks dated subsequent to year-end to the outstanding checks listed on the year-end bank reconciliation.
d. Deposits listed on the cutoff bank statement to deposits in the cash receipts journal.

Answer 5

a. Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation

Question 6

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 by the assistant treasurer. What is the major flaw in this audit procedure?
a. The confirmation request was signed by the treasurer.
b. The request was mailed by the assistant treasurer
c. The CPA did not sign the confirmation request before it was mailed.
d. Sending the request was meaningless because the account was closed before year-end.

Answer 6

b. The request was mailed by the assistant treasurer

Question 7

An auditor would consider a cashier’s job description to contain compatible duties if the cashier receives remittance from the mailroom and also prepares the
a. Daily deposit slip.
b. Prelist of individual checks.
c. Remittance advices.
d. Monthly bank reconciliation

Answer 7

a. Daily deposit slip.

Question 8

Which of the following internal control procedures will most likely prevent the concealment of a cash shortage resulting from improper write-off of a trade account receivable?
a. Write-offs must be supported by an aging schedule showing that only receivables overdue for several months have been written off.
b. Write-offs must be approved by the cashier who is in a position to know if the receivables have, in fact, been collected.
c. Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence.
d. Write-offs must be authorized by company field sales employees who are in a position to determine the financial standing of the customers

Answer 8

c. Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence.

Question 9

An entity’s internal control structure requires every check request that there be an approved voucher, supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all
a. Cancelled checks.
b. Approved vouchers.
c. Purchase orders.
d. Receiving reports

Answer 9

a. Cancelled checks.

Question 10

Which of the following auditing procedures would the auditor not apply to a cutoff bank statement?
a. Trace year end outstanding checks and deposits in transit to the cutoff bank statement.
b. Reconcile the bank account as of the end of the cutoff period.
c. Compare dates, payees and endorsements on returned checks with the cash disbursements record.
d. Determine that the year-end deposit in transit was credited by the bank on the first working day of the following accounting period.

Answer 10

b. Reconcile the bank account as of the end of the cutoff period.

Question 11

While performing an audit of cash, an auditor begins to suspect check kiting. Which of the following is the best evidence that the auditor could obtain concerning whether kiting is taking place?
a. Documentary evidence obtained by vouching credits on the latest bank statement to supporting documents.
b. Documentary evidence obtained by vouching entries in the cash account to supporting documents.
c. Oral evidence obtained by discussion with controller personnel.
d. Evidence obtained by preparing a schedule of interbank transfers

Answer 11

d. Evidence obtained by preparing a schedule of interbank transfers

Question 12

Two months before year-end, the bookkeeper erroneously recorded the receipt of a long-term bank loan by a debit to cash and a credit to sales. Which of the following is the most effective procedure for detecting this type of error?
a. Analyze bank confirmation information.
b. Analyze the notes payable journal.
c. Prepare year-end bank reconciliation.
d. Prepare a year-end bank transfer schedule

Answer 12

a. Analyze bank confirmation information.

Question 13

The cashier of Milady Jewelries covered a shortage in the cash working fund with cash obtained at December 31 from a bank by cashing but not recording a check drawn on the company out of town bank. How would you as an auditor discover the manipulation?
a. By confirming all December 31 bank balances.
b. By counting the cash working fund at the close of business on December 31.
c. By investigating items returned with the bank cut-off statements of the succeeding month.
d. By preparing independent bank reconciliations as of December 31

Answer 13

c. By investigating items returned with the bank cut-off statements of the succeeding month.

Question 14

An essential phase of the audit of the cash balance at the end of the year is the auditor’s review of cutoff bank statement. This specific procedure is not useful in determining if
a. Kiting has occurred.
b. Lapping has occurred.
c. The cash receipts journal was held open.
d. Disbursements per the bank statement can be reconciled with total checks written.

Answer 14

b. Lapping has occurred.

Question 15

An unrecorded check issued during the last week of the year would most likely be
discovered by the auditor when
A. Check register for the last month is reviewed.
B. Cutoff bank statement is reconciled.
C. Bank confirmation is reviewed.
D. Search for unrecorded liabilities is performed.

Answer 15

B. Cutoff bank statement is reconciled.

Question 16

An unrecorded check issued during the last week of the year would most likely be
discovered by the auditor when
A. Check register for the last month is reviewed.
B. Cutoff bank statement is reconciled.
C. Bank confirmation is reviewed.
D. Search for unrecorded liabilities is performed.

Answer 16

B. Cutoff bank statement is reconciled.

Question 17

To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine all of the following except
A. Cutoff bank statement
B. Year-end bank statement
C. Bank confirmation
D. General ledger

Answer 17

D. General ledger

Question 18

An auditor compares information on cancelled checks with information contained in the cash disbursements journal. The objective of this test is to determine that
A. Recorded cash disbursement transactions are properly authorized.
B. Proper cash purchase discounts have been recorded.
C. Cash disbursements are for goods and services actually received.
D. No discrepancies exist between the data on the checks and the data in the journal.

Answer 18

D. No discrepancies exist between the data on the checks and the data in the journal.

Question 19

When counting cash on hand, the auditor must exercise control over all cash and other negotiable assets to prevent
A. Theft
B. Irregular endorsement
C. Substitution
D. Deposit in transit

Answer 19

C. Substitution

Question 20

If the balance shown on an entity’s bank statement is less than the correct cash balance and neither the entity nor the bank has made any errors, there must be
A. Deposits credited by the bank but not yet recorded by the entity.
B. Outstanding checks.
C. Deposits in transit.
D. Bank charges not yet recorded by the entity.

Answer 20

C. Deposits in transit.

Question 21

If the cash balance shown on an entity’s accounting records is less than the correct cash balance and neither the entity nor the bank has made any errors, there must be
A. Deposits credited by the bank but not yet recorded by the entity.
B. Deposits in transit.
C. Outstanding checks.
D. Bank charges not yet recorded by the entity.

Answer 21

A. Deposits credited by the bank but not yet recorded by the entity.

Question 22

The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may
A. Not believe that the bank is obligated to verify confidential information to a third party.
B. Sign and return the form without inspecting the accuracy of the client’s bank reconciliation.
C. Not have access to the client’s cutoff bank statement.
D. Be unaware of all the financial relationships that the bank has with the client.

Answer 22

D. Be unaware of all the financial relationships that the bank has with the client.

Question 23

The best evidence regarding year-end bank balances is documented in the
A. Cutoff bank statement.
B. Bank reconciliations.
C. Interbank transfer schedule.

Answer 23

B. Bank reconciliations.

Question 24

While performing an audit of cash, an auditor begins to suspect check kiting. Which of the
following is the best evidence that the auditor could obtain concerning whether kiting is taking
place?
A. Documentary evidence obtained by vouching credits on the latest bank statement to
supporting documents.
B. Documentary evidence obtained by vouching entries in the cash account to supporting
documents.
C. Oral evidence obtained by discussion with controller personnel.
D. Evidence obtained by preparing a schedule of interbank transfers

Answer 24

D. Evidence obtained by preparing a schedule of interbank transfers

Question 25

Two months before year-end, the bookkeeper erroneously recorded the receipt of a long term
bank loan by a debit to cash and a credit to sales. Which of the following is the most effective
procedure for detecting this type of error?
A. Analyze bank confirmation information.
B. Analyze the notes payable journal.
C. Prepare year-end bank reconciliation.
D. Prepare a year-end bank transfer schedule.

Answer 25

A. Analyze bank confirmation information.

Question 26

In validating the bank reconciliation statements, the auditor should primarily trace back outstanding checks to the:
a. Accounts payable voucher.
b. Cancelled checks returned by the bank.
c. Bank statement of the current month.
d. Cut-off bank statement of the subsequent month.

Answer 26

a. Accounts payable voucher.

Question 27

Objective of establishing a petty cash fund
a. Cash checks for employees
b. Account for all cash recipients and disbursements
c. Account for cash sales
d. Facilitate payment of small, miscellaneous items

Answer 27

d. Facilitate payment of small, miscellaneous items

Question 28

Effect of not replenishing the petty cash ay year-end and not making the appropriate entry
a. Detailed audit is essential
b. Petty cash custodian should turn over the petty cash to the general cashier
c. Cash will be overstated and expenses understated
d. Expenses will be overstated and cash will be understated

Answer 28

c. Cash will be overstated and expenses understated

Question 29

Cash receipts should be deposited on the day of the receipt or the following
business day. Select the most appropriate audit procedure to determine that cash is promptly deposited
a. Review the functions of cash receiving and disbursing for proper segregation of duties
b. Review cash register tapes prepared for each sale
c. Review the functions of handling and maintaining accounting records for proper segregation of duties
d. Compare the daily cash receipts with the bank deposits

Answer 29

d. Compare the daily cash receipts with the bank deposits

Question 30

Which of the following bets of information does an auditor usually confirm on one form?
a. Cash in bank and collateral for loans
b. Accounts payable and purchase commitments.
c. Accounts receivable and accrued interest receivable
d. Inventory on consignment and contingent liabilities

Answer 30

a. Cash in bank and collateral for loans

Question 31

An auditor who is engaged to examine the financial statements of a business entity will request cutoff bank statement primarily in order to
a. Detect lapping
b. Detect kiting
c. Verify reconciling items on the client’s bank reconciliation
d. Verify the cash balance reported on the bank confirmation inquiry form

Answer 31

c. Verify reconciling items on the client’s bank reconciliation