Cash Flashcards
When examining a client’s statement of cash flows for audit evidence, an auditor will rely primarily upon
Determination of the amount of working capital at year-end.
Cross-referencing to balances and transactions reviewed in connection with the examination of the other financial statements.
Analysis of significant ratios of prior years as compared to the current year.
The guidance provided by the SFAS on the statement of cash flows.
Cross-referencing to balances and transactions reviewed in connection with the examination of the other financial statements.
This answer is correct because the auditor will be able to cross-reference balances on the statement of cash flows to the other financial statements since audit tests have already been performed on balance sheet and income statement accounts.
An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to
Verify the cash balance reported on the bank confirmation inquiry form.
Verify reconciling items on the client’s bank reconciliation.
Detect lapping.
Detect kiting.
Verify reconciling items on the client’s bank reconciliation.
This answer is correct since a cutoff bank statement will include canceled checks and deposit slips for the period immediately following year-end. The auditor is, therefore, able to test whether the reconciling items at year-end have been handled properly.
This answer is incorrect because a cutoff bank statement, by itself, will provide limited assistance in detecting lapping. Lapping is an embezzlement scheme in which cash collections from customers are stolen and is detected by the use of confirmations and analytical procedures.
This answer is incorrect because a cutoff bank statement, by itself, will provide limited assistance in detecting kiting. Kiting is the overstatement of cash by recording a deposit without a corresponding withdrawal at year-end and is best detected through the use of a bank transfer schedule.
Which of the following sets of information does an auditor usually confirm on one form?
Accounts payable and purchase commitments.
Cash in bank and collateral for loans.
Inventory on consignment and contingent liabilities.
Accounts receivable and accrued interest receivable.
Cash in bank and collateral for loans.
The requirement is to identify the information that an auditor usually confirms on one form. Answer (b) is correct because the standard form to confirm account balance information with financial institution requests information on both the cash in bank and collateral for loans. Answers (a), (c), and (d) are all incorrect because they suggest pairs of information that are not usually confirmed on one form.
Which of the following cash transfers results in a misstatement of cash at December 31, year 1?
Bank Transfer Schedule
Disbursement date per books Disbursement date per bank Receipt date per books Receipt date per bank 12/31/Y1 01/05/Y2 12/31/Y1 01/04/Y2 01/04/Y2 01/11/Y2 01/04/Y2 01/04/Y2 12/31/Y1 01/04/Y2 12/31/Y1 12/31/Y1 01/04/Y2 01/05/Y2 12/31/Y1 01/04/Y2
01/04/Y2
01/05/Y2
12/31/Y1
01/04/Y2
This answer is correct (cash is misstated) because the cash is in both accounts at year-end and is recorded in the client’s books as received as of December 31, but not recorded as having been disbursed until January 4; cash is overstated at year-end.
The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to
Detect kiting activities that may otherwise not be discovered.
Corroborate information regarding deposit and loan balances.
Provide the data necessary to prepare a proof of cash.
Request information about contingent liabilities and secured transactions.
Corroborate information regarding deposit and loan balances.
The requirement is to identify the primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year. Answer (b) is correct because CPAs generally provide the account information on the form and ask for balance corroboration. The form explicitly states that the CPAs do not request, nor expect, the financial institution to conduct a comprehensive, detailed, search of its records for other accounts. Answer (a) is incorrect because a standard confirmation request will not detect kiting, a manipulation causing an amount of cash to be included simultaneously in the balance of two or more bank accounts. Answer (c) is incorrect because bank statements available from the client allow the CPA to prepare a proof of cash. Answer (d) is incorrect because the standard form does not request information about contingent liabilities and secured transactions.
Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows?
Reconcile the amounts included in the statement of cash flows to the other financial statements’ amounts.
Vouch a sample of cash receipts and disbursements for the last few days of the current year.
Reconcile the cutoff bank statement to the proof of cash to verify the accuracy of the year-end cash balance.
Confirm the amounts included in the statement of cash flows with the entity’s financial institution.
Reconcile the amounts included in the statement of cash flows to the other financial statements’ amounts.
This answer is correct because basic to the auditor’s approach is making certain that the amounts on the statement of cash flows reconcile with other financial statement amounts.
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?
The confirmation request was signed by the treasurer.
Sending the request was meaningless because the account was closed before the year-end.
The request was mailed by the assistant treasurer.
The CPA did not sign the confirmation request before it was mailed.
The request was mailed by the assistant treasurer.
This answer is correct because allowing the client to mail the confirmation directly violated the requirement that the confirmations remain under the auditor’s control. The auditor is unable to ascertain whether the confirmation reached the proper party.
The information below was taken from the bank transfer schedule prepared during the audit of Fox Co.’s financial statements for the year ended December 31, 2005. Assume all checks are dated and issued on December 30, 20X5.
Bank accounts Disbursement date Receipt date
Check no. From To Per books Per bank Per books Per bank
101 National Federal Dec. 30 Jan. 4 Dec. 30 Jan. 3
202 County State Jan. 3 Jan. 2 Dec. 30 Dec. 31
303 Federal American Dec. 31 Jan. 3 Jan. 2 Jan. 2
404 State Republic Jan. 2 Jan. 2 Jan. 2 Dec. 31
Which of the following checks illustrate deposits/transfers in transit at December 31, 20X5?
#101 and #202. #101 and #303. #202 and #404. #303 and #404.
101 and #303.
The requirement is to determine the checks which represent deposits in transit at December 31, 2001. Deposits in transit are those that have been sent to the bank prior to year-end, but have not been received by the bank as of year-end. Answer (b) is correct because both check #101 and check #303 have been disbursed per books as of year-end, but have not yet been received by the bank as of December 31. Checks #202 and #404 have been received by the bank as of year-end and accordingly are not in transit. Answer (a) is incorrect because check #202 has been received before year-end. Answer (c) is incorrect because both checks #202 and #404 have been received before year-end. Answer (d) is incorrect because check #404 has been received before year-end.
On receiving the bank cutoff statement, the auditor should trace
Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal.
Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.
Deposits listed on the cutoff statement to deposits in the cash receipts journal.
Checks dated subsequent to year-end to the outstanding checks listed on the year-end bank reconciliation.
Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.
This answer is correct because comparing checks returned with the cutoff statement which was dated prior to year-end with the list of outstanding checks on the bank reconciliation will provide evidence as to the completeness of the listing of outstanding checks on the bank reconciliation. This step facilitates a search for unrecorded liabilities.
The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may
Not believe that the bank is obligated to verify confidential information to a third party.
Sign and return the form without inspecting the accuracy of the client’s bank reconciliation.
Not have access to the client’s cutoff bank statement.
Be unaware of all the financial relationships that the bank has with the client.
Be unaware of all the financial relationships that the bank has with the client.
The requirement is to determine a reason that the usefulness of the standard bank confirmation request may be limited. Answer (d) is correct because the bank employee who completes the form often will not have access to all the financial relationships that the bank has with the client. Answer (a) is incorrect because bank employees who complete the form realize that they may verify confidential information with the auditor. Answer (b) is incorrect because while it is correct that the employee who completes the confirmation form will not generally inspect the accuracy of the bank reconciliation, this does not limit the confirmation’s usefulness. Answer (c) is incorrect because the employee who completes the form does not need to have access to the client’s cutoff bank statement to complete the confirmation.
Under which of the following circumstances would an auditor be most likely to intensify an examination of a $500 imprest petty cash fund?
Reimbursement vouchers are not prenumbered.
Reimbursement occurs twice each week.
The custodian occasionally uses the cash fund to cash employee checks.
The custodian endorses reimbursement checks.
Reimbursement occurs twice each week.
This answer is correct because a petty cash fund is most frequently used for small expenditures and one would not expect to find one in which the imprest amount of $500 was being reimbursed twice weekly. The auditor would be likely to intensify an examination of the petty cash fund if this situation occurred.
Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows?
Compare the amounts included in the statement of cash flows to similar amounts in the prior year’s statement of cash flows.
Reconcile the cutoff bank statements to verify the accuracy of the year-end bank balances.
Vouch all bank transfers for the last week of the year and first week of the subsequent year.
Reconcile the amounts included in the statement of cash flows to the other financial statements’ balances and amounts.
Reconcile the amounts included in the statement of cash flows to the other financial statements’ balances and amounts.
The requirement is to determine the most likely approach for auditing the statement of cash flows. Answer (d) is correct because the statement of cash flows includes accounts considered during the audit of the balance sheet and income statements and, accordingly, the most frequent approach is to reconcile amounts. Answers (a), (b), and (c) are all incorrect because they suggest approaches not typically followed when auditing the statement of cash flows.
When counting cash on hand the auditor should exercise control over all cash and other negotiable assets to prevent
Theft.
Irregular endorsements.
Substitution.
Deposits-in-transit.
Substitution.
This answer is correct because the liquidity of these assets makes substitution (changing the form of the assets and thereby double counting them) possible.
Once satisfied that the balance sheet and income statement are fairly presented in accordance with generally accepted accounting principles, an auditor who is examining the statement of cash flows would be most concerned with details of transactions in
Cash.
Trade receivables.
Notes payable.
Accounts payable.
Notes payable.
This answer is correct because the auditor would examine notes payable (a noncurrent account) to determine financing and investing activities that occurred (i.e., by examining changes in the noncurrent accounts). Each transaction involving notes payable is generally considered a financing and investing activity which requires disclosure.
A cash shortage may be concealed by transporting funds from one location to another or by converting negotiable assets to cash. Because of this, which of the following is vital?
Simultaneous confirmations.
Simultaneous bank reconciliations.
Simultaneous verification.
Simultaneous surprise cash count.
Simultaneous verification.
This answer is correct because by simultaneously verifying cash, securities, and other related items, any concealment of cash shortages will be exposed. If a transfer from another account is made to conceal a cash shortage, a shortage in the transferred item will result and this will be identified.
