cash Flashcards

1
Q
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.
A

Substitution.

You Answered Correctly!
This answer is correct because the liquidity of these assets makes substitution (changing the form of the assets and thereby double counting them) possible.

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2
Q

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 cut-off 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.

A

Reconcile the amounts included in the statement of cash flows to the other financial statements’ amounts.

Much of the work done to audit the statement of cash flows consists of agreeing amounts included in the statement of cash flows to amounts reported in the other financial statements. This would include, for example, agreeing depreciation expense to the amount reported in the income statement.

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3
Q
Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of
	Presentation.
	Completeness.
	Rights.
	Existence.
A

The completeness assertion deals with whether all transactions have been included in the proper period.

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4
Q

Which of the following characteristics most likely would be indicative of check kiting?
High turnover of employees who have access to cash.
Many large checks that are recorded on Mondays.
Low average balance compared to high level of deposits.
Frequent ATM checking account withdrawals.

A

Low average balance compared to high level of deposits.

Check kiting occurs when cash is fraudulently created through the transfer of money between banks. Insufficient funds checks are written and deposited among a series of banks and the float is used to “create” cash.

Kiting would be evidenced by a low average balance compared to a high level of deposits because, although deposits are being made, checks are immediately written to remove the funds, resulting in a low average balance.

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5
Q

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.

A

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.

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6
Q
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.
A

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.

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7
Q

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.

A

Corroborate information regarding deposit and loan balances.

The primary purpose of standard bank confirmations is to corroborate information regarding deposit and loan balances.

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8
Q

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.

A

Corroborate information regarding deposit and loan balances.

The primary purpose of standard bank confirmations is to corroborate information regarding deposit and loan balances.

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9
Q

On receiving a client’s bank cut-off statement, an auditor most likely would trace
Prior-year checks listed in the cut-off statement to the year-end outstanding checklist.
Deposits in transit listed in the cut-off statement to the year-end bank reconciliation.
Checks dated after year end listed in the cut-off statement to the year-end outstanding checklist.
Deposits recorded in the cash receipts journal after year end to the cut-off statement.

A

Prior-year checks listed in the cut-off statement to the year-end outstanding checklist.

A cut-off bank statement is a regular bank statement that is prepared by the bank for a shorter period than normal. It is sent directly to (or picked up by) the auditors.

The cut-off bank statement is used by the auditors to verify the components of the client’s bank reconciliation. The correct answer is A the auditor would trace the prior year checks clearing in the cut-off statement to the outstanding check list in the bank reconciliation as a means of verifying the completeness and accuracy of the outstanding check list.

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10
Q
An auditor is not required to confirm accounts receivable if the overall balance of the accounts is
	Older than the prior year.
	Immaterial.
	Smaller than expected.
	Subject to valuation estimates.
A

Immaterial.

This is correct because confirmation of accounts receivable is a generally accepted auditing procedure that is presumed to have been performed unless (1) the overall account balance is immaterial, (2) external confirmation procedures would be ineffective or (3) the assessed level of risk of material misstatement is low and other procedures address that risk.

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11
Q
Which of the following might be detected by an auditor’s cutoff review and examination of sales journal entries for several days prior to and subsequent to the balance sheet date?
	Lapping year-end accounts receivable.
	Inflating sales for the year.
	Kiting bank balances.
	Misappropriating merchandise.
A

Inflating sales for the year.

This answer is correct because holding the sales journal open (i.e., recording sales of the next period in this period) inflates sales in the current period and this should be detected by the auditor’s cutoff work.

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12
Q

Which of the following procedures would an auditor most likely perform to identify unusual sales transactions?
Tracing credits in the accounts receivable ledger to source documentation
Performing a trend analysis of quarterly sales
Examining duplicate sales invoices for credit approval by the credit manager
Tracing cash receipt entries to the bank statement deposit for amount and date

A

Performing a trend analysis of quarterly sales

Correct! Performing a trend analysis of quarterly sales is an analytical procedure that would be relevant to identifying unusual sales activities.

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13
Q
Two assertions for which confirmation of accounts receivable balances provides primary evidence are
	Completeness and valuation.
	Valuation and rights and obligations.
	Rights and obligations and existence.
	Existence and completeness.
A

Rights and obligations and existence.

Correct! Confirmations of accounts receivable balances provide primary evidence for rights and obligations and existence. Direct responses from third parties provide proof that the accounts receivable are valid (that they exist) and that the amounts are properly owed to the entity.

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14
Q

Once a CPA has determined that accounts receivable have increased due to slow collections in a “tight money” environment, the CPA would be likely to
Increase the balance in the allowance for bad debts account.
Review the going concern ramifications.
Review the credit and collection policy.
Expand tests of collectability.

A

Expand tests of collectability.

This answer is correct because during a period of slow collections caused by “tight money,” the primary problem is to ascertain that the account is properly valued. Expanding the tests of collectability would allow the auditor to determine if the accounts are collectible.

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15
Q

An auditor discovered that a client’s accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that
Obsolete inventory has not yet been reduced to fair market value.
There was an improper cutoff of sales at the end of the year.
An unusually large receivable was written off near the end of the year.
The aging of accounts receivable was improperly performed in both years.

A

There was an improper cutoff of sales at the end of the year.

This answer is correct because an improper cutoff of sales at the end of the year that overstates year-end sales and receivables will decrease the ratio since that ratio is ordinarily far greater than 1. That is, increasing the numerator and denominator of a ratio that is greater than one by the same amount will decrease the ratio (e.g., 3/2 = 1.5 ? 4/3 = 1.3).

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16
Q

In order to safeguard the assets through proper internal control, accounts receivable that are written off are transferred to a(n)
Separate ledger.
Attorney for evidence in collection proceedings.
Tax deductions files.
Credit manager since customers may seek to reestablish credit by paying.

A

Separate ledger.

This answer is correct because when accounts receivable are written off they should be controlled for possible future collection. Accordingly, they should be recorded to maintain accountability in a separate ledger. If they were simply written off and forgotten, there would be no means of maintaining accountability over these contingent assets.