Ch 10 - Cash Flashcards
Analytical procedures, substantive tests, and internal controls for cash
To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except:
General ledger
(auditors would examine cutoff bank statements, year-end bank statements, and bank confirmations)
The best way to verify the amounts of dividend revenue received during the year is:
Verification by reference to dividend record books
(provides evidence of the amount of dividend revenue that should have been received during the year.)
The auditors should always count small petty cash funds at year-end to make sure that balance is not overstated on the financial statements.
False
(typically immaterial)
Which of the following procedures would the auditors most likely perform to test controls relating to management’s assertion about the completeness of cash receipts for cash sales at a retail outlet?
Observe the consistency of the employees’ use of cash registers and tapes
(cash registers and tapes helps assure that all sales of a retail store are recorded)
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 reconciling items on the client’s bank reconciliation
Reconciliation of the bank account should not be performed by an individual who also:
Processes cash disbursements
T/F: Cash is actually usually material to the financial statements.
False; cash is NOT usually material
3 reasons to audit cash:
1) Cash is cheap / easy to audit
2) misappropriation-fraud risks for cash are extremely high
3) we indirectly audit/test lots of other areas of the financials (bc cash is typically a part of other accounts)
Misappropriation/theft of cash is _____ (risk level).
Extremely high (because cash is universally desired, small/portable and untraceable)
Financial Reporting Fraud is _______ (risk level).
Not that high (because cash is often not very material, so it’s not a desirable area to make the financials look better)
Disguising a theft of cash as a legitimate business expense is an example of which fraud risk?
Financial Reporting Fraud (covering up a misappropriation)
T/F: Cash is very subjective
False; Cash is objective (Lots of issues related estimates and fair value just don’t apply to cash)
Causes of material misstatements in cash:
1) overstating cash to hide thefts (stolen money counted in financial statements)
2) overstating cash to avoid violations of covenants (must have cash on hand for debt contracts and loan agreements)
3) understating cash to have a slush fund of hidden cash (i.e. for bribes)
T/F: The Foreign Corrupt Practices act may be going away in part or in whole
True (stupid asf)
Cash ratio formula:
Cash / Current Liabilities
Quick Ratio formula:
Quick Assets / Current Liabilities
What would be classified as quick assets?
Cash + Marketable Securities + A/R
Current Ratio formula:
Current Assets / Current Liabilities
3 Liquidity ratios:
1) Cash ratio
2) Quick ratio
3) Current ratio
T/F: Internal controls (and how to test them) are tailored to the risks of the specific client
True; specifics will vary significantly
T/F: Cash collections (authorization) and tracking (recording) are two VERY common, high-risk functions regarding the segregation of duties.
False; cash collections are a part of custody, NOT authorization
T/F: Misappropriation/Theft of cash is an example of high risks for custody and recording.
True; A person with Custody and Recording functions can pocket Cash and either delete/alter records or never even record the cash receipt
What is the purpose of having custody and recording duties separated?
It helps to ensure that if cash is stolen, there are records showing that the cash should have been there.
How to test that segregation of duties are working properly?
1) Inspections (of flow charts with job positions and descriptions)
2) Inquiries (interviews with relevant employees)
** to see who is responsible for what
**Both are important parts of testing virtually every control
3) Observations (shadow employees)
