Ch 13: auditing cash and inventory

Question 1

what are the initial procedures for cash balance? (hint: there’s 5)

Answer 1

1. agree beginning balance to prior year working papers
2. obtain cash trial balances/ schedules
3. scan for unusual items
4. check mathematical accuracy
5. agree subsidiary ledger to general ledger

Question 2

are substantive analytical procedures used when auditing cash and inventory?

Answer 2

not as often- they may not be meaningful for cash as cash balances may be difficult to predict due

Question 3

cutoff testing is related to what kind of test

Answer 3

test of details of transactions

Question 4

what is it called when auditors while auditing cash and inventory inspect last checks written at year end to cash disbursements journal?

Answer 4

cutoff testing

Question 5

what is it called when auditors while auditing cash and inventory inspect last deposits made at year-end to cash receipts journal

Answer 5

cutoff testing

Question 6

what does cutoff testing do when auditing cash and inventory?

Answer 6

ensure client records recorded in the proper period

Question 7

under the test of details of transaction, the bank transfer schedule is used to detect what?

Answer 7

kiting

Question 8

There is a ___________ risk of kiting with worse internal controls

Answer 8

higher

Question 9

confirming cash balances falls under what test of details when auditing cash and inventory

Answer 9

test of details of balances

Question 10

re performance when auditing cash and inventory falls under which test of details

Answer 10

test of details of balances

Question 11

confirming cash balances tests what relevant assertions

Answer 11

• existence
• completeness
• valuation

Question 12

when confirming cash balances do you confirm the accounts with balances of 0?

Answer 12

yes- ALL account balances

Question 13

confirms for cash balances are in a _________ from and from ____________

Answer 13

written- third party

Question 14

what is being reperformed in the test of details of balances

Answer 14

year-end bank reconciliation

Question 15

what do auditor’s obtain in the test of details of balances?

Answer 15

partial cutoff bank statement

Question 16

what is the test of details for correct classifications on balance sheet and note disclosures

Answer 16

test of details of presentation and disclosure

Question 17

how is a bond sinking fund classified on the financial statements

Answer 17

long-term asset

Question 18

how are restrictions in cash put on the financial statements

Answer 18

listed separately on balance sheet and discloses im the notes

Question 19

how are lines of credit put in the financial statements

Answer 19

described in the notes; any balance/ amount used is classified as a liability

Question 20

how is a bank draft accounted classified in the financial statements

Answer 20

current liability

Question 21

when planning the audit it is important for the auditor to:
- understand ______________
- understand _______________
- evaluate the ______________________

Answer 21

• understand the account
• understand the entity and its environment
• evaluate the results of analytical procedures performed during planning

Question 22

what are examples (3) of cash and cash equivalents

Answer 22

cash in bank, imprest bank accounts, cash equivalents

Question 23

commercial paper, treasury bills, and money market funds are examples of what

Answer 23

cash equivalents

Question 24

what is the excess of cash flow from operations over capital expenditures

Answer 24

free cash flow

Question 25

top performers in the country generate significant ___________

Answer 25

free cash flow

Question 26

its important for the auditor to understand how management ________ and manages __________ and to tailor the audit of cash accordingly

Answer 26

budgets; cash balances

Question 27

effective analytical procedures involve comparing cash balances with ____________ or with _____________________

Answer 27

forecasts or budgets; company policies regarding minimum cash balances and the investment of surplus cash

Question 28

when internal controls over the budgeting process are strong, it is usually most effective to compare cash balances with ____________

Answer 28

budgets and company policies

Question 29

there are significant inherent risks surrounding _________ and __________

Answer 29

cash receipts; disbursement transaction

Question 30

many schemes for stealing cash involve failing to record ________

Answer 30

cash receipts

Question 31

misappropriating assets during the period results in issues with which assertion

Answer 31

completeness

Question 32

inherent risks pertaining to rights and obligations and accuracy, valuation and allocation assertions for cash are usually _________

Answer 32

low bc no complexities involving rights, accounting measurements and estimates.

Question 33

the effectiveness of bank reconciliations depends on the adequacy of ____________

Answer 33

segregation of duties

Question 34

in companies with good segregation of duties, bank recs will also be tested at _______

Answer 34

interim

Question 35

if duties are not adequately segregated, auditor will follow a primarily ___________ approach

Answer 35

substantive

Question 36

if internal controls over cash receipts and disbursements appear to be effective they should be tested when?

Answer 36

at interim

Question 37

fraud risk is increased when control risk is ________

Answer 37

high

Question 38

the most important control over the existence completeness and accuracy and valuation of cash balances is ________________

Answer 38

an independent bank reconciliation

Question 39

if control risk is high the auditor should assume that fraud risk is _________

Answer 39

high

Question 40

when fraud risk is high, its important for the auditor to design _____________

Answer 40

substantive procedures

Question 41

test of cash balances focus on the assertions of:

Answer 41

- existence - completeness - rights and obligations - accuracy, valuation and allocation

Question 42

what is the float period

Answer 42

when checks are written to transfer funds between accounts at different banks several days generally will elapse before the check clears the bank on which it's drawn

Question 43

what is kiting

Answer 43

a method often used to conceal a cash shortage or to overstate cash; involves recording a transfer between bank accounts as a deposit while failing to record the cash disbursement in the same time period

Question 44

journal entires are not made based on when the check actually arrives but rather based on the ______________

Answer 44

economic event

Question 45

test of details of balances primarily on 2 major tests

Answer 45

(1) sending a bank confirmation and (2) testing the client's bank reconciliation

Question 46

bank confirms test which relevant assertions

Answer 46

- existence - completeness - accuracy, valuation and allocation assertions

Question 47

when the acceptable level of detection risk is high, the auditor may scan the client-prepared bank reconciliation and verify the ________________ of the rec

Answer 47

mathematical accuracy

Question 48

what is a cutoff bank statement

Answer 48

a bank statement for the period subsequent tot he date of the balance sheet that the client requests to send directly to the auditor

Question 49

deposits in transit on the bank rec can be vouched to _______________

Answer 49

deposits on the cutoff statement

Question 50

if the financial statements show a trend of increased profit margin combined with an increase int eh number of inventory turnover in days, inventory may be ____________

Answer 50

overstated

Question 51

a lengthening of inventory turnover days may indicate __________ or ______________ problems

Answer 51

existence; valuation

Question 52

cutoff problems can result in ________ inventory, __________ cost of goods sold and __________ gross margins

Answer 52

overstating; understating; overstating

Question 53

what is a cycle count

Answer 53

client frequently identifies small portions of items in perpetual inventory and count that on a rotating basis

Question 54

what is the three step process to determing the value of ending inventory

Answer 54

1. client determines inventory quantities at each location 2. compilation of inventory values is developed 3. JE prepared to adjust the value of ending inventory and COGs based on physical count and compilation of inventory values

Question 55

observation of inventories is required when inventories are ____________ to a company's financial statements

Answer 55

material

Question 56

the observation of counting inventories once and only once is related to which assertion

Answer 56

existence

Question 57

making test counts and tracing quantities to final counts is related to which assetion

Answer 57

completeness

Question 58

the auditor recording the last receiving and shipping documents used and determining goods received during the count is related to which assertion

Answer 58

cutoff