Ch 16

Question 1

Why are analytical procedures of limited use in the audit of the cash balance?

Answer 1

Because of the residual nature of cash, it does not have a predictable relationship to other
financial statement accounts. As a result, the auditor’s use of analytical procedures for
auditing cash is limited to comparisons with prior years’ cash balances and to budgeted
amounts. This limited use of analytical procedures is normally offset by (1) extensive
tests of controls and/or substantive tests of transactions for cash receipts and cash
disbursements or (2) extensive tests of the entity’s bank reconciliations.

Question 2

Explain why the standard bank confirmation form does Not identify all information about an entity’s bank accounts or loans

Answer 2

The Standard Form to Confirm Account Balance Information with Financial Institutions
does not identify all information about an entity’s bank deposits or loans because it does
not require bank personnel to conduct a comprehensive, detailed search of the bank’s
records beyond the account information requested on the confirmation.

Question 3

Why auditor obtain a cutoff bank statement

Answer 3

A cutoff bank statement is obtained to test the reconciling items included in the bank
reconciliation. The outstanding checks or substitute checks returned with the cutoff bank
statement are examined for proper payee, amount, and endorsement.

Question 4

How does the Fair Value evidence the auditor is likely to gather differ between Level 1 & Level 3 asset?

Answer 4

Fair value audit evidence for Level 1 is objective and market-based so the auditor will
obtain fair values from publicly available sources (e.g., finance website).

Level 3 fair
value evidence will involve examining management’s assumptions and subjective inputs
to valuation models.

Question 5

From an accounting standpoint, what does cash include?

Answer 5

Currency on hand, bank accounts, savings accounts, time deposits, certificate of deposit maturing less than 3 months from year end, cash equivalent

Question 6

What are cash equivalents?

Answer 6

Short-term, highly liquid investments that are readily convertible to cash or so near maturity that there is little risk of change in their value.

Question 7

What are examples of cash equivalents?

Answer 7

Treasury bills and money market funds

Question 8

What are the cash related assertions?

Answer 8

Existence, cutoff, rights and obligations

Question 9

What is the cash existence assertion?

Answer 9

Do cash balances represented in the general ledger exist?

Question 10

What is the cash cutoff assertion?

Answer 10

Are all transactions represented in the appropriate accounting period?

Question 11

What is the cash rights and obligations assertion?

Answer 11

Are there any restrictions or obligations related to cash balances?

Question 12

How do auditors obtain comfort for the existence assertion?

Answer 12

Confirming cash accounts

Question 13

How do auditors obtain comfort for the cutoff assertion?

Answer 13

Testing the reconciliation

Question 14

How do auditors obtain comfort for the rights and obligation assertion?

Answer 14

Confirmations, review of contracts, and inquiries of management

Question 15

What is the cash lead sheet?

Answer 15

Breaks down the cash account from the balance sheet into individual general ledger accounts

Question 16

What is the cash audit program?

Answer 16

Instruction list for audit procedures, minimum required audit procedures for each audit section

Question 17

What are cash workpapers?

Answer 17

Include auditor related work papers as well as provided by client evidence

Question 18

What is the auditor’s use of substantive procedures for auditing cash limited to?

Answer 18

Comparisons with prior years’ cash balances, comparisons with budgeted amounts

Question 19

What is the limited applicability of substantive analytics procedures offset by?

Answer 19

Tests of controls and substantive tests of transactions

Question 20

What does the auditor need to obtain to audit a cash account?

Answer 20

Copy of bank reconciliation, standard bank confirmation, cutoff bank statement

Question 21

What assertion is tested when testing reconciling items?

Answer 21

Cutoff

Question 22

What is the time period of the cutoff bank statement?

Answer 22

Beginning the first day after the end of the year and cutoff the day you are auditing

Question 23

What should the balance of the cutoff bank statement tie back to?

Answer 23

Bank reconciliation

Question 24

What are the steps for auditing a cash account?

Answer 24

Confirm the balance on the bank reconciliation with a confirmation and cutoff statement, confirm all transactions from reconciliation on cutoff statement, confirm adjusted balance per books on general ledger

Question 25

What are other issues for cash and cash equivalents?

Answer 25

Accounting policy for defining cash and cash equivalents, restrictions on cash such as sinking fund requirements, obligations to maintain compensating balances, or funds designated for specific purposes, letters of credit