Chap 17 - audit of Cash Balance Flashcards
What is meant by an ‘imprest bank account’ for a branch operation?
A.
An imprest bank account for a branch operation is one where a fluctuating balance is acceptable. After management uses the funds for proper disbursements they are reimbursed from the home office’s general account for a portion of the cash disbursements.
B.
An imprest bank account for a branch operation is one where a fluctuating balance is acceptable. When authorized branch personnel use the funds for disbursements, they send an accounting report to the home office. After the expenditures have been approved by the home office, a reimbursement is made to the branch account from the home office’s general account for the total of the cash disbursements.
C.
An imprest bank account for a branch operation is one where a fixed balance is maintained. After authorized branch personnel use the funds for proper disbursements, they send an accounting report to the home office. After the expenditures have been approved by the home office, a reimbursement is made to the branch account from the home office’s general account for the total of the cash disbursements.
D.
An imprest bank account for a branch operation is one where a fixed balance is maintained. After management uses the funds for proper disbursements they are reimbursed from the home office’s general account for a portion of the cash disbursements.
c
Explain the purpose of using this type of bank account.
The purpose of using this type of account is to provide controls over (1)______ and (2)______by preventing the (3)________ from disbursing their cash receipts directly, and by providing (5) ____ of cash disbursements before more cash is made available.
(1): Cash; Cash receipts; AR; petty cash
(2): Cash disbursements; AP; Cash; Bank reconciliation
(3): Accounting supervisors; Management; Branch operators
(4): Supervision; Review and approval; Classification
(1) : CAsh receipts
(2) : CAsh disbursements
(3) : Branch operators
(4) : REview and approval
Explain the relationships among the initial assessed level of control risk, test of controls for cash disbursements, and the tests of details of cash balances
The scope of tests for the ending balance in the cash accounts (1)____ the evaluation of the internal controls for cash disbursements. The company’s controls over cash disbursements assist the auditor in determining that cash disbursed is for approved company purposes, that cash disbursements are promptly recorded in the proper amount, and that (2)______at year-end is proper. If the results of the evaluation of internal control are adequate, (3)____ the tests of details of balances for cash, especially for the detailed tests of bank reconciliations. On the other hand, if the tests indicate that the client’s controls are inadequate, (4)______
(1) : depend heavily on; are not heavily influenced by
(2) : petty cash; cash cut-off; cash receipts
(3) : it is appropriate to increase; it is not appropriate to change; it is appropriate to reduce
(4) : minimal year end testing will be necessary; extensive year end testing may be necessary; the level of year-end testing will not change
(1) : depend heavily on
(2) : cash cut-off
(3) : it is appropriate to reduce
(4) : extensive year end testing may be necessary.
Give one example in which the conclusions reached about internal controls in cash disbursements would affect the tests of cash balances.
If controls over the issuance of blank cheques, the review of payees, amounts, and supporting documentation, the signing of cheques, and the reconciliation of bank statements and (1)___are adequate, the auditor’s review of outstanding cheques on the year-end bank reconciliation may be (2)___. The year-end outstanding cheques can be verified by testing a sample of cheques returned with the (3)____ bank statement rather than tracing all paid outstanding cheques and the final monthly cheques in the cash disbursements journal to the last month’s cleared cheques and the bank reconciliation.
(1) : vendors’ statements; customers’ statements; financial statements
(2) : slightly reduced; slightly increased; greatly increased; greatly reduced.
(3) : cutoff; year-end
(1) : vendors’ statements
(2) : greatly reduced
(3) : cutoff
Why is the monthly reconciliation of bank accounts by an independent person an important internal control over cash balances?
A.
It provides an opportunity for an internal verification of the cash receipts and cash disbursements transactions, investigation of reconciling items on the bank reconciliation, and the verification of the cash ending balance.
B.
It provides an opportunity for an outside verification of the cash receipts and cash disbursements transactions, investigation of reconciling items on the bank reconciliation, and the verification of the ending cash balance.
C.
It provides an opportunity for an internal verification of the cash receipts and cash disbursements transactions, investigation of reconciling items on the bank reconciliation, and the verification of the beginning cash balance.
D.
It provides an opportunity for an outside verification of the cash receipts and cash disbursements transactions, investigation of reconciling items on the bank reconciliation, and the verification of the beginning cash balance.
A
Which individuals would generally not be considered independent for this responsibility?
Anyone responsible for the following duties would not be considered independent for the purposes of preparing monthly bank reconciliations:
A.
Other handling of cash
B.
Record keeping
C.
Receipt and deposit of cash
D.
Issuance of cheques
E.
All of the above are correctE
Assume that a client with excellent internal controls uses an imprest payroll bank account. Explain why the verification of the payroll bank reconciliation ordinarily takes less time than the tests of the general bank account, even if the number of cheques exceeds those for the general account.
A.
This account typically requires less extensive testing than general bank accounts because an imprest payroll account has no activity other than payroll disbursements and deposits made to re-establish the standard minimum account balance.
B.
An imprest payroll account maintains a $0 account balance. Assets with no or immaterial balances do not require extensive testing.
C.
This account typically requires less extensive testing because of its purpose as solely a cheque-clearing account (and not as a depository account). While a large volume of disbursements are made from this account, such disbursements are typically small in nature, and recurring, which is inherently less risky and easier to test.
D.
None of the above is correct.
A
Why is there a greater emphasis on the detection of fraud in tests of details of cash balances than for other balance sheet accounts?
A.
There is a greater emphasis on the detection of fraud in tests of details of cash balances than for other balance sheet accounts because cash is the most important balance sheet account.
B.
The amount of cash flowing into and out of the cash account is frequently larger than for any other account in the financial statements. Furthermore, the susceptibility of cash to defalcation is greater than other types of assets.
C.
There is a greater emphasis on the detection of fraud in tests of details of cash balances than for other balance sheet accounts because if the cash account is accurate, all of the other accounts are accurate also.
D.
The amount of cash flowing into and out of the cash account is frequently smaller than for any other account in the financial statements. Furthermore, the susceptibility of cash to defalcation is smaller than other types of assets.
B
Give two specific examples that demonstrate how this emphasis affects the auditor’s evidence accumulation in auditing year-end cash.
A.
(1) Verifying whether cash transactions are properly recorded and (2) obtaining bank confirmations.
B.
(1) Tests performed to detect lapping and (2) review of the general ledger entries in the cash account for unusual items.
C.
(1) Testing of bank reconciliations and (2) tests performed to detect lapping.
D.
(1) Review of the general ledger entries in the cash account for unusual items and (2) obtaining bank confirmations.
A
Evaluate the effectiveness and state the shortcomings of the preparation of a bank reconciliation by the controller in the manner described in the following statement:
”When I reconcile the bank account, the first thing I do is to sort the cheques in numerical order and find which numbers are missing. Next I determine the amount of the uncleared cheques by referring to the cash disbursements journal. If the bank account reconciles at that point, I am all finished with the reconciliation. If it does not, I search for deposits in transit, cheques from the beginning of the outstanding cheque list that still have not cleared, other reconciling items, and bank errors until it reconciles. In most instances, I can do the reconciliation in 20 minutes.”
The controller’s approach is to reconcile until the balance agrees. The shortcoming of this approach is that it (1)_______. Such items as cheques payable to improper parties, reissuance of outstanding cheques to improper parties, and (2)__ be discovered with the controller’s approach.
(1): does not include a review of bank confirmations received from banks with which the client does business;
does not include a review of the control procedures in the department;
does not include a review of the items that flow through the account and it opens the door for the processing of improper items.
(2): kiting of funds would
kiting of funds would not
lapping of funds would
lapping of funds would no
The controller's procedures should include the following: A. Follow-up on old outstanding cheques to determine why they are still outstanding. B. Review list of liabilities to the bank for notes, mortgages, or other debt, including the amount and date of the loan, the loan due date, interest rate, and the existence of collateral. C. Examination of all cheques clearing with the statement (including those on the previous month's outstanding cheque list) and comparison of payee and amount to the cash disbursements journal. D. Assess control risk for all cash cycles. E. Test of cash receipts to determine that they are deposited within a reasonable amount of time. F. Examination of all cheques clearing with the purchases journal and comparison of payee and amount to the cash receipts journal.
(1) : does not include a review of the items that flow through the account and it opens the door for the processing of improper items.
(2) : kiting of funds would not
A, C, E
Explain the rationale for the differences between these two types of confirmations: Bank confirmation, Positive confirmation of Accounts receivable
The reason why more importance is placed on (1)____ is that cash, being the most liquid of assets,(2)____. In addition, other information, such as liabilities to the bank, must be known for purposes of the (3)_____. Finally, there are usually (4)___ bank accounts and most bank accounts have a (5)___ during the year.
(1): AR confirmations than bank confirmations
Bank confirmations than AR confirmations
(2): must be less closely controlled than accounts receivable.
must be more closely controlled than accounts receivable.
(3): bank statement.
financial statements.
(4): many
only a few
(5): large volume of transactions
small volume of transactions
(1) : bank confirmations than accounts receivable confirmations
(2) : must be more closely controlled than accounts receivable.
(3) : financial statements.
(4) : only a few
(5) : large volume of transactions
Evaluate the necessity for following the practice described by an auditor: “In confirming bank accounts, I insist upon a response from every bank the client has done business with in the past two years, even though the account may be closed at the balance sheet date.”
A.
This is a good auditing procedure that attempts to discover if any accounts that should have been closed is still being used, such as by a company employee to deposit customer remittances. The procedure may also discover unrecorded and contingent liabilities.
B.
There are not currently any guidelines on whether the practice described above is beneficial.
C.
This is a bad auditing procedure. There are no reasons for the auditor to inquire about accounts that have been closed as of the balance sheet date.
D.
None of the above is correct.
A
Describe a cutoff bank statement and state its purpose.
A cutoff bank statement is a (1)____ period bank statement with the related cancelled cheques, duplicate deposit slips, and other documents included in bank statements, which is mailed by the bank directly to the (2)______. The purpose of the cutoff bank statement is to verify the reconciling items on the client’s (3)____ reconciliation with evidence that is (4)___ to the client.
(1): partial
full
(2): client's employee handling the reconciliation.
auditor.
client's management.
(3): quarterly
month-end
year-end
(4): accessible
inaccessible
(1) : partial
(2) : auditor
(3) : year-end
(4) : inaccessible
Why are auditors usually less concerned about the client’s cash receipts cut-off than the cut-off for sales?
The cut-off of cash receipts affects only cash and (1)_____and not the (2)_______, whereas a misstatement in the cut-off of sales affects (3)____ and the (4)___
(1): accounts receivable sales inventory accounts payable (2): income statement balance sheet (3): sales accounts receivable inventory accounts payable (4): balance sheet. income statement.
(1) : AR
(2) : income statement
(3) : accounts receivable
(4) : income statement.
Explain the procedure involved in testing for the cut-off for cash receipts.
For the purpose of detecting a cash receipt cut-off misstatement, there are two useful audit procedures. The first is to trace the (1)______ to the (2)_____ bank statement to determine the date they were deposited in the bank account. Because the recorded cash will have to be included as (3)_______ on the bank reconciliation, the auditor can test for the number of days it took for the (4)____ If there is more than a two or three day delay between the balance sheet date and the subsequent deposit of all (5)______, there is an indication of a cut-off misstatement.
(1): outstanding cheques deposits in transit actual deposits (2): year end cut-off (3): outstanding cheques actual deposits deposits in transit (4): outstanding cheques to clear. in transit items to be deposited. actual deposits to be deposited. (5): deposits in transit actual deposits outstanding cheques
The second audit procedure requires being on the premises at the (6)\_\_\_\_\_\_ date and counting all cash and cheques on hand and recording the amount in the (7)\_\_\_\_\_. When the bank reconciliation is tested, the auditor can then check whether the (8)\_\_\_\_\_equal the amount recorded.
(6): cut-off balance sheet (7): working papers. bank reconciliation (8): outstanding cheques deposits in transit actual deposits
(1) : deposits in transit
(2) : cut-off
(3) : deposits in transit
(4) : in transit items to be deposited.
(5) : deposits in transit
(6) : balance sheet
(7) : working papers
(8) : deposit in transits
How would a company’s bank reconciliation reflect an electronic deposit of cash received by the bankfrom credit card agencies that make payments on behalf of customers purchasing products from the company’s websitebut not recorded in the company’s records?
The company does not have the electronic deposit (1)___. The company’s (2)____ should include an adjustment for this transaction, which would increase the book balance of (3)____ and decrease (4)____.
(1): on the bank statement.
recorded as a receivable.
recorded in the general ledger.
(2): bank reconciliation
bank statement
cutoff bank statement
general ledger
(3): Accounts receivable from cash
Accounts receivable from credit card agencies
Cash
Inventory
(4): Accounts receivable from cash.
Accounts receivable from credit card agencies.
Cash.
Inventory
(1) : recorded in the general ledger.
(2) : bank reconciliation
(3) : Cash
(4) : Accounts receivable from credit card agencies.
Explain why, in verifying bank reconciliations, most auditors emphasize the possibility of a nonexistent deposit in transit being included in the reconciliation and an outstanding cheque being omitted, rather than the omission of a deposit in transit and the inclusion of a nonexistent outstanding cheque.
The misstatements that are of the (1)_____ concern to auditors in bank reconciliations are (2)____ usually resulting from a defalcation. A fraudulent deposit in transit or an omitted outstanding cheque will both (3)____ a cash shortage. Omitted deposits in transit or inclusion of a nonexistent outstanding cheque are likely misstatements only when the (4)____ a highly unlikely occurrence.
(1): greatest
least
(2): intentional ones to cover up a cash overage
intentional ones to cover up a cash shortage
(3): cover up
uncover
(4): bank balance, after reconciling items are accounted for, is greater than the book balance,
book balance, after reconciling items are accounted for, is greater than the bank balance,
(1) : greatest
(2) : intentional ones to cover up a cash shortage
(3) : cover up
(4) : bank balance, after reconciling items are accounted for, is greater than the book balance,
The auditor should ordinarily send confirmation requests to all banks with which the client has conducted any business during the year, regardless of the year-end balance, because
1.
this procedure will detect kiting activities that would otherwise not be detected.
2.
the sending of confirmation requests to all such banks is required by auditing standards.
Your answer is not correct.3.
the confirmation form also seeks information about indebtedness to the bank.
4.
this procedure relieves the auditor of any responsibility with respect to nondetection of forged cheques.
3
The auditor should control and verify all liquid assets simultaneously to prevent 1. unauthorized disbursements. 2. embezzlement. 3. conversion of assets to conceal a shortage. 4. unrecorded disbursements.
3
Which of the following is one of the better auditing techniques to detect kiting?
1.
Prepare a schedule of bank transfers from the client’s books.
2.
Review composition of authenticated deposit slips.
3.
Prepare year-end bank reconciliations.
4.
Review subsequent bank statements and cancelled cheques received directly from the banks.
1
For each possible misstatement, identify one audit procedure that would be most effective in providing evidence regarding the potential misstatement. Listed auditing procedures may be used once, more than once, or not at all.
Possible misstatement
1. The auditor suspects that a lapping scheme exists because an accounting department employee who has access to cash receipts also maintains the accounts receivable ledger and refuses to take any vacation or sick days.
2. The auditor suspects that the entity is inappropriately increasing the cash reported on its balance sheet by drawing a cheque on one account and not recording it as an outstanding cheque on that account and simultaneously recording it as a deposit in a second account.
3. The entity’s cash receipts of the first few days of the subsequent year were properly deposited in its general operating account after the year-end. However, the auditor suspects that the entity recorded the cash receipts in its books during the last week of the year under audit.
4. The auditor noticed a significant increase in the number of times that petty cash was reimbursed during the year and suspects that the custodian is stealing from the petty cash fund.
5. The auditor suspects that a kiting scheme exists because an accounting department employee who can issue and record cheques seems to be leading an unusually luxurious lifestyle.
6. During tests of the reconciliation of the payroll bank account, the auditor notices that a cheque to an employee is significantly larger than other payroll cheques.
7. The auditor suspects that the controller wrote several cheques and recorded the cash disbursements just before year-end but did not mail the cheques until after the first week of the subsequent year.
Audit procedure
a.
Send a standard bank confirmation confirming the balance in the bank at year-end.
b.
Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips.
c.
Count the balance in petty cash at year-end.
d.
Agree gross amount on payroll cheques to approved hours and pay rates.
e.
Obtain the cutoff bank statement and compare the cleared cheques to the year-end reconciliation.
f.
Examine invoices, receipts, and other documentation supporting reimbursement of petty cash.
g.
Examine payroll cheques clearing after year-end with the payroll journal.
h.
Prepare a bank transfer schedule.
1-b 2-h 3-b 4-f 5-e 6-d 7-e
Distinguish between ‘lapping’ and ‘kiting.’ (Match a description with each term.) (Abbreviation used: N.S.F = Non-Sufficient Funds.)
a.
A defalcation in which a cash shortage is concealed by delaying the crediting of cash receipts to the proper accounts receivable. The first step in the fraud is to withhold cash remitted by a customer from a bank deposit. A few days later, because the customer must receive credit for the remittance, the first customer’s account is credited with an amount from a remittance made by a second customer. The process requires the continuous shifting of shortages from account to account and the crediting of subsequent receipts to the wrong accounts receivable.
e.
A procedure used to conceal cash shortages from employers and auditors, to conceal bank overdrafts from the bank or banks affected, or to pad a cash position. These procedures are designed to take advantage of the “float” period during which a cheque is in transit between banks.
a. Lapping
e. Kitting
Describe audit procedures that can be used to uncover lapping.
1. Make a surprise count of the cash and customers cheques on hand. The deposit of these funds should be made under the auditor’s control, and the details of the deposit should be compared with the cash receipts book and the accounts receivable records.
- Compare the details of remittance lists (if prepared), stamped duplicate deposit slips, and entries in the cash receipts book. Because deposit slips are easily altered, some auditors obtain duplicate deposit slips made a few days before and after the examination date and have these slips authenticated by the bank. These authenticated duplicate deposit slips are compared to remittance lists and to entries in the cash book.
- Obtain cut-off bank statements directly from the bank covering the seven to ten day period after the balance sheet date. Examine the cheques returned with the cut-off statements and pay attention to dates of the transactions stamped by the banks on the backs of the cheques. These stamped dates should not be earlier than the dates of the cheques or the dates of cash disbursements recorded on the books. Protested (N.S.F.) cheques should be investigated to determine they are not fictitious cheques deposited temporarily to cover a shortage.
- Confirm accounts receivable and give close attention to exceptions made by customers about payment dates. The confirmation procedure is better applied as a surprise at an interim date so that if a person is engaged in lapping, he or she will not have been able to bring the affected accounts up to date.
- Prepare a schedule of the bank transfers made for a few days before and after the audit date. The schedule should show, for each cheque, the date that the cash disbursement was recorded on the books, and the dates of withdrawal and deposit shown on the bank statements.
- As a surprise, count of cash and customers’ cheques on hand is made as a test for one type of embezzlement, determine that cheques representing transfers of funds are properly recorded on the books.
- Compare the cheque vouchers received with the customers’ cheques with stamped duplicate deposit slips, the entries in the cash book, and postings to the accounts receivable records. If the client stamps the voucher with the date it was received, in making the comparisons particular attention should be given to the stamped dates and recording dates in the cash receipts book.
1, 2, 4, 7
Describe audit procedures that can be used to uncover kiting
1. Compare the cheque vouchers received with the customers’ cheques with stamped duplicate deposit slips, the entries in the cash book, and postings to the accounts receivable records. If the client stamps the voucher with the date it was received, the auditor should make careful comparisons of the stamped dates to the dates recorded in the cash receipts journal.
- As a surprise, count of cash and customers’ cheques on hand is made as a test for one type of embezzlement, determine that cheques representing transfers of funds are properly recorded on the books.
- Confirm accounts receivable and give close attention to exceptions made by customers about payment dates. The confirmation procedure is better applied as a surprise at an interim date so that if a person is engaged in this, he or she will not have been able to bring the affected accounts up to date.
- Prepare a schedule of the bank transfers made for a few days before and after the examination date. The schedule should show, for each cheque, the date that the cash disbursement was recorded on the books, and the dates of withdrawal and deposit shown on the bank statements.
- Compare the details of remittance lists (if prepared), stamped duplicate deposit slips, and entries in the cash receipts book. Because deposit slips are easily altered, some auditors prepare duplicate deposit slips made a few days before and after the examination date and have these slips authenticated by the bank. These authenticated duplicate deposit slips are compared to remittance lists and to entries in the cash book.
- Make a surprise count of the cash and customers cheques on hand. The deposit of these funds should be made under the auditor’s control, and the details of the deposit should later be compared with the cash receipts book and the accounts receivable records.
- Obtain cut-off bank statements directly from the bank covering the seven to ten day period after the balance sheet date. Examine the cheques returned with the cut-off statements and pay attention to dates of the transactions stamped by the banks on the backs of the cheques. These stamped dates should not be earlier than the dates of the cheques or the dates of cash disbursements recorded on the books. Protested (N.S.F.) cheques should be investigated to determine they are not fictitious cheques deposited temporarily to cover a shortage.
2, 4, 7
A CPA obtains a January 10 cutoff bank statement for a client directly from the bank. Very few of the outstanding cheques listed on the client’s December 31 bank reconciliation cleared during the cutoff period. A probable cause for this is that the client
1.
transmitted the cheques to the payees after year-end.
2.
is engaged in kiting.
3.
has overstated its year-end bank balance.
4.
is engaged in lapping.
1.
