Chapter 12 Audit of Cash and Other Liquid Assets

Question 1

customers are instructed to send payments directly to the company at a specific post office box number, which is a depository __ at the organization’s banking institution

Answer 1

Lockbox

Question 2

cash transfers are made automatically and instantaneously; checks are not used. can reduce the use of lockboxes and other cash collection approaches over time

Answer 2

Electronic Funds Transfer

Question 3

Financial institutions provide automated services for many clients. auditor should determine that:

1. adequate procedures are used for monitoring the risk associated with the investment
2. controls are used to assure that investments are not subject to undue risks

Answer 3

Cash management systems

Question 4

most companies have short-term loans and lines of credit with their primary financial institution. the line of credit provides the company with a prenegotiated loan, available for use when the company needs it

Answer 4

Compensating balances

Question 5

• separation of duties
• restrictive endorsements of customer checks
• independent bank reconciliations by employees who do not handle cash
• computerized control totals and edit tests
• authorization of transactions
• prenumbered cash receipt documents and turnaround documents
• periodic internal audits
• competent, well-trained employees

Answer 5

Types of reconciliation control procedures

Question 6

customers return these with their cash payments. a clerk can quickly review the document and compare the amount indicated paid with the actual cash remittance

Answer 6

Turnaround Document

Question 7

auditor should perform __ when control risk is assessed as high, when fraud red flags are present, or (for nonpublic clients) when the auditor determines it is more efficient to directly test account balances.

Answer 7

Substantive tests of cash balances

Question 8

auditor reconciles the balance per the bank statement with the balance per the books. quite effective in detecting major errors, such as those that might be covered up by omitting or underfooting outstanding checks

Answer 8

Independent Bank Reconciliation

Question 9

normal bank statement prepared at an interim agreed upon date that is sent directly to the auditor

Answer 9

Cutoff Bank Statement

Question 10

auditor usually sends a __ to each bank with which the company has transacted business during the year. Has 2 parts:

1. confirmation of the client’s deposit balances, on the existence of loans, due dates of the loans, interest rates, dates through which interest has been paid, and collateral for all loans outstanding with the bank at year end.
2. confirmation about any contingent liabilities

Answer 10

Standard Bank Confirmation

Question 11

companies wanting to overstate cash often use a technique called __ to record the same cash twice

Answer 11

Kiting

Question 12

most effective and efficient way to test for the existence of kiting is to prepare a __, which lists all transfers between the company’s bank accounts for a short period of time before and after year end

Answer 12

Bank Transfer Schedule

Question 13

pg. 684-687

Answer 13

Audit of marketable securities