Chapter 16 (ALL)

Question 1

Which of the following controls would most effectively ensure that the proper custody of assets in the investing process is maintained?
a) Direct access to securities in the safe-deposit box is limited to one corporate officer.
b) Personnel who post investment transactions to the general ledger are not permitted to update the investment subsidiary ledger.
c) Purchase and sale of investments are executed on the specific authorization of the board of directors.
d) The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safe-deposit box by independent personnel.

Answer 1

d) The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safe-deposit box by independent personnel.

Question 2

The tick mark (diamond shape) on a bank transfer schedule most likely indicates the amount was traced to:
a) December cash disbursements journal.
b) Outstanding check list of the applicable bank reconciliation.
c) January cash disbursements journal.
d) Year-end bank confirmations.

Answer 2

b) Outstanding check list of the applicable bank reconciliation.

Question 3

The tick mark (triangle shape) on a bank transfer schedule most likely indicates the amount was traced to:
a) Deposit in transit of the applicable bank reconciliation.
b) December cash receipts journal.
c) January cash receipts journal.
d) Year-end bank confirmations.

Answer 3

a) Deposit in transit of the applicable bank reconciliation.

Question 4

An auditor ordinarily sends a standard confirmation request to all banks with which the entity has done business during the year under audit, regardless of the year-end balance. One purpose of this procedure is to:
a) Provide the data necessary to prepare a proof of cash.
b) Request that a cutoff bank statement and related checks be sent to the auditor.
c) Detect kiting activities that may otherwise not be discovered.
d) Seek information about loans from the banks.

Answer 4

d) Seek information about loans from the banks.

Question 5

The primary evidence regarding year-end bank balances is documented in the:
a) Standard bank confirmations and accompanying reconciliation.
b) Outstanding check listing.
c) Interbank transfer schedule.
d) Bank deposit lead schedule.

Answer 5

a) Standard bank confirmations and accompanying reconciliation.

Question 6

On receiving the cutoff bank statement, the auditor should vouch:
a) Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal.
b) Checks dated before year-end listed as outstanding on the year-end bank reconciliation to the cutoff statement.
c) Deposits listed on the cutoff statement to deposits in the cash receipts journal.
d) Checks dated after year-end to outstanding checks listed on the year-end bank reconciliation and to the cutoff statement.

Answer 6

b) Checks dated before year-end listed as outstanding on the year-end bank reconciliation to the cutoff statement.

Question 7

Which of the following cash transfers results in a misstatement of cash at December 31?
a) Disbursing Bank Acct- (Recorded in Clients Books = 12/31 & Paid by Bank = 1/4) and Receiving Bank Acct- (Recorded in Clients Books = 12/31 & Paid by Bank = 12/31)
b) Disbursing Bank Acct- (Recorded in Clients Books = 1/4 & Paid by Bank = 1/5) and Receiving Bank Acct- (Recorded in Clients Books = 12/31 & Paid by Bank = 1/4)
c) Disbursing Bank Acct- (Recorded in Clients Books = 12/31 & Paid by Bank = 1/5) and Receiving Bank Acct- (Recorded in Clients Books = 12/31 & Paid by bank = 1/4)
c) Disbursing Bank Acct- (Recorded in Clients Books = 1/4 & Paid by Bank = 1/11) and Receiving Bank Acct- (Recorded in Clients Books = 1/4 & Paid by bank = 1/4)

Answer 7

b) Disbursing Bank Acct- (Recorded in Clients Books = 1/4 & Paid by Bank = 1/5) and Receiving Bank Acct- (Recorded in Clients Books = 12/31 & Paid by Bank = 1/4)

Question 8

An auditor testing long-term investments would ordinarily use substantive analytical procedures to ascertain the reasonableness of the:
a) Existence of unrealized gains or losses in the portfolio.
b) Completeness of recorded investment income.
c) Classification between current and noncurrent portfolios.
d) Valuation of marketable equity securities.

Answer 8

b) Completeness of recorded investment income.

Question 9

To establish the existence and rights of a long-term investment in the common stock of a publicly traded company, an auditor ordinarily performs a security count or:
a) Relies on the entity’s internal controls if the auditor has reasonable assurance that the control activities are being applied as prescribed.
b) Confirms the number of shares owned that are held by an independent custodian.
c) Determines the market price per share at the balance sheet date from published quotations.
d) Confirms the number of shares owned with the issuing company.

Answer 9

b) Confirms the number of shares owned that are held by an independent custodian.

Question 10

Which of the following is likely to be the most effective audit procedure for verifying dividends earned on investments in
publicly traded equity securities?
a) Trace deposits of dividend checks to the cash receipts book.
b) Reconcile recorded earnings with the dividend earnings reported in the investment broker statement.
c) Compare the amounts received with prior-year dividends received.
d) Recompute selected extensions and footings of dividend schedules and compare totals to the general ledger.

Answer 10

b) Reconcile recorded earnings with the dividend earnings reported in the investment broker statement.

Question 11

An auditor would most likely verify the interest earned on bond investments by:
a) Vouching the receipt and deposit of interest checks.
b) Confirming the bond interest rate with the issuer of the bonds.
c) Recomputing the interest earned on the basis of face amount, interest rate, and period held.
d) Testing the controls over cash receipts.

Answer 11

c) Recomputing the interest earned on the basis of face amount, interest rate, and period held.

Question 12

The audit firm’s valuation specialist would likely be brought in to assist in the audit of fair value measurements at an entity when the following is present:
a) The entity is a new audit client.
b) Significant uncertainty exists in key inputs to the entity’s valuation models.
c) The entity has a financial instrument with a Level 2 input.
d) The entity owns a large and diverse portfolio of publicly traded stock.

Answer 12

b) Significant uncertainty exists in key inputs to the entity’s valuation models.

Question 13

How does an entity’s controls over cash receipts and disbursements affect the nature and extent of the auditor’s substantive tests of cash balances?

Answer 13

The reliability of an entity’s control activities over cash receipts and cash disbursements affects the nature and extent of the auditor’s substantive tests of cash balances.

If the control risk assessment is below the maximum level for both cash receipts and disbursements, the auditor can reduce the extent of substantive evidence gathered for the cash balances.

Question 14

Briefly describe each type of bank account. How does an imprest account help to improve control over cash?

Answer 14

A general cash account is the principal cash account for most entities. The major source of cash receipts for this account is the revenue process, and the major sources of cash disbursements are the purchasing and human resource management processes.

Companies that have multiple locations are likely to have branch accounts. Such accounts provide the branch with the ability to pay local expenses and to maintain banking relations with the local community.

An imprest bank account contains a stipulated amount of money, and the account is used for limited purposes. Imprest accounts are frequently used for disbursing payroll and dividend checks.

An imprest account serves as a clearing account for similar types of checks. By separating similar types of checks, the entity facilitates the disbursement of cash while maintaining adequate control over cash. Use of imprest accounts also minimizes the time necessary to reconcile the general cash account.

Question 15

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

Answer 15

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 16

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

Answer 16

The standard bank confirmation form 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 17

Why does an auditor obtain a cutoff bank statement when auditing a bank account? What information is examined on the canceled or substitute checks returned with the cutoff bank statement?

Answer 17

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 18

List three fraud-related audit procedures for cash.

Answer 18

1) Extended bank reconciliation procedures: These procedures include examining the disposition of the
reconciling items included in the prior months’ reconciliations and the reconciling items included in
the current bank reconciliation.

2) Proof of cash: The four-column proof of cash (1) ensures that all cash receipts recorded in the entity’s
cash receipts journal were deposited in the entity’s bank account, (2) ensures that all cash disbursements recorded in the entity’s cash disbursements journal have cleared the entity’s bank account, and (3) ensures that no bank transactions have been omitted from the entity’s accounting records.

3) Tests for kiting. An interbank transfer schedule is used to test for kiting.

Question 19

What is one approach used by auditors to test for kiting?

Answer 19

An approach used by auditors to test for kiting is the preparation and evaluation of an interbank transfer schedule.

With an interbank transfer schedule, the auditor tests the dates of cash disbursements and the cash receipt for each transfer to assure that the transfer is properly recorded.

Question 20

What are the main transaction-related assertions for investments? Identify the key segregation of investment-related duties and possible errors or fraud that can occur if this segregation is not present.

Answer 20

1) Segregation of Duties = The initiation function should be segregated from the final approval function. -> Possible Errors or Fraud as a Result of Conflicts in Duties = Fictitious transactions can be made or securities can be stolen.

2) Segregation of Duties = The value-monitoring function should be segregated from the acquisition function. -> Possible Errors or Fraud as a Result of Conflicts in Duties = Securities values can be improperly recorded or not reported to management.

3) Segregation of Duties = Responsibility for maintaining the securities ledger should be separate from that of making entries in the general ledger. -> Possible Errors or Fraud as a Result of Conflicts in Duties = Concealment of a theft that would normally be detected by reconciliation of subsidiary records with general ledger control accounts.

4)Segregation of Duties = Responsibility for custody of securities should be separate from that of accounting for the securities.-> Possible Errors or Fraud as a Result of Conflicts in Duties = Theft of securities can be concealed.

Question 21

Briefly describe the classification and valuation issues related to investments in debt and equity securities.

Answer 21

• Debt securities that the entity has the positive intent and ability to hold to maturity are classified as
  held-to-maturity securities and reported at amortized cost.
• Debt and equity securities that are bought and held principally for the purpose of selling them in the
  near term are classified as trading securities and reported at fair value, with unrealized gains and
  losses included in earnings.
• Debt or equity securities not classified as either held-to-maturity or trading securities are classified as
  available-for-sale and are reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders’ equity.

Question 22

What two presentation classification issues are important for the audit of debt investments?

Answer 22

1) Marketable securities need to be properly classified between held-to-maturity, trading, and available-
for-sale.

2) The financial statement classification requires that all trading securities be reported as current assets
and held-to-maturity securities and individual available-for-sale securities be classified as current or noncurrent assets based on whether management expects to convert them to cash within the next twelve months.

Question 23

How does the fair value evidence the auditor is likely to gather differ between Level 1 and Level 3 assets?

Answer 23

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.

Complicated financial instruments, such as credit default swaps, asset-backed securities, and collateralized debt obligations, among others, may not be traded on active markets, making accurate valuation of such instruments difficult. The auditor will likely need to involve a valuation specialist.

Question 24

Analytical Procedures

Answer 24

Evaluations of financial information made through analysis of plausible relationships among both financial and non financial data.

Question 25

Assertions

Answer 25

Expressed or implied representations by management regarding the recognition, measurement, presentation, and disclosure of information in the financial statements and related disclosures.

Question 26

Audit Data Analytics

Answer 26

Using analysis, modeling, and visualization to discover and analyze patterns, anomalies, and other
information in data in the context of the audit.

Question 27

Bank Confirmation

Answer 27

A standard form to confirm account balance information with financial institutions.

Question 28

Bank Reconciliation

Answer 28

A control that ensures that the entity’s books reflect the same cash balance as the bank’s balance after reconciling items have been considered.

Question 29

Branch Cash Accounts

Answer 29

Companies that operate branches in multiple locations may maintain separate accounts at local banks. These separate accounts are called branch cash accounts.

Question 30

Cash Equivalents

Answer 30

Short-term, highly liquid investments that are readily convertible to cash or so near their maturity that there is little risk of change in their value (e.g., money market funds, Treasury bills).

Question 31

Confirmation

Answer 31

The process of obtaining and evaluating direct communication from a third party in response to a request for information about a particular item affecting financial statement assertions

Question 32

Fair Value

Answer 32

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Question 33

General Cash Account

Answer 33

The main cash account for most entities.

Question 34

Imprest Bank Account

Answer 34

A bank account containing a stipulated amount of money used for limited purposes (e.g., imprest accounts are frequently used for disbursing payroll and dividend checks).

Question 35

Kiting

Answer 35

A fraud scheme that involves an employee covering a cash shortage by transferring money from one bank account to another and recording the transactions improperly on the entity’s books.

Question 36

Proof of Cash

Answer 36

A technique used to reconcile the cash receipts and disbursements recorded on the entity’s books with the cash deposited into and disbursed from the entity’s bank account for a specific time period.

Question 37

Reliance Strategy

Answer 37

The auditor’s decision to rely on the entity’s controls, test those controls, and reduce the direct tests of the financial statement accounts.

Question 38

Substantive Test of Transactions

Answer 38

Tests to detect errors or fraud in individual transactions.

Question 39

Test of Controls

Answer 39

Audit procedures performed to test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the relevant assertion level.

Question 40

Test of Details of Account Balances & Disclosures

Answer 40

Substantive tests that concentrate on the details of items contained in the account balance and disclosure.

Question 41

Cash

Answer 41

reported in the financial statements represents currency on hand and cash on deposit in bank accounts, including certificates of deposit, time deposits, and savings accounts.

Question 42

Cash Equivalents

Answer 42

-Are frequently combined with cash for presentation in the financial statements.

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

Question 43

2 Examples of Cash Equivalents

Answer 43

1) Treasury bills
2) Money market funds

Question 44

Tests for Existence, Completeness, Accuracy, Valuation & Allocation

Answer 44

1) Confirm bank account balance with financial institution

2) Test bank reconciliation for each account;
- Foot the reconciliation and the outstanding check listing.
- Trace balances per book to the general ledger.
- Obtain standard bank confirmation and trace balance per bank to the bank reconciliation.
- Obtain cutoff bank statement
- Trace deposits in transit, outstanding checks, and other reconciling items to cutoff bank statement.

3) If control risk is high or if fraud is suspected:
- Perform extended bank reconciliation procedures
- Perform a proof of cash.
- Test for kiting

Question 45

To audit a cash account, the auditor should obtain 3 items:

Answer 45

1) Copy of Bank Reconciliation
2) Standard Bank Confirmation
3) Cutoff Bank Statement

Question 46

Cutoff Bank Statement

Answer 46

• Normally covers the 7- to 10-day period after the date on which the bank account is reconciled.
• For reconciliation purposes, any item should have cleared the client’s bank account during the 7- to 10-day period.

Question 47

The auditor typically uses the following audit procedures to test the bank reconciliation: (6)

Answer 47

1) Verify the mathematical accuracy and agree the balance per the books to the general ledger.
2) Agree the bank balance on the reconciliation with the balance shown on the standard bank confirmation.
3) Trace the deposits in transit on the bank reconciliation to the cutoff bank statement.
4) Sample canceled checks contained in the cutoff bank statement to determine if properly included or excluded in outstanding checks on the bank reconciliation comparing proper payee, amount, and endorsement.
5) Agree any charges included on the bank statement to the bank reconciliation.
6) Agree the adjusted book balance to the cash account lead schedule.

Question 48

Fraud-Related Audit Procedures-> Proof of Cash

Answer 48

• Used to reconcile the cash receipts and disbursements recorded on the entity’s books with the cash deposited into and disbursed from the entity’s bank account for a specific time period.
• Reconciles cash receipts and disbursements (books) to cash deposited/disbursed from bank.
• Can be for month or period.

Question 49

The primary purposes of the proof of cash are: (3)

Answer 49

1) To ensure that all cash receipts recorded in the entity’s cash receipts journal were deposited in the entity’s bank account
2) To ensure that all cash disbursements recorded in the entity’s cash disbursements journal have cleared the entity’s bank account
3) To ensure that no bank transactions have been omitted from the entity’s accounting records.

• Note that a proof of cash will not detect a theft of cash when the cash was stolen before it was recorded in the entity’s books

Question 50

Kiting

Answer 50

When cash has been stolen by an employee, sometimes the employee will attempt to cover the cash shortage by following a practice known as kiting.

Kiting = transferring $ from one account to another and recording reconciling items incorrectly

• Incoming $$ in current period
• Outgoing $$ in subsequent period

Question 51

Tests for Kiting

Answer 51

• This involves an employee covering the cash shortage by transferring money from one bank account to another and recording the transactions improperly on the entity’s books.
• The employee does this by preparing a check on one account before year-end but not recording it as a cash disbursement in the account until the next period (paper checks are still commonly used, particularly by small businesses).
• The check is deposited and recorded as a cash receipt in a second account before year-end.
• The employee makes this deposit close enough to year-end that the check will not clear the first bank account before the end of the year.

Question 52

3 Examples of Investments

Answer 52

1) Equity Securities
- Common stock
- Preferred stock

2) Debt securities
- Notes
- Bonds

3) Hybrid Securities
- Convertible Bonds
- Convertible Stocks

Question 53

5 of the more important assertions for investments:

Answer 53

1) Occurrence
2) Authorization
3) Completeness
4) Accuracy
5) Classification

Note that these relate to investment transactions.

Question 54

(Investments - Existence) Auditing Standards state that the auditor should perform one of the following procedures when gathering evidence for existence:

Answer 54

1) Physical examination
2) Confirmation with the issuer
3) Confirmation with the custodian
4) Confirmation of unsettled transactions with the broker-dealer
5) Confirmation with the counterparty
6) Reading executed partnership or similar agreements

Question 55

(T/F): The auditor must also determine if there has been any “other than temporary” or permanent decline in the value of an investment security.

Answer 55

TRUE

Question 56

(Investments - Valuation & Allocation) The following factors are indicators that the value decline of the investment may be other than temporary: (7)

Answer 56

1) Fair value is significantly below cost.
2) The decline in fair value is attributable to specific adverse conditions, such as conditions in an industry or in a geographic area, affecting a particular investment.
3) Management does not possess both the intent and ability to hold the investment long enough to allow for any anticipated recovery in fair value.
4) The decline in fair value has existed for an extended period.
5) A debt security has been downgraded by a rating agency.
6) The financial condition of the issuer has deteriorated.
7) Dividends have been reduced or eliminated, or scheduled interest payments on debt securities have not been made.

Question 57

Permanently Impaired =

Answer 57

Write down to new carrying amount

Question 58

(Investments - Classification & Presentation)

Answer 58

• Debt securities need to be properly classified as held-to-maturity, trading, and available-for-sale.
• All trading securities should be classified as current assets.
• Held-to-maturity securities and individual available-for-sale securities should be classified as current or non-current assets based on whether management expects to convert them to cash within 12 months.

Question 59

Auditing Fair Value Measurements- ASC Topic 820 Levels: (3)

Answer 59

• Level 1: Valuations based on quoted prices in active markets for identical assets. Also known as “marking to market.” (Not super risky to find FMV)
• Level 2: Valuations based on directly or indirectly observable market data for similar assets. Also known as “marking to matrix.”
• Level 3: Valuations based on management’s best judgment and involve management’s assumptions. Also known as “marking to model.” (Riskiest valuation of FMV-> a lot of assumptions & judgement)

Question 60

Level 1

Answer 60

Level 1 inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets.

A quoted price for an identical asset or liability in an active market (e.g., an equity security traded on a major exchange) provides the most reliable fair value measurement and, if available, should be used to measure fair value in that particular market.

Ex: traded on the stock exchange (cash)

Determine FMV is relatively easy

Question 61

The list of instruments that likely qualify as Level 1 fair value measurements is fairly narrow. It includes: (7)

Answer 61

1) Listed equity securities traded in active, deep markets (e.g., NYSE, NASDAQ)

2) London Metal Exchange futures contract prices

3) On-the-run Treasury bills, notes, and bonds 1

4) Exchange-traded futures and options

5) Open-ended mutual funds with published daily NAV at which investors can freely subscribe to or redeem from the fund [These are investments that do not use NAV as a practical expedient and, therefore, are still required to be leveled in the fair value hierarchy — unlike funds that use NAV as a practical expedient

6) Closed-ended registered mutual funds (e.g., exchange-traded funds) traded on active markets (the exchange price may represent a Level 1 input)

7) Many government-backed to-be-announced securities (TBAs)

Question 62

Level 2 inputs include: (3)

Answer 62

1) A dealer quote for a non-liquid security, provided the dealer is standing ready and able to transact

2) Posted or published clearing prices, if corroborated with market transactions

3) Vendor or broker provided indicative prices, if due diligence by the reporting entity indicates such prices were developed using observable market data

Question 63

5 Examples of instruments that are typically Level 2 measurements include:

Answer 63

1) Most US public debt
2) Short-term cash instruments
3) Certain derivative products
4) Off-the-run Treasury bills, bonds and notes 2
5) Mortgage-backed securities when valued by adjusting the quoted prices of TBAs)

Question 64

Inputs that are typically unobservable and considered Level 3 include: (3)

Answer 64

1) Inputs obtained from broker quotes that are indicative (i.e., not firm and able to be transacted upon) or not corroborated with market transactions

2) Management assumptions that cannot be corroborated with observable market data

3) Vendor-provided prices, not corroborated by market transactions

Question 65

4 Examples of instruments that are typically Level 3 measurements include:

Answer 65

1) Complex instruments, such as longer-dated interest rate and currency swaps and structured derivatives

2) Fixed income asset-backed securities, depending on the specific asset owned (i.e., the specific tranche), the nature of the valuation model used, and whether the inputs are observable

3) Impairment testing of goodwill or indefinite-lived intangible assets

4) Contingent consideration

Question 66

Auditing Fair Value Measurements Steps: (4)

Answer 66

1) Obtain an understanding of how management makes the fair value measurements.

2) Consider whether specialized skills or knowledge are required.

3) Test the entity’s fair value measurements.

4) Evaluate the reasonableness of the fair value measurements.

Question 67

Vouch a sample of entries in the cash receipts journal to remittance advices, daily deposit slips, and bank statement

What assertion?

Answer 67

Occurence

Question 68

Vouch a sample of entries from the cash disbursements journal to canceled checks, voucher packet, and bank statement

What assertion?

Answer 68

Occurence

Question 69

Trace a sample of remittance advices to cash receipts journal and, if necessary, to deposit slips

What assertion?

Answer 69

Completeness

Question 70

Trace a sample of canceled checks to the cash disbursements journal

What assertion?

Answer 70

Completeness

Question 71

For a sample of days, examine the signature on the deposit slip and the check endorsements for proper authorization

What assertion?

Answer 71

Authorization

Question 72

Examine a sample of canceled checks for authorized signature and proper endorsement

What assertion?

Answer 72

Authorization

Question 73

For a sample of daily deposits, foot the remittance advices and entries on the deposit slip and agree to the cash receipts journal and bank statement

What assertions?

Answer 73

Accuracy

Question 74

For a sample of weeks, foot the cash receipts journal and agree posting to the general ledger

What assertions?

Answer 74

Accuracy

Question 75

For a sample of voucher packets, agree amounts in purchase order, receiving report, invoice, canceled check, and disbursement journal

What assertions?

Answer 75

Accuracy

Question 76

For a sample of weeks, foot the cash disbursements journal and agree posting to the general ledger

What assertions?

Answer 76

Accuracy

Question 77

Compare the dates for recording a sample of cash receipts transactions in the cash receipts journal with the dates the cash was deposited in the bank (note any significant delays)

What assertions?

Answer 77

Cutoff

Question 78

Observe cash on hand for the last day of the year, and trace deposits to cash receipts journal and cutoff bank statement

What assertions?

Answer 78

Cutoff

Question 79

Compare the dates for a sample of checks with the dates the checks cleared the bank (note any significant delays)

What assertions?

Answer 79

Cutoff

Question 80

Record the last check issued on the last day of the year, and trace to cash disbursements journal

What assertions?

Answer 80

Cutoff

Question 81

Examine a sample of remittance advices for proper account classification

What assertions?

Answer 81

Classification

Question 82

Examine a sample of canceled checks for proper account classification

What assertions?

Answer 82

Classification

Question 83

Procedure- Verify the mathematical accuracy and agree the balance per the books to the general ledger.

a) What assertions are tested by the procedure?
b) What errors are detected by procedure?

Answer 83

a) Test the accuracy and completeness of the cash account balance.
b) Cash balance incorrectly reported on the general ledger.

Question 84

Procedure- Agree the bank balance on the reconciliation with the balance shown on the standard bank confirmation.

a) What assertions are tested by the procedure?
b) What errors are detected by procedure?

Answer 84

a) Test the accuracy of the bank balance.
b) Bank balance incorrectly listed on the bank reconciliation.

Question 85

Procedure- Trace the deposits in transit on the bank reconciliation to the cutoff bank statement.

a) What assertions are tested by the procedure?
b) What errors are detected by procedure?

Answer 85

a) Test cutoff and accuracy of each deposit; existence of cash account balance.
b) Deposits recorded in incorrect period or at an incorrect amount. Cash overstated.

Question 86

Procedure- Agree any charges included on the bank statement to the bank reconciliation.

a) What assertions are tested by the procedure?
b) What errors are detected by procedure?

Answer 86

a) Test cutoff and accuracy of bank charges; completeness of cash account balance.
b) Charges/adjustments are recorded in incorrect period or at an incorrect amount. Cash overstated.

Question 87

Procedure- Agree the adjusted book balance to the cash account lead schedule.

a) What assertions are tested by the procedure?
b) What errors are detected by procedure?

Answer 87

a) Test the accuracy and completeness of the cash account balance.
b) Cash balance incorrectly reported on the general ledger.

Question 88

Who prepares a bank reconciliation?

Answer 88

The company

Question 89

Standard Bank Confirmation has who’s name on it, the auditor or the client?

Answer 89

Client (Company name)

Question 90

Sample canceled checks contained in the cutoff bank statement to determine if properly included or excluded in outstanding checks on the bank reconciliation comparing proper payee, amount, and endorsement.

a) What assertions are tested by the procedure?
b) What errors are detected by procedure?

Answer 90

a) Test cutoff and accuracy of outstanding checks; completeness of cash account balance
b) Checks are recorded in incorrect period at an incorrect amount. Cash overstated.

Question 91

(T/F) Auditors have to report investments at FMV

Answer 91

TRUE

Question 92

Which procedure would you use to check the balance per book?

1. Trace to cash receipts journal.
2. Trace to cash disbursements journal.
3. Compare to 9/30/2021 general ledger
4. Directly confirm with bank.
5. Ascertain reason for unusual delay.
6. Inspect supporting documents for reconciling item not appearing on cutoff statement.
7. Vouch items on bank reconciliation to cutoft statement.
8. Vouch items on the cutoff statement to bank reconciliation

Answer 92

4. Directly confirm with bank.

Question 93

Which 5 procedures would you use to check the deposit in transit?

1. Trace to cash receipts journal.
2. Trace to cash disbursements journal.
3. Compare to 9/30/2021 general ledger
4. Directly confirm with bank.
5. Ascertain reason for unusual delay.
6. Inspect supporting documents for reconciling item not appearing on cutoff statement.
7. Vouch items on bank reconciliation to cutoft statement.
8. Vouch items on the cutoff statement to bank reconciliation

Answer 93

1. Trace to cash receipts journal.
2. Ascertain reason for unusual delay.
3. Inspect supporting documents for reconciling item not appearing on cutoff statement.
4. Vouch items on bank reconciliation to cutoft statement.
5. Vouch items on the cutoff statement to bank reconciliation

Question 94

Which 5 procedures would you use to check the outstanding checks?

1. Trace to cash receipts journal.
2. Trace to cash disbursements journal.
3. Compare to 9/30/2021 general ledger
4. Directly confirm with bank.
5. Ascertain reason for unusual delay.
6. Inspect supporting documents for reconciling item not appearing on cutoff statement.
7. Vouch items on bank reconciliation to cutoft statement.
8. Vouch items on the cutoff statement to bank reconciliation

Answer 94

2. Trace to cash disbursements journal.
3. Ascertain reason for unusual delay.
4. Inspect supporting documents for reconciling item not appearing on cutoff statement.
5. Vouch items on bank reconciliation to cutoft statement.
6. Vouch items on the cutoff statement to bank reconciliation

Question 95

Which procedure would you use to check the error?

1. Trace to cash receipts journal.
2. Trace to cash disbursements journal.
3. Compare to 9/30/2021 general ledger
4. Directly confirm with bank.
5. Ascertain reason for unusual delay.
6. Inspect supporting documents for reconciling item not appearing on cutoff statement.
7. Vouch items on bank reconciliation to cutoft statement.
8. Vouch items on the cutoff statement to bank reconciliation

Answer 95

7. Vouch items on bank reconciliation to cutoft statement.

Question 96

Which procedure would you use to check the final balance per books?

1. Trace to cash receipts journal.
2. Trace to cash disbursements journal.
3. Compare to 9/30/2021 general ledger
4. Directly confirm with bank.
5. Ascertain reason for unusual delay.
6. Inspect supporting documents for reconciling item not appearing on cutoff statement.
7. Vouch items on bank reconciliation to cutoft statement.
8. Vouch items on the cutoff statement to bank reconciliation

Answer 96

3. Compare to 9/30/2021 general ledger

Question 97

Phung then prepared the following partial audit program of substantive audit procedures
1. foot and cross foot the analyses
2. Trace the September 30 balances to the general ledger and financial statements
3. Trace the beginning balances to the prior-year’s working papers.
4. Obtain positive confirmation of the investments held by an independent custodian as of the balance sheet date
5. Determine that income from investments has been properly recorded as accrued or collected by reference to published sources, by computation, and by tracing to recorded amounts.
6. For investments in nonpublic entities. compare carrying value to information in the most recently available audited financial statements.
7. Determine that all transfers among held-to-maturity, trading, an available-or-sale securities nave been properly authorized and recorded.
8. Determine that any other-than-temporary decline in the price of an investment has been properly recorded.

Required:
For procedures 4-8, identify the primary financial statement assertion relative to investments that would be addressed by each
procedure

Answer 97

4. Obtain positive confirmation of the investments held by an independent custodian as of the balance sheet date -> existence or occurrence
5. Determine that income from investments has been properly recorded as accrued or collected by reference to published sources, by computation, and by tracing to recorded amounts.
   -> completeness
6. For investments in nonpublic entities. compare carrying value to information in the most recently available audited financial statements.
   -> accuracy, valuation, & allocation
7. Determine that all transfers among held-to-maturity, trading, an available-or-sale securities nave been properly authorized and recorded.
   -> authorization, presentation, & classification
8. Determine that any other-than-temporary decline in the price of an investment has been properly recorded.
   -> accuracy, valuation, & allocation

Question 98

Phung then prepared the following partial audit program of substantive audit procedures
1. foot and cross foot the analyses
2. Trace the September 30 balances to the general ledger and financial statements
3. Trace the beginning balances to the prior-year’s working papers.
4. Obtain positive confirmation of the investments held by an independent custodian as of the balance sheet date
5. Determine that income from investments has been properly recorded as accrued or collected by reference to published sources, by computation, and by tracing to recorded amounts.
6. For investments in nonpublic entities. compare carrying value to information in the most recently available audited financial statements.
7. Determine that all transfers among held-to-maturity, trading, an available-or-sale securities nave been properly authorized and recorded.
8. Determine that any other-than-temporary decline in the price of an investment has been properly recorded.

Required:
Describe three additional substantive auditing procedures Phung should consider in auditing Vernon investments.

Answer 98

Inspect securities on hand in the presence of the custodian.
* Examine supporting evidence (broker’s advices, etc.) for transactions between the balance sheet
date and the inspection date.
* Obtain confirmation from the issuers or trustees of investments in nonpublic entities.
* Examine contractual terms of debt securities and preferred stock.
* Determine if the board of directors or its designee properly approved sales and purchases.
* Examine broker’s advices in support of transactions or confirm transactions with broker.
* Determine if gains and losses on dispositions have been properly computed.
* Trace payments for purchases to canceled checks and proceeds from sales to entries in the cash
receipts journal.
* Determine if the amortization of premium or discount on bonds has been properly computed.
* Determine if trading securities and available-for-sale securities are properly valued and any
unrealized gains and losses are properly accounted for.
* Ascertain whether any investments are pledged as collateral or encumbered by liens and, if so,
are properly disclosed.

Question 99

Required:
For the specific assertion, select the most appropriate procedure.

Assertion: “Verify that investments are properly described and classified in the financial statements (presentation and disclosure-classification).”

Audit Procedures:
1. Vouch opening balances in the subsidiary ledgers to the prior-year’s audit working papers
2. Determine that employees who are authorized to se investments do not have access to cash
3. Examine supporting documents for a sample of investment transactions to verify that pre-numbered documents are used
4. Determine that any impairments in the price of investments have been properly recorded
5. Verify that transfers from the current to the non-current investment portfolio have been properly recorded
6. Obtain positive confirmations as of the balance sheet date of investments held by independent custodians
7. Trace investment transactions to minutes of board of directors meetings to determine that transactions were properly authorized

Answer 99

5. Verify that transfers from the current to the non-current investment portfolio have been properly recorded

Question 100

Required:
For the specific assertion, select the most appropriate procedure.

Assertion: “Verify that recorded investments represent investments actually owned at the balance sheet date 
(rights and obligations).”

Audit Procedures:
1. Vouch opening balances in the subsidiary ledgers to the prior-year’s audit working papers
2. Determine that employees who are authorized to se investments do not have access to cash
3. Examine supporting documents for a sample of investment transactions to verify that pre-numbered documents are used
4. Determine that any impairments in the price of investments have been properly recorded
5. Verify that transfers from the current to the non-current investment portfolio have been properly recorded
6. Obtain positive confirmations as of the balance sheet date of investments held by independent custodians
7. Trace investment transactions to minutes of board of directors meetings to determine that transactions were properly authorized

Answer 100

6. Obtain positive confirmations as of the balance sheet date of investments held by independent custodians

Question 101

Required:
For the specific assertion, select the most appropriate procedure.

Assertion: “ Verify that investments are properly valued at the lower of cost or market at the balance sheet date (valuation and allocation).”

Audit Procedures:
1. Vouch opening balances in the subsidiary ledgers to the prior-year’s audit working papers
2. Determine that employees who are authorized to se investments do not have access to cash
3. Examine supporting documents for a sample of investment transactions to verify that pre-numbered documents are used
4. Determine that any impairments in the price of investments have been properly recorded
5. Verify that transfers from the current to the non-current investment portfolio have been properly recorded
6. Obtain positive confirmations as of the balance sheet date of investments held by independent custodians
7. Trace investment transactions to minutes of board of directors meetings to determine that transactions were properly authorized

Answer 101

4. Determine that any impairments in the price of investments have been properly recorded

Question 102

Spencer, CPA, has been engaged to audit the fair value measurements of Christensen & Son. a high-tech company in the Midwest. During the audit, Spencer must obtain evidence that management of Christensen & Son has appropriately valued the following two accounts:
1. Available-for Sale Stock Portfolio, containing investments in Fortune 100 company stocks
2. Stock compensation expense related to stock options granted to Christensen’s employees as valued by the Black-Scholes option-pricing model. Christensen s stock is largely held by the owners and neither the company’s stock nor the related stock options are actively traded

Required:
Identify the fair value inputs to the value of each account.

Answer 102

Stock portfolio inputs: Current Stock Prices

Option Expense inputs: Current stock price; risk-free rate; dividend-yield; exercise price; time; standard deviation.

Question 103

Spencer, CPA, has been engaged to audit the fair value measurements of Christensen & Son. a high-tech company in the Midwest. During the audit, Spencer must obtain evidence that management of Christensen & Son has appropriately valued the following two accounts:
1. Available-for Sale Stock Portfolio, containing investments in Fortune 100 company stocks
2. Stock compensation expense related to stock options granted to Christensen’s employees as valued by the Black-Scholes option-pricing model. Christensen s stock is largely held by the owners and neither the company’s stock nor the related stock options are actively traded

Required:
Identify the valuation levels for each of the identified inputs as well as the account as a whole (i.e.. Level 1, 
Level 2, or Level 3).

Answer 103

Stock portfolio: Level 1
* Stock Price: Level 1

Stock Compensation Expense: Level 2 or 3
* Current Stock Price: Level 2
* Risk-free Rate: Could be Levels 2 or 3 depending on whether management claims a rate
difference from that commonly used by the industry.
* Dividend-Yield: Level 2
* Exercise Price: Level 2
* Time: Level 2
* Standard Deviation: Level 2 or Level 3

Question 104

Spencer, CPA, has been engaged to audit the fair value measurements of Christensen & Son. a high-tech company in the Midwest. During the audit, Spencer must obtain evidence that management of Christensen & Son has appropriately valued the following two accounts:
1. Available-for Sale Stock Portfolio, containing investments in Fortune 100 company stocks
2. Stock compensation expense related to stock options granted to Christensen’s employees as valued by the Black-Scholes option-pricing model. Christensen s stock is largely held by the owners and neither the company’s stock nor the related stock options are actively traded

Required:
Create a summary audit plan, by account, for how Spencer can obtain assurance regarding the fair value of each of the inputs

Answer 104

Audit Plan: Stock portfolio
* Verify that stock prices listed by company are accurate according to NYSE ticker quotes as of period-end.

Audit Plan: Stock Compensation Expense
* Verify that risk-free rate as used by the entity is consistent with quoted Treasury bill prices as of 12/31.
* Verify that standard deviation as used by the entity is consistent with market information about previous fluctuations in the stock price.
* Perform sensitivity analysis to see how much small changes in these inputs would impact the overall stock compensation expense listed on the financial statements.
* Tie out inputs to the model, verify model’s accuracy, trace model outcome to accounting records.
* Consider qualifications and competence of person(s) computing the valuation for the entity.
* Consider past history of input estimates; has the company’s process yielded reasonable results
or have they tended to be aggressive or conservative?
* Consider involving an option valuation specialist.
* Develop independent estimate of fair value.
* Review subsequent events.
* Determine appropriateness of valuation techniques considering the current market environment.

Question 105

Which audit assertion is seldom assessed as high risk in the audit of the cash balance?
A. Rights and Obligations.
B. Existence.
C. Completeness.
D. Accuracy, Valuation, and Allocation.

Answer 105

A. Rights and Obligations.

Question 106

Which of the following cash transfers results in a misstatement of cash at December 31?
A. Operating Account (Recorded by Client = Dec 30, Paid by Bank = Dec 31) & Payroll Account ( Recorded by Client = Dec 31, Received by Bank = Jan 1)
B. Operating Account (Recorded by Client = Jan 4, Paid by Bank = Jan 3) & Payroll Account ( Recorded by Client = Jan 3, Received by Bank = Jan 4)
C. Operating Account (Recorded by Client = Jan 2, Paid by Bank = Jan 4) & Payroll Account ( Recorded by Client = Dec 31, Received by Bank = Jan 4)
D. C. Operating Account (Recorded by Client = Dec 31, Paid by Bank = Jan 5) & Payroll Account ( Recorded by Client = Dec 31, Received by Bank = Jan 4)

Answer 106

C. Operating Account (Recorded by Client = Jan 2, Paid by Bank = Jan 4) & Payroll Account ( Recorded by Client = Dec 31, Received by Bank = Jan 4)

Question 107

Match the audit procedure with the appropriate assertion(s) substantiated (tested) by the procedure. Each item (A-D) may be used once, more than once, or not at all.
A. Test cutoff and accuracy of each deposit.
B. Test cutoff and accuracy of each transaction.
C. Test the accuracy of the bank balance.
D. Test the classification of the bank balance

Audit Procedure: Agree the bank balance on the bank reconciliation with the balance shown on the standard bank confirmation

Answer 107

C. Test the accuracy of the bank balance.

Question 108

Match the audit procedure with the appropriate assertion(s) substantiated (tested) by the procedure. Each item (A-D) may be used once, more than once, or not at all.
A. Test cutoff and accuracy of each deposit.
B. Test cutoff and accuracy of each transaction.
C. Test the accuracy of the bank balance.
D. Test the classification of the bank balance

Audit Procedure: Trace the deposits in transit on the bank reconciliation to the cutoff bank statement

Answer 108

A. Test cutoff and accuracy of each deposit.

Question 109

An auditor ordinarily sends a standard confirmation request to all banks with which the entity has done business during the year under audit, regardless of the year-end balance. One purpose of this procedure is to:
A. seek information about loans from the banks.
B. detect kiting activities that may otherwise not be discovered.
C. request that a cutoff bank statement and related checks be sent to the auditor.
D. provide the data necessary to prepare a proof of cash.

Answer 109

A. seek information about loans from the banks.

Question 110

Match the audit procedure with the appropriate assertion(s) substantiated (tested) by the procedure. Each item (A-D) may be used once, more than once, or not at all.
E. Test cutoff and accuracy of each deposit.
F. Test cutoff and accuracy of each transaction.
G. Test the accuracy of the bank balance.
H. Test the classification of the bank balance.

Audit Procedure: Trace the deposits in transit on the bank reconciliation to the cutoff bank statement

Answer 110

E. Test cutoff and accuracy of each deposit.

Question 111

Match the audit procedure with the appropriate assertion(s) substantiated (tested) by the procedure. Each item (A-D) may be used once, more than once, or not at all.
E. Test cutoff and accuracy of each deposit.
F. Test cutoff and accuracy of each transaction.
G. Test the accuracy of the bank balance.
H. Test the classification of the bank balance.

Audit Procedure: Agree any charges included on the cutoff bank statement to the bank reconciliation.

Answer 111

F. Test cutoff and accuracy of each transaction.

Question 112

The audit firm’s valuation specialist would likely be brought in to assist in the audit of fair value measurements at an entity when the following is present:
A. the entity owns a large and diverse portfolio of publicly traded stock.
B. the entity has a financial instrument with a Level 2 input.
C. significant uncertainty exists in key inputs to the entity’s valuation models.
D. the entity is a new audit client.

Answer 112

C. significant uncertainty exists in key inputs to the entity’s valuation models.

Question 113

What is the primary assertion that guides our audit risk over outstanding checks?

Answer 113

Completeness (of checks listed on the OS list)

Question 114

What is the risk of misstatement associated with outstanding checks (As an auditor, are you more concerned with overstatement or understatement of cash, and how could management achieve this via outstanding checks)?

Answer 114

Management will not include outstanding checks on the cash reconciliation.

Which will allow them to overstate the cash balance.

Question 115

Design a substantive procedure to perform on outstanding checks when auditing cash:

Answer 115

Pull a sample of cancelled checks contained in the cutoff bank statement. Compare proper payee, amount, and endorsement to determine if they have been properly or improperly included or excluded in outstanding checks.