Chapter 17

Question 1

Def: general cash account

Answer 1

the primary bank account for most organizations; almost all cash receipts and disbursement go through here

Question 2

purpose of general cash account (2)

Answer 2

1. make payments and record cash received from operations

2. small companies who only have one account have this one

Question 3

def: imprest payroll account

Answer 3

bank account to which the exact amount of payroll for pay period is transferred from general cash account + sometimes a fixed balance

Question 4

purpose of imprest payroll account

Answer 4

1. used to pay employees and remittances to CRA

2. helps improve control over cash and reduce time to reconcile bank accounts

Question 5

def: branch bank account

Answer 5

separate bank account at a local bank ; could be either general or imprest

Question 6

purpose of branch bank account

Answer 6

1. provides more rapid deposits and/or payments at the local level
2. builds business relationships with local banks

Question 7

def: imprest petty cash fund

Answer 7

a fund of cash maintained within the company for small cash payments and reimbursed periodically

Question 8

purpose of imprest petty cash fund

Answer 8

small cash purchases that can be paid more conveniently and quickly by cash then cheque

Question 9

def: cash equivalents

Answer 9

short term, highly liquid investments (such as term deposits) that have a known value and an insignificant risk of change

Question 10

a liability also used as cash equivalents

Answer 10

bank overdrafts

Question 11

purpose of cash equivalents

Answer 11

used to manage fluctuating cash balances so that cash is available for short term operating needs

Question 12

how to verify petty cash?

Answer 12

test petty cash transactions rather than the ending balance

Question 13

important part of testing petty cash is

Answer 13

determining the client’s procedures for handling the funds

Question 14

how to determine the clients procedures?

Answer 14

discuss internal control with the custodian and examine documentation of a few transactions

Question 15

two most common procedures to test petty cash

Answer 15

counting the petty cash balance and carrying out detailed tests of 1-2 reimbursement transactions

Question 16

when assessing inherent risk, the auditor should consider if the client has

Answer 16

cash flow problems in meeting its current obligations on a timely basis or any debt covenants or regulatory requirements

Question 17

inherent risk for cash is

Answer 17

high because it is more susceptible to theft than other assets

Question 18

the auditing of cash is

Answer 18

easy because there aren’t many estimates except for forex transactions

Question 19

most important internal control for cash is

Answer 19

independent bank reconciliations

Question 20

internal controls over cash receipts and disbursements are key in assessing

Answer 20

control risk

Question 21

individuals who have incompatible functions granted to them using computer systems would results in

Answer 21

control risk being high

Question 22

two kinds of electronic payments

Answer 22

EDI and EFT

Question 23

EDI stands for

Answer 23

electronic data interchange

Question 24

EFT stands for

Answer 24

electronic fund transfer

Question 25

having EDI or EFT improves

Answer 25

internal controls since there is no cash handling by employees

Question 26

2 things to make sure the org has with EDI and EFT

Answer 26

only authorized amounts are set up for payment and all automatic withdrawals are recorded in the period made

Question 27

internal controls over the year end cash balances in the general account can be divided into 2

Answer 27

1. controls over the transaction cycles affecting the recording of cash receipts and disbursements 2. independent bank reconciliations 3. having a responsible employee to review the monthly reconciliations asap

Question 28

def: standard bank confirmation form

Answer 28

a form approved by CPA Canada and the Canadian banker association through which the bank responds to the auditor's request for information about the client's bank balances, loan and other

Question 29

when to do extended tests of year end bank reconciliation?

Answer 29

when the auditor believes that the year end bank rec may be intentionally misstated

Question 30

purpose of extended procedures

Answer 30

verify whether all transactions included in the journals for the last month of the year were correctly included in or excluded from the bank rec and all items in it were correctly included

Question 31

when to prepare proof of cash

Answer 31

when the client has material internal control weaknesses in cash

Question 32

def: proof of cash

Answer 32

four column working paper used to reconcile the banks' records of the client beg balance, cash deposits, cleared cheques and ending balance for the period

Question 33

the auditor uses a proof of cash to determine whether the following occurred (4)

Answer 33

1. all recorded cash receipts were deposited 2. all deposits in the bank were recorded in the accounting records 3. all recorded cash disbursements were paid by the bank 4. all amounts that were paid by the bank were recorded

Question 34

def: kiting

Answer 34

transferring money from one bank to another and improperly recording to the transaction

Question 35

what is the goal of kiting

Answer 35

overstating cash

Question 36

how to test for kiting?

Answer 36

auditors list all bank transfers made a few days before and after the balance sheet date and trace each to the accounting records for proper recording

Question 37

how does lapping occur?

Answer 37

same person that handles cash, record A/R and receives cash

Question 38

most cases of lapping can be prevented with good controls

Answer 38

segregation and rotation

Question 39

why do we need bank confirmations?

Answer 39

1. reach out to the bank and ask how much money is in the bank 2. bank sends out to auditor bypassing the client 3. usually done electronically

Question 40

how many items should be tested when auditing a bank rec

Answer 40

ALL audit items except for the true balance

Question 41

how to test bank balance?

Answer 41

direct confirmation with teh bank

Question 42

how to test deposit in transit?

Answer 42

following month statement | cash receipts or disbursement

Question 43

how to test outstanding cheque?

Answer 43

journal, copy of deposit or cheque as back up

Question 44

how to test for bank error

Answer 44

current bank statement, copy of actual receipt

Question 45

how to test book balance?

Answer 45

compare with general ledger

Question 46

how to test interest earned?

Answer 46

current bank statement

Question 47

how to test NSF cheque?

Answer 47

current bank statement, copy cheque, note from bank

Question 48

how to test recording error

Answer 48

current banking statement, copy of cheque or deposit, journal entry

Question 49

receivables collected through banks

Answer 49

current bank statement, copy of payment and bank credit memo