Chapter 23

Question 1

Which of the following misstatements is most likely to be uncovered during an audit of a client’s
bank reconciliation?
a. Duplicate payment of a vendor’s invoice.
b. Billing a customer at a lower price than indicated by company policy.
c. Failure to record a collection of a note receivable by the bank on the client’s behalf.
d. Payment to an employee for more than the hours actually worked.

Answer 1

c. Failure to record a collection of a note receivable by the bank on the client’s behalf.

Question 2

Which of the following is the focus of an audit of cash for most companies?

a. General cash account.
b. Payroll cash account.
c. Petty cash account.
d. Money market account.

Answer 2

a. General cash account.

Question 3

The test of details of balances procedure that requires the auditor to foot the outstanding check
list and deposits in transit is an attempt to satisfy which audit objective?
a. Cutoff.
b. Presentation and disclosure.
c. Detail tie-in.
d. Completeness.

Answer 3

c. Detail tie-in.

Question 4

Which of the following cycles does not affect cash in bank?

a. Capital acquisitions cycle.
b. Inventory and warehousing.
c. Payroll and personnel cycle.
d. Acquisitions and disbursements.

Answer 4

b. Inventory and warehousing.

Question 5

The audit objective of determining that cash in bank, as stated on the reconciliation, foots
correctly and agrees with the general ledger can be tested by which of the following procedures?
a. Performing tests for kiting.
b. Receiving and testing a cutoff bank statement.
c. Footing the outstanding checks list and the list of deposits in transit.
d. Examining the minutes of the board of directors for restrictions on the use of cash.

Answer 5

c. Footing the outstanding checks list and the list of deposits in transit.

Question 6

The test details of balances procedure that requires the auditor to trace the book balance on the
reconciliation to the general ledger is an attempt to satisfy the audit objective of:
a. detail tie-in.
b. existence.
c. completeness.
d. accuracy.

Answer 6

a. detail tie-in.

Question 7

Which of the following statements is correct?
a. Auditors must obtain bank confirmations on every audit.
b. Auditors obtain bank confirmations at their discretion.
c. Auditing standards do not address specific requirements regarding bank confirmations.
d. Auditing standards do not require bank confirmations except when there is an unusually
large number of inactive bank accounts.

Answer 7

d. Auditing standards do not require bank confirmations except when there is an unusually
large number of inactive bank accounts.

Question 8

Cash is important to auditors primarily because of the potential for:

a. errors.
b. fraud.
c. liquidity.
d. expenditures.

Answer 8

b. fraud.

Question 9

A partial-period bank statement and the related canceled checks, duplicate deposit slips, and
other documents included in bank statements, mailed by the bank directly to the CPA firm’s
office, is called:
a. a four-column proof of cash.
b. a year-end bank statement.
c. a cutoff bank statement.
d. a short-period bank statement.

Answer 9

c. a cutoff bank statement.

Question 10

When the auditor believes the year-end bank reconciliation may be intentionally misstated, it is
appropriate to perform extended tests of the year-end bank reconciliation. Assuming the client
has a October 31 year-end, these extended tests would not include:
a. comparing all September 30 reconciling items with canceled checks and other
documents in the October bank statement.
b. comparing all canceled checks and deposit slips in the October bank statement with the
October cash disbursements and receipts records.
c. carrying out all proper procedures subsequent to the end of the year with the use of the
bank cutoff statement.
d. determining that all outstanding checks had cleared by the date of the bank cutoff
statement.

Answer 10

d. determining that all outstanding checks had cleared by the date of the bank cutoff
statement.

Question 11

Which of the following statements is correct?
a. Bank personnel are responsible for providing reasonable assurance that a response to a
bank confirmation is accurate.
b. Bank personnel are responsible for providing complete assurance that a bank
confirmation is complete.
c. Bank personnel are not responsible for searching their records for bank balances or
loans beyond those included on the bank confirmation.
d. Bank personnel are not responsible for providing information related to interest on the
bank confirmation.

Answer 11

c. Bank personnel are not responsible for searching their records for bank balances or
loans beyond those included on the bank confirmation.

Question 12

The auditor uses a proof of cash to determine whether:
(All recorded cash disbursements were
paid by the bank/
All amounts that were paid by the bank
were recorded.)
a. Yes Yes
b. No No
c. Yes No
d. No Yes

Answer 12

a. Yes Yes

Question 13

Which of the following would normally not be discovered as part of the audit of the bank
reconciliation?
a. Failure to bill a customer.
b. Failure to include a deposit in transit on the bank reconciliation.
c. Duplicate payment of a vendor’s invoice.
d. Payment to an employee for more hours than she worked.

Answer 13

b. Failure to include a deposit in transit on the bank reconciliation.

Question 14

A proof of cash represents:

a. a test of controls and substantive test of transactions.
b. a substantive test of transactions.
c. a substantive test of transactions and test of details of balances.
d. a test of details of balances.

Answer 14

c. a substantive test of transactions and test of details of balances.

Question 15

To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would
examine all of the following except the:
a. general ledger.
b. bank confirmation.
c. cutoff bank statement.
d. year-end bank statement.

Answer 15

a. general ledger.

Question 16

Which of the following balance-related audit objectives typically is assessed as having high
inherent risk for cash?
a. Existence.
b. Cutoff.
c. Detail tie-in.
d. Presentation and disclosure.

Answer 16

a. Existence.

Question 17

Which of the following is not a “cash equivalent”?

a. Time deposits.
b. Certificates of deposit.
c. Money market funds.
d. Marketable securities.

Answer 17

d. Marketable securities.

Question 18

The general cash account is considered significant in almost all audits:

a. where the ending balance is material.
b. even when the ending balance is immaterial.
c. except those of not-for-profit organizations.
d. where either the beginning or ending balance is material.

Answer 18

b. even when the ending balance is immaterial.

Question 19

Which of the following errors would be least likely to be discovered during the audit of the acquisitions and payments cycle?

a. Duplicate payment of a vendor’s invoice.
b. Improper payments of officers’ personal expenditures.
c. Payment of interest to a related party for an amount in excess of the going rate.
d. Payment for raw materials that were not received.

Answer 19

c. Payment of interest to a related party for an amount in excess of the going rate.

Question 20

Because cash is the most desirable asset for people to steal, it has a higher:

a. control risk.
b. inherent risk.
c. detection risk.
d. liquidity risk.

Answer 20

b. inherent risk.

Question 21

Testing the reasonableness of the cash balance at year-end is less important when the year-end
bank reconciliation is verified:
a. on a 100% basis.
b. by someone in client’s organization who is independent of the treasurer’s function.
c. by someone in client’s organization who is independent of the controller’s function.
d. by the owner/manager.

Answer 21

a. on a 100% basis.

Question 22

A major consideration in the audit of the general cash balance is the possibility of fraud. The
auditor must extend his or her procedures in the audit of year-end cash to determine the
possibility of a material fraud when there are:
a. large cash balances at the end of the year.
b. large cash receipts and disbursements during the year.
c. no imprest accounts used for payroll.
d. inadequate internal controls.

Answer 22

d. inadequate internal controls.

Question 23

The starting point for the verification of the balance in the general bank account is to obtain:

a. a bank reconciliation from the client.
b. the client’s cash account from the general ledger.
c. a cutoff bank statement directly from the bank.
d. the client’s year-end bank statement and reconcile it.

Answer 23

a. a bank reconciliation from the client.

Question 24

An imprest petty cash fund would least likely be used to pay for which of the following items?

a. Minor office supplies
b. Monthly interest expense
c. Stamps for small mailings
d. Small contributions to a local charity

Answer 24

b. Monthly interest expense

Question 25

In an effort to satisfy the completeness objective, the auditor could perform which of the
following test of details of balance procedures?
a. Trace the book balance on the reconciliation to the general ledger.
b. Trace outstanding checks to subsequent period bank statements.
c. Perform a four-column proof of cash.
d. Review financial statements to make sure that material savings accounts and certificates
of deposit are disclosed separately.

Answer 25

c. Perform a four-column proof of cash.

Question 26

The audit procedure which requires the auditor to record the last check number used on the last
day of the year and subsequently trace to the outstanding checks and the cash disbursements
records is performed to satisfy the audit objective of:
a. detail tie-in.
b. existence.
c. completeness.
d. cutoff.

Answer 26

d. cutoff.

Question 27

The direct receipt of a confirmation from every bank with which the client does business is:
a. required by auditing standards for every audit.
b. not necessary unless material fraud is suspected.
c. typically done but not required by auditing standards.
d. necessary for every audit except when there are an unusually large number of active
accounts.

Answer 27

c. typically done but not required by auditing standards.

Question 28

The reason for testing the client’s bank reconciliation is to verify whether the client’s recorded
bank balance is the same amount as the actual cash in bank, except for deposits in transit, checks
outstanding, and other reconciling items. The information needed to complete the tests of the
reconciliation are provided by the:
a. client’s records and ledgers for the year under audit.
b. cutoff bank statement.
c. client’s records and ledgers for the subsequent year.
d. canceled checks for the year under audit.

Answer 28

b. cutoff bank statement.

Question 29

Which of the following items would not normally appear on bank reconciliations?

a. Balance per bank
b. List of deposits in transit
c. Outstanding deposits
d. Outstanding checks

Answer 29

c. Outstanding deposits

Question 30

The concern in a monthly proof of cash is with:

a. adjusting account balances.
b. reconciling the amounts per books and bank.
c. determining the month-end balance.
d. identifying cash transfers.

Answer 30

b. reconciling the amounts per books and bank.

Question 31

A proof of cash is effective at identifying which of the following misstatements?

a. Checks written for incorrect amounts.
b. Checks issued to invalid vendors.
c. Fraudulent checks.
d. Checks recorded by the books for an amount different than the check.

Answer 31

d. Checks recorded by the books for an amount different than the check.

Question 32

The emphasis in verifying petty cash is normally on which of the following?

a. Year-end balance
b. Controls over petty cash
c. Transactions for the period
d. Balance sheet classifications

Answer 32

b. Controls over petty cash

Question 33

The process of transferring money from one bank account to another and improperly recording
the transaction is referred to as:
a. kiting.
b. lapping.
c. scamming.
d. embezzling.

Answer 33

a. kiting.

Question 34

If a bank does not respond to a bank confirmation request, an auditor may:
(Perform alternative
procedures/
Send a second
request/
Ask the client to communicate
with the bank to ask them to complete and return the
confirmation)
a. No Yes Yes
b. No No Yes
c. Yes No Yes
d. Yes Yes No

Answer 34

a. No Yes Yes

Question 35

The most important controls for petty cash relate to:
(The use of a separate bank account/ The use of an imprest fund)
a. Yes Yes
b. No No
c. Yes No
d. No Yes

Answer 35

d. No Yes

Question 36

Which of the following cash transfers results in a misstatement of cash at December 31, 2007?

Bank Transfer Schedule

(Recorded transfer in books/ paid by bank/ Disbursement transfer in books /Recorded date received
by bank)
a. 12/31/071/04/08 12/31/07 12/31/07
b. 1/04/08 1/05/08 12/31/07 1/04/08
c. 12/31/071/05/08 12/31/07 1/04/08
d. 1/04/08 1/11/08 1/04/08 1/04/08

Answer 36

b. 1/04/08 1/05/08 12/31/07 1/04/08

Question 37

_____ is cash stolen from an organization before it is recorded in the accounting records.

a. Theft
b. Cash larceny
c. Skimming
d. Floating

Answer 37

c. Skimming

Question 38

The most important balance-related audit objectives in the audit of cash include all but which of the following?

a. Existence
b. Accuracy
c. Completeness
d. Occurrence

Answer 38

d. Occurrence

Question 39

During his examination of a January 19, 2008 cutoff bank statement, an auditor noticed that the
majority of checks listed as outstanding at December 31, 2007, had not cleared the bank. This
would indicate:
a. a high probability of kiting.
b. a high probability of lapping.
c. that the 2007 cash disbursements records had been closed prior to December 31, 2007.
d. that the 2007 cash disbursements records had been held open past December 31, 2007.

Answer 39

d. that the 2007 cash disbursements records had been held open past December 31, 2007.

Question 40

Which of the following errors would be least likely to be discovered during the tests of the bank
reconciliation?
a. Payment was made to an employee for more hours than he worked.
b. Cash received by the client subsequent to the balance sheet date was recorded as cash
receipts in the current year.
c. Payments on notes payable were debited directly to the bank balance by the bank were
not entered in the client’s records.
d. Deposits were recorded in the cash receipts records near the end of the year, deposited in
the bank, and were included in the bank reconciliation as a deposit in transit.

Answer 40

a. Payment was made to an employee for more hours than he worked.

Question 41

When a customer fails to include a remittance advice with a payment, it is common practice for
the person opening the mail to prepare one. Consequently, mail should be opened by which of
the following four company employees?
a. Receptionist.
b. Sales manager.
c. Credit manager.
d. Accounts receivable clerk.

Answer 41

a. Receptionist.

Question 42

Which of the following balance-related objectives applies to auditing the general cash account?
(Rights/ Classification/ Realizable value)
a. Yes No Yes
b. No Yes No
c. Yes Yes Yes
d. No No No

Answer 42

d. No No No

Question 43

A proof of cash is not an effective procedure for identifying which of the following types of
misstatements?
a. All recorded disbursements were paid by the bank.
b. All recorded cash receipts were deposited.
c. All amounts that were paid by the bank were recorded.
d. Some checks were written for incorrect amounts.

Answer 43

d. Some checks were written for incorrect amounts.

Question 44

The standard bank confirmation form has been agreed upon by the:

a. SEC and FASB.
b. AICPA and the SEC.
c. SEC and the American Bankers’ Association.
d. AICPA and the American Bankers’ Association.

Answer 44

d. AICPA and the American Bankers’ Association.

Question 45

Listing all bank transfers made a few days before and after the balance sheet date and tracing
each to the accounting records for proper recording is a useful approach to test for:
a. kiting.
b. lapping.
c. income smoothing.
d. channel stuffing.

Answer 45

a. kiting.

Question 46

Under which of the following circumstances would an auditor be most likely to intensify an
examination of a $500 imprest petty cash fund?
a. Reimbursement occurs twice each week.
b. The custodian endorses reimbursement checks.
c. Reimbursement vouchers are not prenumbered.
d. The custodian occasionally uses the cash fund to cash employee checks.

Answer 46

a. Reimbursement occurs twice each week.

Question 47

Contact with banks for the purpose of opening company bank accounts should normally be the
responsibility of the corporate:
a. board of directors.
b. treasurer.
c. controller.
d. executive committee.

Answer 47

b. treasurer.

Question 48

On the last day of the fiscal year, the cash disbursements clerk drew a company check on bank A
and deposited the check in the company account in bank B to cover a previous theft of cash. The
disbursement has not been recorded. The auditor will best detect this form of kiting by:
a. examining the composition of deposits in both bank A and bank B subsequent to
year-end.
b. examining paid checks returned with the bank statement of the next account period after
year-end.
c. preparing, from the cash disbursements records, a summary of bank transfers for one
week prior to and subsequent to year-end.
d. comparing the detail of cash receipts as shown by the client’s cash receipts records with
the detail on the confirmed duplicate deposit tickets for three days prior to and subsequent
to year-end.

Answer 48

b. examining paid checks returned with the bank statement of the next account period after
year-end.

Question 49

If an auditor “proves” the bank statement in the month subsequent to the balance sheet date, it is
primarily a test for:
a. errors.
b. omissions.
c. kiting.
d. intentional misstatements.

Answer 49

d. intentional misstatements.