You are on page 1of 50

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

Chapter 16 Auditing the Financing/Investing Process: Cash and Investments


True / False Questions

1. The cash account is affected b a!! of the entit "s business processes. True Fa!se

#. The genera! cash account is norma!! the principa! account used to disburse pa ro!!. True Fa!se

$. An imprest cash account is used for specific purposes and genera!! maintains a ver sma!! ba!ance. True Fa!se

%. The auditor"s use of ana! tica! procedures for auditing cash is !imited. True Fa!se

&. A ma'or contro! that direct! affects the audit of cash is the ban( reconci!iation prepared b the auditor. True Fa!se

6. A cutoff ban( statement is used to verif the propriet of the reconci!ing items sho)n on the ban( reconci!iation. True Fa!se

*. +iting is an audit procedure used to test the accurac of the cash receipts. True Fa!se

16-1

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

,. It is genera!! more efficient to fo!!o) a substantive strateg for auditing investments. True Fa!se

-. If the c!ient maintains custod of its investments. the auditor norma!! e/amines the actua! securities. True Fa!se

10. 1eve! 1 inputs are more ris( and difficu!t to audit than 1eve! $ inputs to a va!uation mode!. True Fa!se

Multiple Choice Questions

11. 2hich of the fo!!o)ing interna! contro!s most !i(e! )ou!d reduce the ris( of diversion of customer receipts b an entit "s emp!o ees3 A. A ban( !oc(bo/ s stem. 4. Prenumbered remittance advices. C. 5onth! ban( reconci!iations. 6. 6ai! deposit of cash receipts.

1#. The !east crucia! e!ement of interna! contro! over cash is A. 7eparation of cash record-(eeping from custod of cash. 4. Preparation of the month! ban( reconci!iation. C. 4atch processing of chec(s. 6. 7eparation of cash receipts from cash disbursements.

1$. 2hich of the fo!!o)ing audit procedures is the most appropriate )hen interna! contro! over cash is )ea( or )hen a c!ient re8uests an investigation of cash transactions3 A. Proof of cash. 4. 4an( reconci!iation. C. Cash confirmation. 6. 9va!uate ratio of cash to current !iabi!ities.

16-#

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

1%. An unrecorded chec( issued during the !ast )ee( of the ear )ou!d most !i(e! be discovered b the auditor )hen the A. Chec( register for the !ast month is revie)ed. 4. Cutoff ban( statement is reconci!ed. C. 4an( confirmation is revie)ed. 6. 7earch for unrecorded !iabi!ities is performed.

1&. 2hich of the fo!!o)ing is one of the better auditing techni8ues that might be used b an auditor to detect (iting bet)een intercompan ban(s3 A. :evie) the composition of authenticated deposit s!ips. 4. :evie) subse8uent ban( statements received direct! from the ban(s. C. Prepare a schedu!e of ban( transfers. 6. Prepare ear-end ban( reconci!iations.

16. An interban( transfer schedu!e A. Is another name for the proof of cash. 4. ;e!ps the auditor test for (iting. C. Is on a standard ban( confirmation. 6. Is used to e/amine c!ient ban( reconci!iations.

1*. If fraud is suspected. auditors ma comp!ete a!! of the fo!!o)ing procedures e/cept: A. Testing for (iting. 4. Footing the ban( reconci!iation and the outstanding chec(s !isting. C. Performing a proof of cash. 6. Performing e/tended ban( reconci!iation procedures. inc!uding detai!ed e/amination of reconci!ing items.

1,. <f the fo!!o)ing. )hich is the most efficient audit procedure for verification of interest earned on bond investments3 A. Tracing interest dec!arations to an independent record boo(. 4. :ecomputing interest earned using the interest rate and bond amount. C. Confirming the interest rate )ith the issuer of the bonds. 6. =ouching the receipt and deposit of interest chec(s.

16-$

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

1-. An auditor testing !ong-term investments )ou!d ordinari! use substantive ana! tica! procedures as the primar audit evidence to support the reasonab!eness of the A. =a!uation of mar(etab!e e8uit securities. 4. C!assification of gains and !osses on the disposa! of securities. C. Comp!eteness of recorded investment income. 6. 9/istence and o)nership of investments.

#0. To satisf the va!uation assertion )hen auditing an investment accounted for b the e8uit method. an auditor most !i(e! )ou!d A. Inspect the stoc( certificates evidencing the investment. 4. 9/amine the audited financia! statements of the investee compan . C. :evie) the bro(er"s advice or cance!ed chec( for the investment"s ac8uisition. 6. <btain mar(et 8uotations from financia! ne)spapers or periodica!s.

#1. An auditor usua!! tests the reasonab!eness of dividend income from investments in stoc( of pub!ic companies b computing the amounts that shou!d have been received b referring to A. 6ividend record boo(s produced b investment advisor services. 4. 7toc( indentures pub!ished b corporate transfer agents. C. 7toc( !edgers maintained b independent registrars. 6. Annua! audited financia! statements issued b the investee companies.

##. 2hich of the fo!!o)ing pairs of accounts )ou!d an auditor most !i(e! ana! >e on the same )or(ing paper3 A. ?otes receivab!e and interest income. 4. Accrued interest receivab!e and accrued interest pa ab!e. C. ?otes pa ab!e and notes receivab!e. 6. Interest income and interest e/pense.

16-%

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

#$. In confirming )ith an outside agent. such as a financia! institution. that the agent is ho!ding investment securities in the c!ient"s name. an auditor most !i(e! gathers evidence in support of management"s financia! statement assertions regarding A. 9/istence. 4. :ights and ob!igations. C. Comp!eteness. 6. A!! of the above.

#%. A!! of the fo!!o)ing can assist the auditor in testing the e/istence assertion for investment securities e/cept: A. Ph sica! e/amination. 4. Comparing fair va!ue to cost. C. Confirmation )ith the issuer. 6. Confirmation )ith the custodian.

#&. An imprest cash account is A. @sed for investing in mar(etab!e securities. 4. The principa! cash account for an entit . C. <ne that contains a stipu!ated amount of mone and is used for !imited purposes. 6. The principa! chec(ing account for a branch of an entit .

#6. An auditor ordinari! shou!d send a standard confirmation re8uest to a!! ban(s )ith )hich the c!ient has done business during the ear under audit. regard!ess of the ear-end ba!ance. because this procedure A. Provides for confirmation regarding compensating ba!ance arrangements. 4. 6etects (iting activities that ma not other)ise be discovered. C. 7ee(s information about indebtedness to the ban(. 6. =erifies securities he!d b the ban( in safe(eeping.

16-&

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

#*. Tracing a samp!e of remittance advices to entries in the cash receipts 'ourna! tests )hich of the fo!!o)ing assertions for cash3 A. <ccurrence. 4. Comp!eteness. C. Authori>ation. 6. Cutoff.

#,. 9/amining a samp!e of cance!!ed chec(s for an authori>ed signature tests )hich of the fo!!o)ing assertions for cash3 A. Authori>ation. 4. Comp!eteness. C. Cutoff. 6. Accurac .

#-. The cashier of 4roo(e Compan covered a shortage in the cash )or(ing fund )ith cash obtained on 6ecember $1 from a !oca! ban( b cashing. but not recording. a chec( dra)n on the compan "s out-of-to)n ban(. ;o) )ou!d the auditor discover this manipu!ation3 A. Confirming a!! 6ecember $1 ban( ba!ances. 4. Counting the cash )or(ing fund at the c!ose of business on 6ecember $1. C. Preparing independent ban( reconci!iations as of 6ecember $1. 6. Preparing and detai! testing a ban( transfer schedu!e.

$0. The auditor shou!d ordinari! mai! confirmation re8uests to a!! ban(s )ith )hich the c!ient has conducted an business during the ear. regard!ess of the ear-end ba!ance. since A. The confirmation form a!so see(s information about indebtedness to the ban(. 4. This procedure )i!! detect (iting activities that )ou!d other)ise not be detected. C. The mai!ing of confirmation forms to a!! such ban(s is re8uired b genera!! accepted auditing standards. 6. This procedure re!ieves the auditor of an responsibi!it )ith respect to nondetection of forged chec(s.

16-6

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

$1. An auditor )ho is engaged to e/amine the financia! statements of a business enterprise )i!! re8uest a cutoff ban( statement primari! to A. =erif the cash ba!ance reported on the ban( confirmation in8uir form. 4. =erif reconci!ing items on the c!ient"s ban( reconci!iation. C. 6etect !apping. 6. 6etect (iting.

$#. An auditor shou!d trace interban( transfers for the !ast part of the audit period and first part of the subse8uent period to detect )hether A. The cash receipts 'ourna! )as he!d open for a fe) da s after the ear-end. 4. The !ast chec(s recorded before the ear end )ere actua!! mai!ed b the ear-end. C. Cash ba!ances )ere overstated because of (iting. 6. An unusua! pa ments to or receipts from re!ated parties occurred.

$$. To gather evidence regarding the ba!ance per ban( in a ban( reconci!iation. an auditor )ou!d e/amine a!! of the fo!!o)ing e/cept the: A. Cutoff ban( statement. 4. Aear-end ban( statement. C. 4an( confirmation. 6. Benera! !edger.

$%. A primar purpose of the proof of cash is to A. Prevent fraud. 4. :econci!e actua! cash receipts and disbursements to budgeted receipts and disbursements. C. Investigate variances from e/pected cash ba!ances. 6. 9nsure that a!! cash receipts recorded in the cash receipts 'ourna! )ere deposited in the ban( account.

16-*

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

$&. A compan has additiona! temporar funds to invest. The 4oard of 6irectors decided to purchase mar(etab!e securities and assigned the future purchase and sa!e decisions to a responsib!e financia! e/ecutive. The best personCsD to ma(e periodic revie)s of the investment activit authori>ed b that e/ecutive shou!d be A. An investment committee of the 4oard of 6irectors. 4. The chief operating officer. C. The corporate contro!!er. 6. The treasurer.

$6. A compan ho!ds bearer bonds as a short-term investment. :esponsibi!it for custod of these bonds and submission of coupons for co!!ections of periodic interest probab! shou!d be de!egated to the A. Chief Accountant. 4. Interna! Auditor. C. Cashier. 6. Treasurer.

$*. 2hich of the fo!!o)ing contro!s )ou!d an entit most !i(e! use in safeguarding against the !oss of mar(etab!e securities3 A. An independent trust compan that has no direct contact )ith the emp!o ees )ho have record(eeping responsibi!ities has possession of the securities. 4. The interna! auditor verifies the mar(etab!e securities in the entit "s safe each ear on the ba!ance sheet date. C. The independent auditor traces a!! purchases and sa!es of mar(etab!e securities through the subsidiar !edgers to the genera! !edger. 6. A designated member of the board of directors contro!s the securities in a ban( safedeposit bo/.

16-,

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

$,. 2hich of the fo!!o)ing procedures most !i(e! )ou!d give the greatest assurance that securities he!d as investments are safeguarded3 A. There is no access to securities bet)een the ear-end and the date of the auditor"s securit count. 4. Proceeds from the sa!e of investments are received b an emp!o ee )ho does not have access to securities. C. Investment ac8uisitions are authori>ed b a member of the 4oard of 6irectors before e/ecution. 6. Access to securities re8uires the presence of t)o designated officia!s.

$-. 2hich one of the fo!!o)ing )ou!d the auditor consider to be an incompatib!e operation if the cashier receives remittances from the mai!room3 A. The cashier posts the receipts to the accounts receivab!e subsidiar !edger cards. 4. The cashier ma(es the dai! deposit at a !oca! ban(. C. The cashier prepares the dai! deposit. 6. The cashier endorses the chec(s.

%0. 2hen an entit uses a trust compan as custodian of its mar(etab!e securities. the possibi!it of concea!ing fraud most !i(e! )ou!d be reduced if the A. Trust compan has no direct contact )ith the entit emp!o ees responsib!e for maintaining investment accounting records. 4. 7ecurities are registered in the name of the trust compan . rather than the entit itse!f. C. Interest and dividend chec(s are mai!ed direct! to an entit emp!o ee )ho is authori>ed to se!! securities. 6. Trust compan p!aces the securities in a ban( safe-deposit vau!t under the custodian"s e/c!usive contro!.

%1. In a manufacturing compan . )hich one of the fo!!o)ing audit procedures )ou!d give the !east assurance for the e/istence of the genera! !edger ba!ance of investment in stoc(s and bonds at the audit date3 A. Confirmation from the bro(er. 4. Inspection and count of stoc(s and bonds. C. =ouching a!! changes during the ear to bro(ers" advices and statements. 6. 9/amination of cance!ed chec(s issued in pa ment of securities purchased.

16--

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

%#. The auditor shou!d insist that a representative of the c!ient be present during the ph sica! e/amination of securities in order to A. 1end authorit to the auditor"s directives. 4. 6etect forged securities. C. Coordinate the return of a!! securities to proper !ocations. 6. Ac(no)!edge the receipt of securities returned.

%$. 2hich of the fo!!o)ing is not one of the auditor"s primar ob'ectives in an e/amination of mar(etab!e securities3 A. To determine )hether securities are authentic. 4. To determine )hether securities are the propert of the c!ient. C. To determine )hether securities actua!! e/ist. 6. To determine )hether securities are proper! c!assified on the ba!ance sheet.

%%. Eones )as engaged to e/amine the financia! statements of =irginia Corporation for the ear ended Eune $0. ;aving comp!eted an e/amination of the investment securities. )hich of the fo!!o)ing is the best method of verif ing the accurac of recorded dividend income3 A. Tracing recorded dividend income to cash receipts records and va!idated deposit s!ips. 4. @ti!i>ing ana! tica! procedures and statistica! samp!ing. C. Comparing recorded dividends )ith amounts appearing on federa! information forms 10--. 6. Comparing recorded dividends )ith a standard financia! reporting service"s record of dividends.

%&. A c!ient has a !arge and active investment portfo!io that is (ept in a ban( safe-deposit bo/. If the auditor is unab!e to e/amine and count the securities at the ba!ance sheet date but )i!! e/amine and count the securities short! thereafter. the auditor most !i(e! )i!! A. :e8uest that the ban( confirm to the auditor the contents of the safe-deposit bo/ at the ba!ance sheet date. 4. 9/amine supporting evidence for transactions occurring during the ear. C. Count the securities at a subse8uent date and confirm )ith the ban( )hether securities )ere added or removed since the ba!ance sheet date. 6. :e8uest that the c!ient have the ban( sea! the safe-deposit bo/ unti! the auditor can count the securities at a subse8uent date.

16-10

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

%6. In estab!ishing the e/istence and o)nership of a !ong-term investment in stoc( of a pub!ic! traded compan . an auditor shou!d inspect the securities or A. Correspond )ith the investee compan to verif the number of shares o)ned. 4. Inspect the audited financia! statements of the investee compan . C. Confirm the number of shares o)ned that are he!d b an independent custodian. 6. 6etermine that the investment is carried at the !o)er-of-cost-or-mar(et.

%*. 9/amining bro(ers" advices for a samp!e of securities purchased during the ear is a test for the assertion of A. Comp!eteness. 4. 6isc!osure. C. =a!uation and a!!ocation. 6. :ights and ob!igations.

%,. @nder )hich of the fo!!o)ing circumstances )ou!d an auditor be most !i(e! to intensif an e/amination of a F1.000 pett cash fund maintained on an imprest basis3 A. :eimbursement vouchers are not prenumbered. 4. :eimbursement of the fund from the genera! cash account occurs t)ice or more each )ee(. C. The custodian occasiona!! uses the cash fund to cash emp!o ee chec(s. 6. The custodian endorses reimbursement chec(s.

%-. As one of the ear-end audit procedures. the auditor instructed the c!ient"s personne! to prepare a standard ban( confirmation re8uest for a ban( account that had been c!osed during the ear. After the c!ient"s treasurer had signed the re8uest. it )as mai!ed to the ban( b the assistant treasurer. 2hat is the ma'or f!a) in this audit procedure3 A. The confirmation re8uest )as signed b the treasurer. 4. 7ending the re8uest )as meaning!ess because the account )as c!osed before the ear-end. C. The re8uest )as mai!ed b the assistant treasurer. 6. The CPA did not sign the confirmation re8uest before it )as mai!ed.

16-11

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

&0. The primar purpose of sending a standard confirmation re8uest to financia! institutions )ith )hich the c!ient has done business during the ear is to A. 6etect (iting activities that ma other)ise not be discovered. 4. Corroborate information regarding deposit and !oan ba!ances. C. Provide the data necessar to prepare a proof of cash. 6. :e8uest information about contingent !iabi!ities and secured transactions.

&1. 2hich of the fo!!o)ing contro! activities )ou!d an entit most !i(e! use to assist in satisf ing the comp!eteness assertion re!ated to !ong-term investments3 A. 7enior management verifies that securities in the ban( safe-deposit bo/ are registered in the entit "s name. 4. The interna! auditor compares the securities in the ban( safe-deposit bo/ )ith recorded investments. C. The treasurer vouches the ac8uisition of securities b comparing bro(ers" advices )ith cance!ed chec(s. 6. The contro!!er compares the current mar(et prices of recorded investments )ith the bro(ers" advices on fi!e.

&#. 2hich of the fo!!o)ing contro!s )ou!d a compan most !i(e! use to safeguard mar(etab!e securities )hen an independent trust agent is not emp!o ed3 A. The investment committee of the board of directors periodica!! revie)s the investment decisions de!egated to the treasurer. 4. T)o compan officia!s must be present to access mar(etab!e securities. )hich are (ept in a ban( safe-deposit bo/. C. The interna! auditor and the contro!!er independent! trace a!! purchases and sa!es of mar(etab!e securities from the subsidiar !edgers to the genera! !edger. 6. The chairman of the board verifies the mar(etab!e securities. )hich are (ept in a ban( safedeposit bo/. each ear on the ba!ance sheet date.

16-1#

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

&$. 2hen there is a !arge number of negotiab!e securities in mu!tip!e !ocations. carefu! p!anning of the ph sica! inspection and count of the securities b the auditor is necessar to guard against A. @nauthori>ed negotiation of the securities before the are counted. 4. @nrecorded sa!es of securities after the are counted. C. 7ubstitution of securities a!read counted at one !ocation for other securities that shou!d be on hand at a different !ocation but are not. 6. 7ubstitution of authentic securities )ith counterfeit securities.

&%. 2hen an auditor is unab!e to inspect and count a c!ient"s investment securities unti! after the ba!ance sheet date. the ban( )here the securities are he!d in a safe-deposit bo/ shou!d be notified on or before the ba!ance sheet date that it )i!! be as(ed to A. =erif an differences bet)een the contents of the bo/ and the ba!ances in the c!ient"s subsidiar !edger. 4. Provide a !ist of securities added and removed from the bo/ bet)een the ba!ance sheet date and the securit -count date. C. Confirm that there has been no access to the bo/ bet)een the ba!ance sheet date and the securit -count date. 6. Count the securities in the bo/ so that the auditor )i!! have an independent direct verification.

&&. 2hich of the fo!!o)ing )ou!d provide the best form of evidentia! matter pertaining to the annua! va!uation of a !ong-term investment in )hich the independent auditor"s c!ient o)ns a %& percent voting interest3 A. 5ar(et 8uotations of the investee compan "s stoc(. 4. The current fair va!ue of the investee compan "s assets. C. ;istorica! costs of the investee compan "s assets. 6. Audited financia! statements of the investee compan .

&6. 2hich of the fo!!o)ing procedures )ou!d be most important in the audit of an investment va!ued at fair va!ue3 A. Compare the ba!ance in the investment account to the prior ear. 4. :ead the footnote disc!osure re!ated to the investment. C. In8uire of management"s regarding the accurac and re!iabi!it of the under! ing data. 6. 6eve!op an independent estimate of the fair va!ue measurement.

16-1$

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

&*. Auditors )i!! need to perform more substantive tests than norma! to obtain sufficient appropriate evidence that a financia! instrument is fair! stated if )hich of the fo!!o)ing conditions e/ist3 A. 5anagement is ob'ective and transparent in their assumptions. 4. 5anagement"s (e assumptions are sub'ect to vo!ati!it . C. The entit "s portfo!io is composed of on! stoc(s issued b Fortune 100 firms traded in an active mar(et. 6. The entit does not have contro! )ea(nesses in its va!uation processes.

Short Ans er Questions

&,. 9/p!ain ho) cash p!a s a ro!e in a!! business processes.

&-. For each assertion about cash !isted be!o). give an e/amp!e of a test of transactions for C1D cash receipts and C#D cash disbursements. a. C!assification. b. <ccurrence. c. Authori>ation. d. Comp!eteness.

16-1%

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

60. 9/p!ain the importance of the ban( reconci!iation to the audit and !ist some of the items found on the reconci!iation.

61. Identif $ of the 6 tests an auditor uses on the ban( reconci!iation.

6#. Aou are auditing cash for our c!ient 5oonbeam. Inc. In meeting )ith the CF< during the p!anning stages of the audit. she indicated that there )as a high ris( of misstatement due to fraud in the cash account. given the !ac( of proper segregation of duties. As the auditor. )hat tests cou!d ou perform to detect fraudu!ent activities in the cash account3

6$. The first step in auditing pett cash is to gain an understanding of the c!ient"s contro!s over pett cash. 6escribe some important contro!s a c!ient shou!d have over its pett cash fund.

16-1&

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

6%. For each test of transactions and each test of account ba!ances for investments !isted be!o). identif the assertion for )hich the test provides evidence. 1. 6etermine )hether there has been an permanent impairment in the va!ue of the cost basis of an individua! securit . #. Inspect securities if the are maintained b the c!ient or obtain a confirmation from an independent custodian. $. 7earch for purchases of securities b e/amining transactions for a fe) da s after ear-end. %. 9/amine bro(ers" advices for a samp!e of securities purchased during the ear.

6&. 2hat shou!d an auditor !oo( for )hen testing for proper c!assification of securities3

66. 2hat are the factors that must be considered to determine if a permanent dec!ine in the va!ue of an investment securit has occurred3

16-16

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments


Matching Questions

6*. 5atch the t pe of ban( account )ith its definition: Pett cash account GGGG Benera! cash account GGGG 4ranch account GGGG Imprest cash account GGGG

1. This account is the principa! cash account of an entit #. This account is a separate cash account maintained at the !oca! ban( of the entit $. This account contains a stipu!ated amount of cash and is used for !imited purposes %. This account is t pica!! immateria! in amount and is used for pa ing certain t pes of e/penses and transactions

6,. 5atch the segregation of duties for investments )ith the misstatement Cdue to error or fraudD it can he!p prevent. 1. The initiation function is separate from the fina! approva! function #. The va!uation-monitoring function is separate from the ac8uisition function $. Custod of the securities is separate from accounting for the securities %. The maintenance of the securities !edger is separate from that of the genera! !edger

An individua! can ma(e fictitious transactions GGGG An individua! can improper! record securities va!ues or not report the va!ues to management GGGG An individua! can concea! an defa!cation that )ou!d norma!! be detected b reconci!iation of subsidiar records )ith genera! !edger contro! accounts GGGG An individua! can concea! a theft of securities GGGG

16-1*

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

Chapter 16 Auditing the Financing/Investing Process: Cash and Investments Ans)er +e

True / False Questions

1. The cash account is affected b a!! of the entit "s business processes. T!"#

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Remember Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'1 (nderstand t)e relations)i* of t)e $arious business *rocesses to cas)+ ,o*ic: Auditin! Cas)

#. The genera! cash account is norma!! the principa! account used to disburse pa ro!!. FA$S#

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Remember Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'- .no/ t)e different ty*es of bank accounts+ ,o*ic: ,y*es of Bank Accounts

$. An imprest cash account is used for specific purposes and genera!! maintains a ver sma!! ba!ance. T!"#

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Remember Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'- .no/ t)e different ty*es of bank accounts+ ,o*ic: ,y*es of Bank Accounts

16-1,

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

%. The auditor"s use of ana! tica! procedures for auditing cash is !imited. T!"#

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Remember Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'0 .no/ tests of details of transactions used to audit cas)+ ,o*ic: Substanti$e Procedures & Cas)

&. A ma'or contro! that direct! affects the audit of cash is the ban( reconci!iation prepared b the auditor. FA$S#

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Remember Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'1 Be able to e2*lain tests of details of account balances used to audit cas)+ ,o*ic: Substanti$e Procedures & Cas)

6. A cutoff ban( statement is used to verif the propriet of the reconci!ing items sho)n on the ban( reconci!iation. T!"#

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: A**ly Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'3 .no/ )o/ to audit a bank reconciliation+ ,o*ic: Auditin! t)e 4eneral Cas) Account

16-1-

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

*. +iting is an audit procedure used to test the accurac of the cash receipts. FA$S#

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Remember Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'% (nderstand fraud&related audit *rocedures for cas)+ ,o*ic: Fraud&Related Procedures

,. It is genera!! more efficient to fo!!o) a substantive strateg for auditing investments. T!"#

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Remember Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'5 .no/ t)e a**ro*riate se!re!ation of duties for in$estments+ ,o*ic: Se!re!ation of Duties&In$estments

-. If the c!ient maintains custod of its investments. the auditor norma!! e/amines the actua! securities. T!"#

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: A**ly Difficulty: 1 Easy earnin! "b#ecti$e: 1%&1' .no/ tests of details of account balances used to audit in$estments+ ,o*ic: Substanti$e Procedures&In$estments

10. 1eve! 1 inputs are more ris( and difficu!t to audit than 1eve! $ inputs to a va!uation mode!. FA$S#

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: A**ly Difficulty: 1 Easy earnin! "b#ecti$e: 1%&11 (nderstand )o/ to audit fair $alue measurements+ ,o*ic: Auditin! Fair 6alue 7easurements

16-#0

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

Multiple Choice Questions

11. 2hich of the fo!!o)ing interna! contro!s most !i(e! )ou!d reduce the ris( of diversion of customer receipts b an entit "s emp!o ees3 A% A ban( !oc(bo/ s stem. 4. Prenumbered remittance advices. C. 5onth! ban( reconci!iations. 6. 6ai! deposit of cash receipts.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: A**ly Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'1 (nderstand t)e relations)i* of t)e $arious business *rocesses to cas)+ ,o*ic: Auditin! Cas)

1#. The !east crucia! e!ement of interna! contro! over cash is A. 7eparation of cash record-(eeping from custod of cash. 4. Preparation of the month! ban( reconci!iation. C% 4atch processing of chec(s. 6. 7eparation of cash receipts from cash disbursements.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: A**ly Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'1 (nderstand t)e relations)i* of t)e $arious business *rocesses to cas)+ ,o*ic: Auditin! Cas)

16-#1

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

1$. 2hich of the fo!!o)ing audit procedures is the most appropriate )hen interna! contro! over cash is )ea( or )hen a c!ient re8uests an investigation of cash transactions3 A% Proof of cash. 4. 4an( reconci!iation. C. Cash confirmation. 6. 9va!uate ratio of cash to current !iabi!ities.

AACSB: Communication AICPA BB: Critical ,)inkin! AICPA FN: Decision 7akin! Blooms: A**ly Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'0 .no/ tests of details of transactions used to audit cas)+ earnin! "b#ecti$e: 1%&'% (nderstand fraud&related audit *rocedures for cas)+ ,o*ic: Fraud&Related Procedures ,o*ic: Substanti$e Procedures & Cas)

1%. An unrecorded chec( issued during the !ast )ee( of the ear )ou!d most !i(e! be discovered b the auditor )hen the A. Chec( register for the !ast month is revie)ed. &% Cutoff ban( statement is reconci!ed. C. 4an( confirmation is revie)ed. 6. 7earch for unrecorded !iabi!ities is performed.

AACSB: Communication AICPA BB: Critical ,)inkin! AICPA FN: 7easurement Blooms: A**ly Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'1 Be able to e2*lain tests of details of account balances used to audit cas)+ ,o*ic: Substanti$e Procedures & Cas)

16-##

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

1&. 2hich of the fo!!o)ing is one of the better auditing techni8ues that might be used b an auditor to detect (iting bet)een intercompan ban(s3 A. :evie) the composition of authenticated deposit s!ips. 4. :evie) subse8uent ban( statements received direct! from the ban(s. C% Prepare a schedu!e of ban( transfers. 6. Prepare ear-end ban( reconci!iations.

AACSB: Communication AICPA BB: Critical ,)inkin! AICPA FN: Decision 7akin! Blooms: A**ly Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'% (nderstand fraud&related audit *rocedures for cas)+ ,o*ic: Fraud&Related Procedures

16. An interban( transfer schedu!e A. Is another name for the proof of cash. &% ;e!ps the auditor test for (iting. C. Is on a standard ban( confirmation. 6. Is used to e/amine c!ient ban( reconci!iations.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: A**ly Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'% (nderstand fraud&related audit *rocedures for cas)+ ,o*ic: Fraud&Related Procedures

1*. If fraud is suspected. auditors ma comp!ete a!! of the fo!!o)ing procedures e/cept: A. Testing for (iting. &% Footing the ban( reconci!iation and the outstanding chec(s !isting. C. Performing a proof of cash. 6. Performing e/tended ban( reconci!iation procedures. inc!uding detai!ed e/amination of reconci!ing items.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: A**ly Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'% (nderstand fraud&related audit *rocedures for cas)+ ,o*ic: Fraud&Related Procedures

16-#$

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

1,. <f the fo!!o)ing. )hich is the most efficient audit procedure for verification of interest earned on bond investments3 A. Tracing interest dec!arations to an independent record boo(. &% :ecomputing interest earned using the interest rate and bond amount. C. Confirming the interest rate )ith the issuer of the bonds. 6. =ouching the receipt and deposit of interest chec(s.

AACSB: Analytic AICPA BB: Critical ,)inkin! AICPA FN: Decision 7akin! Blooms: Analy8e Difficulty: 1 Easy earnin! "b#ecti$e: 1%&1' .no/ tests of details of account balances used to audit in$estments+ ,o*ic: Substanti$e Procedures&In$estments

1-. An auditor testing !ong-term investments )ou!d ordinari! use substantive ana! tica! procedures as the primar audit evidence to support the reasonab!eness of the A. =a!uation of mar(etab!e e8uit securities. 4. C!assification of gains and !osses on the disposa! of securities. C% Comp!eteness of recorded investment income. 6. 9/istence and o)nership of investments.

AACSB: Analytic AICPA BB: Critical ,)inkin! AICPA FN: Decision 7akin! Blooms: A**ly Difficulty: 1 Easy earnin! "b#ecti$e: 1%&1' .no/ tests of details of account balances used to audit in$estments+ ,o*ic: Substanti$e Procedures&In$estments

#0. To satisf the va!uation assertion )hen auditing an investment accounted for b the e8uit method. an auditor most !i(e! )ou!d A. Inspect the stoc( certificates evidencing the investment. &% 9/amine the audited financia! statements of the investee compan . C. :evie) the bro(er"s advice or cance!ed chec( for the investment"s ac8uisition. 6. <btain mar(et 8uotations from financia! ne)spapers or periodica!s.

AACSB: Analytic AICPA BB: Critical ,)inkin! AICPA FN: 7easurement Blooms: A**ly Difficulty: 1 Easy earnin! "b#ecti$e: 1%&1' .no/ tests of details of account balances used to audit in$estments+ ,o*ic: Substanti$e Procedures&In$estments

16-#%

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

#1. An auditor usua!! tests the reasonab!eness of dividend income from investments in stoc( of pub!ic companies b computing the amounts that shou!d have been received b referring to A% 6ividend record boo(s produced b investment advisor services. 4. 7toc( indentures pub!ished b corporate transfer agents. C. 7toc( !edgers maintained b independent registrars. 6. Annua! audited financia! statements issued b the investee companies.

AACSB: Analytic AICPA BB: Industry AICPA FN: 7easurement Blooms: A**ly Difficulty: 1 Easy earnin! "b#ecti$e: 1%&1' .no/ tests of details of account balances used to audit in$estments+ ,o*ic: Substanti$e Procedures&In$estments

##. 2hich of the fo!!o)ing pairs of accounts )ou!d an auditor most !i(e! ana! >e on the same )or(ing paper3 A% ?otes receivab!e and interest income. 4. Accrued interest receivab!e and accrued interest pa ab!e. C. ?otes pa ab!e and notes receivab!e. 6. Interest income and interest e/pense.

AACSB: Analytic AICPA BB: Industry AICPA FN: 7easurement Blooms: Analy8e Difficulty: 1 Easy earnin! "b#ecti$e: 1%&1' .no/ tests of details of account balances used to audit in$estments+ ,o*ic: Substanti$e Procedures&In$estments

16-#&

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

#$. In confirming )ith an outside agent. such as a financia! institution. that the agent is ho!ding investment securities in the c!ient"s name. an auditor most !i(e! gathers evidence in support of management"s financia! statement assertions regarding A. 9/istence. 4. :ights and ob!igations. C. Comp!eteness. '% A!! of the above.

AACSB: Analytic AICPA BB: Industry AICPA FN: 7easurement Blooms: Analy8e Difficulty: 1 Easy earnin! "b#ecti$e: 1%&1' .no/ tests of details of account balances used to audit in$estments+ ,o*ic: Substanti$e Procedures&In$estments

#%. A!! of the fo!!o)ing can assist the auditor in testing the e/istence assertion for investment securities e/cept: A. Ph sica! e/amination. &% Comparing fair va!ue to cost. C. Confirmation )ith the issuer. 6. Confirmation )ith the custodian.

AACSB: Analytic AICPA BB: Critical ,)inkin! AICPA FN: 7easurement Blooms: A**ly Difficulty: 1 Easy earnin! "b#ecti$e: 1%&1' .no/ tests of details of account balances used to audit in$estments+ ,o*ic: Substanti$e Procedures&In$estments

#&. An imprest cash account is A. @sed for investing in mar(etab!e securities. 4. The principa! cash account for an entit . C% <ne that contains a stipu!ated amount of mone and is used for !imited purposes. 6. The principa! chec(ing account for a branch of an entit .

AACSB: Communication AICPA BB: Industry AICPA FN: Decision 7akin! Blooms: Remember Difficulty: - 7edium earnin! "b#ecti$e: 1%&'- .no/ t)e different ty*es of bank accounts+ ,o*ic: ,y*es of Bank Accounts

16-#6

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

#6. An auditor ordinari! shou!d send a standard confirmation re8uest to a!! ban(s )ith )hich the c!ient has done business during the ear under audit. regard!ess of the ear-end ba!ance. because this procedure A. Provides for confirmation regarding compensating ba!ance arrangements. 4. 6etects (iting activities that ma not other)ise be discovered. C% 7ee(s information about indebtedness to the ban(. 6. =erifies securities he!d b the ban( in safe(eeping.

AACSB: Communication AICPA BB: Critical ,)inkin! AICPA FN: 7easurement Blooms: Remember Difficulty: - 7edium earnin! "b#ecti$e: 1%&'0 .no/ tests of details of transactions used to audit cas)+ earnin! "b#ecti$e: 1%&'1 Be able to e2*lain tests of details of account balances used to audit cas)+ ,o*ic: Substanti$e Procedures & Cas)

#*. Tracing a samp!e of remittance advices to entries in the cash receipts 'ourna! tests )hich of the fo!!o)ing assertions for cash3 A. <ccurrence. &% Comp!eteness. C. Authori>ation. 6. Cutoff.

AACSB: Analytic AICPA BB: Industry AICPA FN: 7easurement Blooms: A**ly Difficulty: - 7edium earnin! "b#ecti$e: 1%&'0 .no/ tests of details of transactions used to audit cas)+ ,o*ic: Substanti$e Procedures & Cas)

16-#*

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

#,. 9/amining a samp!e of cance!!ed chec(s for an authori>ed signature tests )hich of the fo!!o)ing assertions for cash3 A% Authori>ation. 4. Comp!eteness. C. Cutoff. 6. Accurac .

AACSB: Analytic AICPA BB: Industry AICPA FN: 7easurement Blooms: A**ly Difficulty: - 7edium earnin! "b#ecti$e: 1%&'0 .no/ tests of details of transactions used to audit cas)+ ,o*ic: Substanti$e Procedures & Cas)

#-. The cashier of 4roo(e Compan covered a shortage in the cash )or(ing fund )ith cash obtained on 6ecember $1 from a !oca! ban( b cashing. but not recording. a chec( dra)n on the compan "s out-of-to)n ban(. ;o) )ou!d the auditor discover this manipu!ation3 A. Confirming a!! 6ecember $1 ban( ba!ances. 4. Counting the cash )or(ing fund at the c!ose of business on 6ecember $1. C. Preparing independent ban( reconci!iations as of 6ecember $1. '% Preparing and detai! testing a ban( transfer schedu!e.

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision 7akin! Blooms: Analy8e Difficulty: - 7edium earnin! "b#ecti$e: 1%&'0 .no/ tests of details of transactions used to audit cas)+ earnin! "b#ecti$e: 1%&'1 Be able to e2*lain tests of details of account balances used to audit cas)+ ,o*ic: Substanti$e Procedures & Cas)

16-#,

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

$0. The auditor shou!d ordinari! mai! confirmation re8uests to a!! ban(s )ith )hich the c!ient has conducted an business during the ear. regard!ess of the ear-end ba!ance. since A% The confirmation form a!so see(s information about indebtedness to the ban(. 4. This procedure )i!! detect (iting activities that )ou!d other)ise not be detected. C. The mai!ing of confirmation forms to a!! such ban(s is re8uired b genera!! accepted auditing standards. 6. This procedure re!ieves the auditor of an responsibi!it )ith respect to nondetection of forged chec(s.

AACSB: Communication AICPA BB: Industry AICPA FN: 7easurement Blooms: A**ly Difficulty: - 7edium earnin! "b#ecti$e: 1%&'1 Be able to e2*lain tests of details of account balances used to audit cas)+ ,o*ic: Substanti$e Procedures & Cas)

$1. An auditor )ho is engaged to e/amine the financia! statements of a business enterprise )i!! re8uest a cutoff ban( statement primari! to A. =erif the cash ba!ance reported on the ban( confirmation in8uir form. &% =erif reconci!ing items on the c!ient"s ban( reconci!iation. C. 6etect !apping. 6. 6etect (iting.

AACSB: Communication AICPA BB: Industry AICPA FN: 7easurement Blooms: (nderstand Difficulty: - 7edium earnin! "b#ecti$e: 1%&'1 Be able to e2*lain tests of details of account balances used to audit cas)+ ,o*ic: Substanti$e Procedures & Cas)

16-#-

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

$#. An auditor shou!d trace interban( transfers for the !ast part of the audit period and first part of the subse8uent period to detect )hether A. The cash receipts 'ourna! )as he!d open for a fe) da s after the ear-end. 4. The !ast chec(s recorded before the ear end )ere actua!! mai!ed b the ear-end. C% Cash ba!ances )ere overstated because of (iting. 6. An unusua! pa ments to or receipts from re!ated parties occurred.

AACSB: Analytic AICPA BB: Industry AICPA FN: 7easurement Blooms: A**ly Difficulty: - 7edium earnin! "b#ecti$e: 1%&'1 Be able to e2*lain tests of details of account balances used to audit cas)+ ,o*ic: Substanti$e Procedures & Cas)

$$. To gather evidence regarding the ba!ance per ban( in a ban( reconci!iation. an auditor )ou!d e/amine a!! of the fo!!o)ing e/cept the: A. Cutoff ban( statement. 4. Aear-end ban( statement. C. 4an( confirmation. '% Benera! !edger.

AACSB: Analytic AICPA BB: Industry AICPA FN: 7easurement Blooms: Analy8e Difficulty: - 7edium earnin! "b#ecti$e: 1%&'1 Be able to e2*lain tests of details of account balances used to audit cas)+ earnin! "b#ecti$e: 1%&'3 .no/ )o/ to audit a bank reconciliation+ ,o*ic: Auditin! t)e 4eneral Cas) Account ,o*ic: Substanti$e Procedures & Cas)

16-$0

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

$%. A primar purpose of the proof of cash is to A. Prevent fraud. 4. :econci!e actua! cash receipts and disbursements to budgeted receipts and disbursements. C. Investigate variances from e/pected cash ba!ances. '% 9nsure that a!! cash receipts recorded in the cash receipts 'ourna! )ere deposited in the ban( account.

AACSB: Communication AICPA BB: Industry AICPA FN: 7easurement Blooms: A**ly Difficulty: - 7edium earnin! "b#ecti$e: 1%&'1 Be able to e2*lain tests of details of account balances used to audit cas)+ earnin! "b#ecti$e: 1%&'% (nderstand fraud&related audit *rocedures for cas)+ ,o*ic: Fraud&Related Procedures ,o*ic: Substanti$e Procedures & Cas)

$&. A compan has additiona! temporar funds to invest. The 4oard of 6irectors decided to purchase mar(etab!e securities and assigned the future purchase and sa!e decisions to a responsib!e financia! e/ecutive. The best personCsD to ma(e periodic revie)s of the investment activit authori>ed b that e/ecutive shou!d be A% An investment committee of the 4oard of 6irectors. 4. The chief operating officer. C. The corporate contro!!er. 6. The treasurer.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Analy8e Difficulty: - 7edium earnin! "b#ecti$e: 1%&'9 Be able to e2*lain key controls for in$estments+ ,o*ic: Control Risk Assessment&In$estments

16-$1

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

$6. A compan ho!ds bearer bonds as a short-term investment. :esponsibi!it for custod of these bonds and submission of coupons for co!!ections of periodic interest probab! shou!d be de!egated to the A. Chief Accountant. 4. Interna! Auditor. C. Cashier. '% Treasurer.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: A**ly Difficulty: - 7edium earnin! "b#ecti$e: 1%&'9 Be able to e2*lain key controls for in$estments+ ,o*ic: Control Risk Assessment&In$estments

$*. 2hich of the fo!!o)ing contro!s )ou!d an entit most !i(e! use in safeguarding against the !oss of mar(etab!e securities3 A% An independent trust compan that has no direct contact )ith the emp!o ees )ho have record(eeping responsibi!ities has possession of the securities. 4. The interna! auditor verifies the mar(etab!e securities in the entit "s safe each ear on the ba!ance sheet date. C. The independent auditor traces a!! purchases and sa!es of mar(etab!e securities through the subsidiar !edgers to the genera! !edger. 6. A designated member of the board of directors contro!s the securities in a ban( safedeposit bo/.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: A**ly Difficulty: - 7edium earnin! "b#ecti$e: 1%&'9 Be able to e2*lain key controls for in$estments+ ,o*ic: Control Risk Assessment&In$estments

16-$#

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

$,. 2hich of the fo!!o)ing procedures most !i(e! )ou!d give the greatest assurance that securities he!d as investments are safeguarded3 A. There is no access to securities bet)een the ear-end and the date of the auditor"s securit count. 4. Proceeds from the sa!e of investments are received b an emp!o ee )ho does not have access to securities. C. Investment ac8uisitions are authori>ed b a member of the 4oard of 6irectors before e/ecution. '% Access to securities re8uires the presence of t)o designated officia!s.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Analy8e Difficulty: - 7edium earnin! "b#ecti$e: 1%&'9 Be able to e2*lain key controls for in$estments+ ,o*ic: Control Risk Assessment&In$estments

$-. 2hich one of the fo!!o)ing )ou!d the auditor consider to be an incompatib!e operation if the cashier receives remittances from the mai!room3 A% The cashier posts the receipts to the accounts receivab!e subsidiar !edger cards. 4. The cashier ma(es the dai! deposit at a !oca! ban(. C. The cashier prepares the dai! deposit. 6. The cashier endorses the chec(s.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Analy8e Difficulty: - 7edium earnin! "b#ecti$e: 1%&'9 Be able to e2*lain key controls for in$estments+ earnin! "b#ecti$e: 1%&'5 .no/ t)e a**ro*riate se!re!ation of duties for in$estments+ ,o*ic: Control Risk Assessment&In$estments ,o*ic: Se!re!ation of Duties&In$estments

16-$$

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

%0. 2hen an entit uses a trust compan as custodian of its mar(etab!e securities. the possibi!it of concea!ing fraud most !i(e! )ou!d be reduced if the A% Trust compan has no direct contact )ith the entit emp!o ees responsib!e for maintaining investment accounting records. 4. 7ecurities are registered in the name of the trust compan . rather than the entit itse!f. C. Interest and dividend chec(s are mai!ed direct! to an entit emp!o ee )ho is authori>ed to se!! securities. 6. Trust compan p!aces the securities in a ban( safe-deposit vau!t under the custodian"s e/c!usive contro!.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: Analy8e Difficulty: - 7edium earnin! "b#ecti$e: 1%&'9 Be able to e2*lain key controls for in$estments+ earnin! "b#ecti$e: 1%&'5 .no/ t)e a**ro*riate se!re!ation of duties for in$estments+ ,o*ic: Control Risk Assessment&In$estments ,o*ic: Se!re!ation of Duties&In$estments

%1. In a manufacturing compan . )hich one of the fo!!o)ing audit procedures )ou!d give the !east assurance for the e/istence of the genera! !edger ba!ance of investment in stoc(s and bonds at the audit date3 A. Confirmation from the bro(er. 4. Inspection and count of stoc(s and bonds. C. =ouching a!! changes during the ear to bro(ers" advices and statements. '% 9/amination of cance!ed chec(s issued in pa ment of securities purchased.

AACSB: Analytic AICPA BB: Industry AICPA FN: 7easurement Blooms: Analy8e Difficulty: - 7edium earnin! "b#ecti$e: 1%&1' .no/ tests of details of account balances used to audit in$estments+ ,o*ic: Substanti$e Procedures&In$estments

16-$%

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

%#. The auditor shou!d insist that a representative of the c!ient be present during the ph sica! e/amination of securities in order to A. 1end authorit to the auditor"s directives. 4. 6etect forged securities. C. Coordinate the return of a!! securities to proper !ocations. '% Ac(no)!edge the receipt of securities returned.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: A**ly Difficulty: - 7edium earnin! "b#ecti$e: 1%&1' .no/ tests of details of account balances used to audit in$estments+ ,o*ic: Substanti$e Procedures&In$estments

%$. 2hich of the fo!!o)ing is not one of the auditor"s primar ob'ectives in an e/amination of mar(etab!e securities3 A% To determine )hether securities are authentic. 4. To determine )hether securities are the propert of the c!ient. C. To determine )hether securities actua!! e/ist. 6. To determine )hether securities are proper! c!assified on the ba!ance sheet.

AACSB: Communication AICPA BB: Industry AICPA FN: 7easurement Blooms: Analy8e Difficulty: - 7edium earnin! "b#ecti$e: 1%&1' .no/ tests of details of account balances used to audit in$estments+ ,o*ic: Substanti$e Procedures&In$estments

16-$&

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

%%. Eones )as engaged to e/amine the financia! statements of =irginia Corporation for the ear ended Eune $0. ;aving comp!eted an e/amination of the investment securities. )hich of the fo!!o)ing is the best method of verif ing the accurac of recorded dividend income3 A. Tracing recorded dividend income to cash receipts records and va!idated deposit s!ips. 4. @ti!i>ing ana! tica! procedures and statistica! samp!ing. C. Comparing recorded dividends )ith amounts appearing on federa! information forms 10--. '% Comparing recorded dividends )ith a standard financia! reporting service"s record of dividends.

AACSB: Analytic AICPA BB: Industry AICPA FN: 7easurement Blooms: Analy8e Difficulty: - 7edium earnin! "b#ecti$e: 1%&1' .no/ tests of details of account balances used to audit in$estments+ ,o*ic: Substanti$e Procedures&In$estments

%&. A c!ient has a !arge and active investment portfo!io that is (ept in a ban( safe-deposit bo/. If the auditor is unab!e to e/amine and count the securities at the ba!ance sheet date but )i!! e/amine and count the securities short! thereafter. the auditor most !i(e! )i!! A. :e8uest that the ban( confirm to the auditor the contents of the safe-deposit bo/ at the ba!ance sheet date. 4. 9/amine supporting evidence for transactions occurring during the ear. C. Count the securities at a subse8uent date and confirm )ith the ban( )hether securities )ere added or removed since the ba!ance sheet date. '% :e8uest that the c!ient have the ban( sea! the safe-deposit bo/ unti! the auditor can count the securities at a subse8uent date.

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision 7akin! Blooms: A**ly Difficulty: - 7edium earnin! "b#ecti$e: 1%&1' .no/ tests of details of account balances used to audit in$estments+ ,o*ic: Substanti$e Procedures&In$estments

16-$6

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

%6. In estab!ishing the e/istence and o)nership of a !ong-term investment in stoc( of a pub!ic! traded compan . an auditor shou!d inspect the securities or A. Correspond )ith the investee compan to verif the number of shares o)ned. 4. Inspect the audited financia! statements of the investee compan . C% Confirm the number of shares o)ned that are he!d b an independent custodian. 6. 6etermine that the investment is carried at the !o)er-of-cost-or-mar(et.

AACSB: Communication AICPA BB: Industry AICPA FN: 7easurement Blooms: A**ly Difficulty: - 7edium earnin! "b#ecti$e: 1%&1' .no/ tests of details of account balances used to audit in$estments+ ,o*ic: Substanti$e Procedures&In$estments

%*. 9/amining bro(ers" advices for a samp!e of securities purchased during the ear is a test for the assertion of A. Comp!eteness. 4. 6isc!osure. C. =a!uation and a!!ocation. '% :ights and ob!igations.

AACSB: Communication AICPA BB: Industry AICPA FN: 7easurement Blooms: A**ly Difficulty: - 7edium earnin! "b#ecti$e: 1%&1' .no/ tests of details of account balances used to audit in$estments+ ,o*ic: Substanti$e Procedures&In$estments

16-$*

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

%,. @nder )hich of the fo!!o)ing circumstances )ou!d an auditor be most !i(e! to intensif an e/amination of a F1.000 pett cash fund maintained on an imprest basis3 A. :eimbursement vouchers are not prenumbered. &% :eimbursement of the fund from the genera! cash account occurs t)ice or more each )ee(. C. The custodian occasiona!! uses the cash fund to cash emp!o ee chec(s. 6. The custodian endorses reimbursement chec(s.

AACSB: Analytic AICPA BB: Critical ,)inkin! AICPA FN: Decision 7akin! Blooms: Analy8e Difficulty: 0 :ard earnin! "b#ecti$e: 1%&'- .no/ t)e different ty*es of bank accounts+ earnin! "b#ecti$e: 1%&'% (nderstand fraud&related audit *rocedures for cas)+ ,o*ic: Fraud&Related Procedures ,o*ic: ,y*es of Bank Accounts

%-. As one of the ear-end audit procedures. the auditor instructed the c!ient"s personne! to prepare a standard ban( confirmation re8uest for a ban( account that had been c!osed during the ear. After the c!ient"s treasurer had signed the re8uest. it )as mai!ed to the ban( b the assistant treasurer. 2hat is the ma'or f!a) in this audit procedure3 A. The confirmation re8uest )as signed b the treasurer. 4. 7ending the re8uest )as meaning!ess because the account )as c!osed before the ear-end. C% The re8uest )as mai!ed b the assistant treasurer. 6. The CPA did not sign the confirmation re8uest before it )as mai!ed.

AACSB: Communication AICPA BB: Critical ,)inkin! AICPA FN: Risk Analysis Blooms: Analy8e Difficulty: 0 :ard earnin! "b#ecti$e: 1%&'1 Be able to e2*lain tests of details of account balances used to audit cas)+ ,o*ic: Substanti$e Procedures & Cas)

16-$,

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

&0. The primar purpose of sending a standard confirmation re8uest to financia! institutions )ith )hich the c!ient has done business during the ear is to A. 6etect (iting activities that ma other)ise not be discovered. &% Corroborate information regarding deposit and !oan ba!ances. C. Provide the data necessar to prepare a proof of cash. 6. :e8uest information about contingent !iabi!ities and secured transactions.

AACSB: Communication AICPA BB: Industry AICPA FN: 7easurement Blooms: Remember Difficulty: 0 :ard earnin! "b#ecti$e: 1%&'1 Be able to e2*lain tests of details of account balances used to audit cas)+ ,o*ic: Substanti$e Procedures & Cas)

&1. 2hich of the fo!!o)ing contro! activities )ou!d an entit most !i(e! use to assist in satisf ing the comp!eteness assertion re!ated to !ong-term investments3 A. 7enior management verifies that securities in the ban( safe-deposit bo/ are registered in the entit "s name. &% The interna! auditor compares the securities in the ban( safe-deposit bo/ )ith recorded investments. C. The treasurer vouches the ac8uisition of securities b comparing bro(ers" advices )ith cance!ed chec(s. 6. The contro!!er compares the current mar(et prices of recorded investments )ith the bro(ers" advices on fi!e.

AACSB: Communication AICPA BB: Critical ,)inkin! AICPA FN: 7easurement Blooms: Analy8e Difficulty: 0 :ard earnin! "b#ecti$e: 1%&'9 Be able to e2*lain key controls for in$estments+ ,o*ic: Control Risk Assessment&In$estments

16-$-

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

&#. 2hich of the fo!!o)ing contro!s )ou!d a compan most !i(e! use to safeguard mar(etab!e securities )hen an independent trust agent is not emp!o ed3 A. The investment committee of the board of directors periodica!! revie)s the investment decisions de!egated to the treasurer. &% T)o compan officia!s must be present to access mar(etab!e securities. )hich are (ept in a ban( safe-deposit bo/. C. The interna! auditor and the contro!!er independent! trace a!! purchases and sa!es of mar(etab!e securities from the subsidiar !edgers to the genera! !edger. 6. The chairman of the board verifies the mar(etab!e securities. )hich are (ept in a ban( safedeposit bo/. each ear on the ba!ance sheet date.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: A**ly Difficulty: 0 :ard earnin! "b#ecti$e: 1%&'9 Be able to e2*lain key controls for in$estments+ ,o*ic: Control Risk Assessment&In$estments

&$. 2hen there is a !arge number of negotiab!e securities in mu!tip!e !ocations. carefu! p!anning of the ph sica! inspection and count of the securities b the auditor is necessar to guard against A. @nauthori>ed negotiation of the securities before the are counted. 4. @nrecorded sa!es of securities after the are counted. C% 7ubstitution of securities a!read counted at one !ocation for other securities that shou!d be on hand at a different !ocation but are not. 6. 7ubstitution of authentic securities )ith counterfeit securities.

AACSB: Analytic AICPA BB: Critical ,)inkin! AICPA FN: Decision 7akin! Blooms: Analy8e Difficulty: 0 :ard earnin! "b#ecti$e: 1%&1' .no/ tests of details of account balances used to audit in$estments+ ,o*ic: Substanti$e Procedures&In$estments

16-%0

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

&%. 2hen an auditor is unab!e to inspect and count a c!ient"s investment securities unti! after the ba!ance sheet date. the ban( )here the securities are he!d in a safe-deposit bo/ shou!d be notified on or before the ba!ance sheet date that it )i!! be as(ed to A. =erif an differences bet)een the contents of the bo/ and the ba!ances in the c!ient"s subsidiar !edger. 4. Provide a !ist of securities added and removed from the bo/ bet)een the ba!ance sheet date and the securit -count date. C% Confirm that there has been no access to the bo/ bet)een the ba!ance sheet date and the securit -count date. 6. Count the securities in the bo/ so that the auditor )i!! have an independent direct verification.

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision 7akin! Blooms: A**ly Difficulty: 0 :ard earnin! "b#ecti$e: 1%&1' .no/ tests of details of account balances used to audit in$estments+ ,o*ic: Substanti$e Procedures&In$estments

&&. 2hich of the fo!!o)ing )ou!d provide the best form of evidentia! matter pertaining to the annua! va!uation of a !ong-term investment in )hich the independent auditor"s c!ient o)ns a %& percent voting interest3 A. 5ar(et 8uotations of the investee compan "s stoc(. 4. The current fair va!ue of the investee compan "s assets. C. ;istorica! costs of the investee compan "s assets. '% Audited financia! statements of the investee compan .

AACSB: Analytic AICPA BB: Industry AICPA FN: 7easurement Blooms: Analy8e Difficulty: 0 :ard earnin! "b#ecti$e: 1%&1' .no/ tests of details of account balances used to audit in$estments+ ,o*ic: Substanti$e Procedures&In$estments

16-%1

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

&6. 2hich of the fo!!o)ing procedures )ou!d be most important in the audit of an investment va!ued at fair va!ue3 A. Compare the ba!ance in the investment account to the prior ear. 4. :ead the footnote disc!osure re!ated to the investment. C. In8uire of management"s regarding the accurac and re!iabi!it of the under! ing data. '% 6eve!op an independent estimate of the fair va!ue measurement.

AACSB: Analytic AICPA BB: Industry AICPA FN: 7easurement Blooms: A**ly Difficulty: 0 :ard earnin! "b#ecti$e: 1%&11 (nderstand )o/ to audit fair $alue measurements+ ,o*ic: Auditin! Fair 6alue 7easurements

&*. Auditors )i!! need to perform more substantive tests than norma! to obtain sufficient appropriate evidence that a financia! instrument is fair! stated if )hich of the fo!!o)ing conditions e/ist3 A. 5anagement is ob'ective and transparent in their assumptions. &% 5anagement"s (e assumptions are sub'ect to vo!ati!it . C. The entit "s portfo!io is composed of on! stoc(s issued b Fortune 100 firms traded in an active mar(et. 6. The entit does not have contro! )ea(nesses in its va!uation processes.

AACSB: Analytic AICPA BB: Industry AICPA FN: 7easurement Blooms: Analy8e Difficulty: 0 :ard earnin! "b#ecti$e: 1%&11 (nderstand )o/ to audit fair $alue measurements+ ,o*ic: Auditin! Fair 6alue 7easurements

16-%#

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments


Short Ans er Questions

&,. 9/p!ain ho) cash p!a s a ro!e in a!! business processes. Cash is received b the entit through the revenue process. as )e!! as from the sa!e of propert . p!ant and e8uipment. and proceeds from the issuance of !ong-term debt or capita! stoc(. Cash is disbursed through the purchasing process )hen bu ing inventor . materia!s. and e8uipment and through the human resource process through pa ro!!. Cash is a!so disbursed in the financing process )hen the entit pa s off !ong-term debt or bu s bac( its stoc( Ctreasur stoc(D.

AACSB: Communication AICPA BB: Industry AICPA FN: 7easurement Blooms: (nderstand Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'1 (nderstand t)e relations)i* of t)e $arious business *rocesses to cas)+ ,o*ic: Auditin! Cas)

16-%$

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

&-. For each assertion about cash !isted be!o). give an e/amp!e of a test of transactions for C1D cash receipts and C#D cash disbursements. a. C!assification. b. <ccurrence. c. Authori>ation. d. Comp!eteness. Student ans ers ill var(: a.1. Cash receipts-9/amine a samp!e of remittance advices for proper account c!assification. a.#. Cash disbursements-9/amine a samp!e of cance!ed chec(s for proper account c!assification. b.1. Cash receipts-Trace a samp!e of entries in the cash receipts 'ourna! to remittance advices. dai! deposit s!ips. and the ban( statement. b.#. Cash disbursements-Trace a samp!e of entries in the cash disbursements 'ourna! to cance!ed chec(s. the voucher pac(et. and the ban( statement. c.1. Cash receipts-For a samp!e of da s. e/amine the signature on the deposit s!ip and the chec( endorsements for proper authori>ation. c.#. Cash disbursements-9/amine a samp!e of cance!ed chec(s for authori>ed signature and proper endorsement. d.1. Cash receipts-Trace a samp!e of remittance advices to the cash receipts 'ourna! and. if necessar . to deposit s!ips. d.#. Cash disbursements-Trace a samp!e of cance!ed chec(s to the cash disbursements 'ourna!.

AACSB: Communication AICPA BB: Industry AICPA FN: 7easurement Blooms: A**ly Difficulty: - 7edium earnin! "b#ecti$e: 1%&'0 .no/ tests of details of transactions used to audit cas)+ ,o*ic: Substanti$e Procedures & Cas)

16-%%

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

60. 9/p!ain the importance of the ban( reconci!iation to the audit and !ist some of the items found on the reconci!iation. The comp!etion of a month! ban( reconci!iation is an important contro! that affects the audit of the cash. The reconci!iation ensures that the c!ient"s boo(s ref!ect the same amount of cash as the ban("s after the consideration of reconci!ing items. A proper reconci!iation can reduce the amount of audit time spent on cash. The reconci!iation contains the ba!ance per the c!ient"s boo(s and the ba!ance per the ban(. as )e!! as reconci!ing items such as outstanding chec(s and deposits in transit. It ma a!so inc!ude ban( service charges and chec(s returned because the customer did not have sufficient cash in his account to cover the pa ment of the chec(.

AACSB: Communication AICPA BB: Industry AICPA FN: 7easurement Blooms: (nderstand Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'3 .no/ )o/ to audit a bank reconciliation+ ,o*ic: Auditin! t)e 4eneral Cas) Account

61. Identif $ of the 6 tests an auditor uses on the ban( reconci!iation. ;"nly 0 are re<uired for t)e student=s ans/er> H Test the mathematica! accurac of the ban( reconci!iation )or(ing paper and agree the ad'usted ba!ance per the boo(s to the genera! !edger. H Agree the ban( ba!ance on the ban( reconci!iation )ith the ba!ance sho)n on the standard ban( confirmation. H Trace the deposits in transit on the ban( reconci!iation to the cutoff ban( statement. H Compare the outstanding chec(s on the ban( reconci!iation )or(ing paper )ith the cance!ed chec(s contained in the cutoff ban( statement for proper pa ee. amount. and endorsement. H Agree an charges inc!uded on the ban( statement to the ban( reconci!iation. H Agree the ad'usted boo( ba!ance to the cash account !ead schedu!e.

AACSB: Communication AICPA BB: Industry AICPA FN: 7easurement Blooms: Remember Difficulty: - 7edium earnin! "b#ecti$e: 1%&'3 .no/ )o/ to audit a bank reconciliation+ ,o*ic: Auditin! t)e 4eneral Cas) Account

16-%&

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

6#. Aou are auditing cash for our c!ient 5oonbeam. Inc. In meeting )ith the CF< during the p!anning stages of the audit. she indicated that there )as a high ris( of misstatement due to fraud in the cash account. given the !ac( of proper segregation of duties. As the auditor. )hat tests cou!d ou perform to detect fraudu!ent activities in the cash account3 There are three tests used for detecting fraud in the cash accounts. The first is e/tended ban( reconci!iation procedures. The auditor e/amines disposition of the reconci!ing items inc!uded on the prior months" reconci!iations and the reconci!ing items inc!uded in the current ban( reconci!iation. These procedures can !ocate a fraud that used reconci!ing items to cover a cash defa!cation. A second test is a proof of cash. A proof of cash reconci!es the cash receipts and disbursements recorded on the c!ient"s boo(s )ith the cash deposited into and disbursed from the c!ient"s ban( account for a specific time period. Its primar purpose is to ensure that a!! cash receipts recorded in the c!ient"s cash receipts 'ourna! )ere deposited in the c!ient"s ban( account. to ensure that a!! cash disbursements recorded in the cash disbursements 'ourna! have c!eared the ban( account. and to ensure that no ban( transactions have been omitted from the c!ient"s accounting records. It can detect cash sto!en after being recorded on the c!ient"s boo(s. A third test is a test for (iting. +iting is the process of covering a cash shortage b transferring mone from one ban( account to another and recording the transactions improper! on the c!ient"s boo(s. A test for (iting is comp!eted through the use of an intertransfer schedu!e that !ists a!! the transfers made bet)een cash accounts. 9ach transfer is fo!!o)ed through from one account to another. noting the dates recorded on the c!ient"s boo( and the dates on the ban( statements.

AACSB: Communication AICPA BB: Critical ,)inkin! AICPA FN: Decision 7akin! Blooms: A**ly Difficulty: - 7edium earnin! "b#ecti$e: 1%&'% (nderstand fraud&related audit *rocedures for cas)+ ,o*ic: Fraud&Related Procedures

16-%6

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

6$. The first step in auditing pett cash is to gain an understanding of the c!ient"s contro!s over pett cash. 6escribe some important contro!s a c!ient shou!d have over its pett cash fund. 1. The pett cash fund shou!d be maintained b an independent custodian. If this custodian is invo!ved in other cash functions. the pett cash activit shou!d be revie)ed b another person. #. Prenumbered vouchers shou!d be used for )ithdra)ing from the fund. $. A !imit shou!d be p!aced on the si>e of reimbursements made to pett cash. %. An additiona! person shou!d conduct surprise counts of the fund.

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: (nderstand Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'% (nderstand fraud&related audit *rocedures for cas)+ ,o*ic: Fraud&Related Procedures

6%. For each test of transactions and each test of account ba!ances for investments !isted be!o). identif the assertion for )hich the test provides evidence. 1. 6etermine )hether there has been an permanent impairment in the va!ue of the cost basis of an individua! securit . #. Inspect securities if the are maintained b the c!ient or obtain a confirmation from an independent custodian. $. 7earch for purchases of securities b e/amining transactions for a fe) da s after ear-end. %. 9/amine bro(ers" advices for a samp!e of securities purchased during the ear. 1. =a!uation and a!!ocation. #. 9/istence. $. Comp!eteness. %. :ights and ob!igations.

AACSB: Communication AICPA BB: Industry AICPA FN: 7easurement Blooms: A**ly Difficulty: - 7edium earnin! "b#ecti$e: 1%&1' .no/ tests of details of account balances used to audit in$estments+ ,o*ic: Substanti$e Procedures&In$estments

16-%*

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

6&. 2hat shou!d an auditor !oo( for )hen testing for proper c!assification of securities3 First. the securities need to be proper! c!assified as trading. avai!ab!e-for-sa!e. or he!d-tomaturit . Then. those securities that are c!assified as trading must be !isted as current assets. Proper c!assification of the avai!ab!e-for-sa!e and he!d-to-maturit securities as current or !ong-term shou!d a!so be considered.

AACSB: Communication AICPA BB: Critical ,)inkin! AICPA FN: Re*ortin! Blooms: A**ly Difficulty: 1 Easy earnin! "b#ecti$e: 1%&1' .no/ tests of details of account balances used to audit in$estments+ ,o*ic: Substanti$e Procedures&In$estments

16-%,

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments

66. 2hat are the factors that must be considered to determine if a permanent dec!ine in the va!ue of an investment securit has occurred3 The auditor must determine if there has been an permanent dec!ine in the va!ue of an investment securit . Auditing standards provide guidance for determining )hether a dec!ine in va!ue be!o) amorti>ed cost is other than temporar . The fo!!o)ing factors are cited as indicating other than temporar impairments: 1. Fair va!ue is significant! be!o) cost. #. The dec!ine in fair va!ue is attributab!e to specific adverse conditions affecting a particu!ar investment. $. The dec!ine in fair va!ue is attributab!e to specific conditions. such as conditions in an industr or in geographic areas. %. 5anagement does not possess both the intent and the abi!it to ho!d the investment !ong enough to a!!o) for an anticipated recover in fair va!ue. &. The dec!ine in fair va!ue has e/isted for an e/tended period. 6. A debt securit has been do)ngraded b a rating agenc . *. The financia! condition of the issuer has deteriorated. ,. 6ividends have been reduced or e!iminated. or schedu!ed interest pa ments on debt securities have not been made. If the investment va!ue is determined to be permanent! impaired. the securit shou!d be )ritten do)n and a ne) carr ing amount estab!ished. In addition. the auditor shou!d e/amine the sa!e of an securit to ensure that proper va!ues )ere used to record the sa!e and an rea!i>ed gain or !oss.

AACSB: Communication AICPA BB: Critical ,)inkin! AICPA FN: Re*ortin! Blooms: A**ly Difficulty: 1 Easy earnin! "b#ecti$e: 1%&1' .no/ tests of details of account balances used to audit in$estments+ ,o*ic: Substanti$e Procedures&In$estments

16-%-

Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments


Matching Questions

6*. 5atch the t pe of ban( account )ith its definition: Pett cash account Benera! cash account 4ranch account Imprest cash account

1. This account is the principa! cash account of an entit #. This account is a separate cash account maintained at the !oca! ban( of the entit $. This account contains a stipu!ated amount of cash and is used for !imited purposes %. This account is t pica!! immateria! in amount and is used for pa ing certain t pes of e/penses and transactions
AACSB: Communication AICPA BB: Industry AICPA FN: Decision 7akin! Blooms: Remember Difficulty: 1 Easy earnin! "b#ecti$e: 1%&'- .no/ t)e different ty*es of bank accounts+ ,o*ic: ,y*es of Bank Accounts

) 1 * +

6,. 5atch the segregation of duties for investments )ith the misstatement Cdue to error or fraudD it can he!p prevent. 1. The initiation function is separate from the fina! approva! function #. The va!uation-monitoring function is separate from the ac8uisition function $. Custod of the securities is separate from accounting for the securities %. The maintenance of the securities !edger is separate from that of the genera! !edger

An individua! can ma(e fictitious transactions 1 An individua! can improper! record securities va!ues or not report the va!ues to management * An individua! can concea! an defa!cation that )ou!d norma!! be detected b reconci!iation of subsidiar records )ith genera! !edger contro! accounts ) An individua! can concea! a theft of securities +

AACSB: Communication AICPA BB: Industry AICPA FN: Risk Analysis Blooms: (nderstand Difficulty: - 7edium earnin! "b#ecti$e: 1%&'5 .no/ t)e a**ro*riate se!re!ation of duties for in$estments+ ,o*ic: Se!re!ation of Duties&In$estments

16-&0