Chapter 10 - Part 1

1.

1 point

Which of the following controls over cash would an auditor expect to observe?

Reconciliation of the general ledger to the subsidiary ledger.

Checks permanently marked "for deposit only" with the proper routing information.

Internal audits of marketable securities held in the company's lockbox.

Authorization privileges given only to those employees using the accounting system.

2.

1 point

What form of evidence is used by the auditor to verify bank reconciliation items?

Cash counting observation.

General ledger.

Bank confirmation.

Cutoff statement.

3.

1 point

Which of the following is a cash management arrangement with a bank whereby the organization's customers send payments directly to the client's bank, which deposits the remittance to the client's account?

Lockbox.

Bank transfer.

Imprest bank account.

Imprest Account.

4.

1 point

Which one of the following is not a fundamental internal control the auditor would expect to find in place for a cash processing system?

Segregation of duties.

Electronic payments.

Authorization of transactions.

Periodic internal audits.

5.

1 point

Which of the following best describes kiting?

Theft of cash for personal use and cover-up using the bank statement.

A fraudulent cash scheme to overstate cash assets at year end by manipulating year-end transfers between cash accounts.

Manipulation of financial reporting by increasing both cash and debt by the same amount.

Colluding to steal cash by wiring money to a fictional vendor and concealing it with customer payments.

6.

1 point

Which of the following describes documents that accompany customer payments to help the clerk identify the payments?

Receipts such as register tapes.

Accommodation certificates such as authenticated customer tokens.

Turnaround documents such as remittance advices.

Checks stamped with restrictive endorsements such as customer signatures.

7.

1 point

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

Year-end balance.

Controls over petty cash.

Transactions for the period.

Balance sheet classification.

8.

1 point

During the testing of a year end bank reconciliation, an auditor noticed that the majority of checks listed as outstanding at year-end had not cleared the bank. Which of the following is a likely explanation?

A high probability of kiting.

A high probability of lapping.

The year-end cash disbursements records had been closed prior to year-end.

The year-end cash disbursements records had been held open past year-end.

9.

1 point

How will the auditor most likely utilize the bank reconciliation as evidence in the audit of cash?

The auditor sends the reconciliation to the bank for independent verification.

The auditor performs the reconciliation for the client to record the proper cash balance.

The auditor traces the book balance of the reconciliation to the cutoff bank statement.

The auditor tests deposits-in-transit and outstanding items to other corroborating evidence.

10.

1 point

Lockbox arrangements for the collection of cash have which of the following advantages?

The manual processing associated with maintaining control of the receipts is now shifted to a computer.

Cash is deposited directly into the bank.

The bank usually establishes only one lockbox geographically next to the client to minimize delay in collections.

Eliminates the customer decision for the due date of payment.

11.

1 point

Which of the following is the primary reason the auditor obtains and reviews a cutoff bank statement?

Verify the balance of cash per the bank's general ledger at the balance sheet date.

Verify the reconciling items on the year-end bank reconciliation.

Test for intentional lapping of bank transfers.

Foot the cutoff bank statement for completeness.

12.

1 point

Which of the following situations would normally be discovered as part of the test of the bank reconciliation?

Failure to bill a customer.

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

Duplicate payment of a vendor’s invoice.

Payment to an employee for more hours than she worked.

13.

1 point

The auditor will send a standard bank confirmation to which of the following?

Financial institutions of customers using the lockbox.

Financial institutions for which the client has a balance greater than $0 at the end of the year.

Financial institutions with which the client has transacted during the year.

Financial institutions used by significant shareholders.

14.

1 point

The cash account is significant to the auditor for which of the following reasons?

The cash account is the culmination of a large volume of transactions.

The cash account is not as susceptible to fraud as most other accounts.

Cash is the only account that provides opportunity for fraud.

Automated systems do not possess the capability to maintain strong internal controls over cash.

15.

1 point

Management has developed cash management techniques for which of the following reasons?

Increase the time to collect billings.

Reduce the amount of volume of cash transactions.

Automate the cash management process.

Increase the liquidity of cash balances.

16.

1 point

As cash processing systems become more automated and integrated, which of the following is true about the general concept of segregation of duties?

Segregation of duties becomes less important.

Segregation of duties becomes more important.

The importance of segregation of duties does not change.

Segregation of duties becomes completely computerized without human involvement.

17.

1 point

The ease with which cash can be stolen is most related to which of the following risks?

Control risk.

Inherent risk.

Detection risk.

Liquidity risk.

18.

1 point

Which of the following best describes a fraudulent cash scheme to overstate cash assets at year end by recording deposits in transit in both the account from which the cash is withdrawn and the account to which it is transferred?

Lapping of cash.

Kiting of cash.

Embezzlement of cash.

Restrictive endorsements of cash.

19.

1 point

Which of the following controls would be most successful in mitigating the theft of customer checks received in the mail?

Custody of receipts by the accounts receivable manager.

Restricted endorsements placed on the check as soon as it arrives.

Weekly deposits to a secure bank.

Reconciliation of bank accounts each month.

20.

1 point

A company must do which of the following, if a company maintains a material compensating balance of cash?

Disclose the compensating account arrangement in financial statements.

Close out the balance prior to year-end.

Tie balances to debt covenants.

Provide a lockbox for appropriate line-of-credit draws.

21.

1 point

A compensating balance arrangement usually results in which of the following for a company?

Increase its interest income.

Increase the effective interest rate on corporate borrowing.

Decrease the effective interest rate on corporate borrowing.

Exhibit no change in the effective interest rate on corporate borrowing.

22.

1 point

Which of the following represents a typical substantive audit procedure for cash balances?

Verify material deposits-in-transit to subsequent statements.

Review cash confirms received by the client from the bank.

Foot cutoff bank statements provided by the financial institutions.

Perform kiting techniques to transfer cash between two client accounts.

23.

1 point

Which one of the following risks is not a risk associated with cash?

The large volume of transactions.

Importance of meeting debt covenants.

Valuation issues are typically complex.

Easy to manipulate.

24.

1 point

Electronic authorization privileges for cash transactions may be best assigned to individuals based on which of the following?

Roles and activities falling within appropriate segregation of duties.

Identification cards with picture identification.

Encrypted passwords memorized by employees.

The principle of "absolute knowledge".