Audit of cash and marketable securities

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

a. Large volume of transactions.

D. Complex Valuation issues
b. Easy to manipulate.
c. Importance of meeting debt covenants.
d. Complex valuation issues.
Kiting is an example of a technique used to intentionally overstate
True
cash. T/F
Skimming occurs when an employee makes a sale but does not
True
record it and steals the cash. T/F
During the testing of a year-end bank reconciliation, an auditor no-
ticed that the majority of checks listed as outstanding at year-end
did not clear the bank until the middle of the subsequent month.
Which of the following is a likely explanation?
a. A high probability of kiting. d. Checks were issued before year-end but not mailed until the
b. The year-end cash disbursements records had been closed subsequent period.
prior to year-end.
c. A high probability of lapping.
d. Checks were issued before year-end but not mailed until the
subsequent period.
Which of the following is a risk associated with complex financial
instruments?
a. Management may enter into such transactions without proper
oversight from those charged with corporate governance.
b. Management and/or those charged with corporate governance d. all of the above
may lack experience with complex financial instruments.
c. Management's objectives in entering into such transactions may
relate to misstating the financial statements.
d. All of the above are risks.
Customer checks received at the client company should be re-
False
strictively endorsed within one week of receipt. T/F
The reported fair market value of securities held by the client
can be verified by the auditor through which of the following
procedures?
a. Confirming the fair values with the client as of the close of the
year.
c. Comparing the fair values to credible publications and websites.
b. Comparing the fair values with the fair values of similar securi-
ties.
c. Comparing the fair values to credible publications and websites.
d. Comparing the values to those securities held by the auditing
firm.
Which of the following is not a normal edit test as part of comput-
erized control for checks?

a. Self-checking digits. b. Cross-references.

b. Cross-references.
c. Reasonableness tests.
d. Field checks.
Which of the following situations would normally be discovered by
testing the bank reconciliation?
a. Duplicate payment of a vendor's invoice.
d. Failure to include a deposit in transit on the bank reconciliation
b. Failure to bill a customer.
c. Payment to an employee for more hours than she worked.
d. Failure to include a deposit in transit on the bank reconciliation.
Which of the following controls would be most successful in miti-
gating the theft of customer checks received in the mail?
d. Restrictive endorsements placed on checks as soon as they
a. Custody of receipts by the accounts receivable manager.
arrive.
b. Weekly deposits to a secure bank.
c. Reconciliation of bank accounts each month.
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 Audit of cash and marketable securities
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d. Restrictive endorsements placed on checks as soon as they
arrive.
Money laundering is designed to create the appearance that large
sums of cash obtained from criminal activities, such as drug True
trafficking, originated from legitimate business sources. T/F
Commercial paper is the term applied to notes issued by major
False
corporations with poor credit ratings. T/F
Assume that an auditor notes a large series of checks that does
not clear the bank for an unusually long time after period end.
Which of the following would the auditor likely suspect from this
observation?
d. The presence of held checks at period-end.
a. The reconciliation is accurate.
b. Cash does not exist.
c. Vendors are eager to get their payments.
d. The presence of held checks at period-end.
The primary purpose of the cutoff bank statement is to verify the
TRUE
reconciling items on the bank reconciliation. T/F
The auditor prepares a schedule for marketable securities. Which
of the following is not one of the items in the schedule related to
the value of the securities?
a. Year-end market value. b. Interest and dividends
b. Interest and dividends.
c. Carrying value for debt instruments.
d. Cost.
The auditor may discover evidence of kiting by preparing an
TRUE
interbank transfer schedule. T/F
The audit of the cash account is inherently risky due to volume of
TRUE
activity, liquidity, and the account's susceptibility to fraud. T/F
Because substantive audit procedures are largely ineffective for
cash accounts, auditors typically focus on tests of controls when FALSE
the risk of material misstatement is assessed at a high level. T/F
The valuation/allocation and completeness assertions are usually
FALSE
the most relevant for auditing cash. T/F
Which assertion related to investments is tested when the auditor
examines the documents for any restrictions?
a. Valuation.
d. Rights.
b. Existence.
c. Completeness.
d. Rights.
Independent reconciliations of bank statement balances with the
balance on the books should identify misstatements and any TRUE
unusual banking activity. T/F
Smurfing involves the overstatement of a bank account by trans-
ferring funds at the end of the year to another bank account and FALSE
failing to record the disbursement. T/F
The valuation assertion is most relevant to the audit of marketable
TRUE
securities. T/F
Which of the following is not a common test of controls for mar-
ketable securities?
a. Review reports of internal audits.
b. Review broker's advice for accurate recording of security.
b. Review broker's advice for accurate recording of security.
c. Review the minutes of the board meetings.
d. Inquire of management about its process for reclassifications.
A risk of fraud is not associated with petty cash funds because of
FALSE
the small amounts of money involved. T/F

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 Audit of cash and marketable securities
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Which of the following types of securities is valued at amortized
cost, subject to an impairment test?
a. Trading securities.
b. Held-to-maturity securities.
b. Held-to-maturity securities.
c. Cash equivalent securities.
d. Available-for-sale securities
The standard bank confirmation includes the confirmation of cash
FALSE
accounts but not liabilities with financial institutions. T/F
Automated controls over cash eliminate the inherent risks asso-
FALSE
ciated with the cash account. T/F
All marketable securities are carried at fair market value on the
FALSE
balance sheet.
The standard bank confirmation includes a designated place for
the financial institution to report which of the following?
a. Maturity dates for certificates of deposit.
d. Loans and collateral.
b. A reconciliation of the lockbox.
c. Cash held on consignment.
d. Loans and collateral.
Electronic funds transfers have controls built into the process and
FALSE
do not require further reconciliation by the client. T/F
Which of the following best describes kiting?
a. Colluding to steal cash by wiring money to a fictional vendor and
concealing it with customer payments.
b. Manipulation of financial reporting by increasing both cash and
d. A fraudulent scheme to overstate cash at year-end by manipu-
debt by the same amount.
lating year-end transfers between bank accounts.
c. Theft of cash for personal use and cover-up using the bank
statement.
d. A fraudulent scheme to overstate cash at year-end by manipu-
lating year-end transfers between bank accounts.
The emphasis in verifying petty cash is normally on which of the
following?

a. Year-end balance. c. Controls over petty cash.

b. Balance sheet classification.
c. Controls over petty cash.
d. Transactions for the period.
The auditor's performance of an independent reconciliation of the
client's bank accounts provides evidence as to the rights and FALSE
obligations of the year-end cash balances. T/F
Periodic bank reconciliations should be performed by the individ-
FALSE
ual who makes the client's bank deposits. T/F
Notes issued by major corporations are known as commercial
TRUE
paper.T/F
The cash account is significant to the auditor for which of the
following reasons?
a. Automated systems do not possess the capability to maintain
strong internal controls over cash.
b. The cash account balance is the culmination of a large volume
b. The cash account balance is the culmination of a large volume
of transactions.
of transactions.
c. Cash is the only account that provides opportunity for fraud.
d. The cash account is not as susceptible to fraud as most other
accounts.
Which of the following procedures does the auditor typically per-
form when testing the existence of cash?
a. Sending a standard bank confirmation.
a. Sending a standard bank confirmation
b. Tracing the bank reconciliation to the general ledger.
c. Inquiry of management.
d. Counting cash at the depository institution
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 Audit of cash and marketable securities
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Which of the following best describes a fraudulent 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?
a. Kiting of cash.
a. Kiting of cash.
b. Embezzlement of cash.
c. Lapping of cash.
d. Restrictive endorsements of cash.
A turnaround document is an effective control because it contains
information useful for further processing of a payment received TRUE
from a customer. T/F
Gains and losses are not considered by auditors in testing mar-
FALSE
ketable securities, as they do not need to be disclosed. T/F
Which of the following is a cash management technique frequently
used by management?
a. Lockboxes.
d. Cash management agreement with financial institutions.
b. Electronic funds transfers.
c. All of the above.
d. Cash management agreement with financial institutions.
As cash processing systems become more automated and inte-
grated, which of the following is true about the general concept of
segregation of duties?
a. Segregation of duties becomes more important.
b. The importance of segregation of duties does not change.
b. The importance of segregation of duties does not change.
c. Segregation of duties becomes completely computerized with-
out human involvement.
d. Segregation of duties becomes less important.
Which of the following types of financial instruments is a contract
between a buyer and a seller in which the buyer has the right
(but not the obligation) to buy an agreed quantity of a specified
commodity or financial instrument at a certain time for a certain
price. d. Call option.
a. Collateralized purchase option.
b. Put option.
c. Hedge.
d. Call option.
Testing debt securities and commercial paper would typically in-
TRUE
clude an analysis of interest income. T/F
Auditors test the assertion of completeness by determining if
any restrictions on the use of commercial paper by an entity are FALSE
disclosed in the footnotes. T/F
When there is a ready market for a financial instrument, the audit
procedures related to valuation and disclosures are more straight- TRUE
forward than when the instrument is not readily marketable. T/F
The cutoff statement is mailed to the client for an agreed-upon
FALSE
date and then copied for the audit files. T/F
Which of the following is the primary reason the auditor obtains
and reviews a cutoff bank statement?
a. Verify the reconciling items on the year-end bank reconciliation.
b. Test for intentional lapping of bank transfers. a. Verify the reconciling items on the year-end bank reconciliation.
c. Foot the cutoff bank statement for completeness.
d. Verify the balance of cash per the bank's general ledger at the
balance sheet date.

Which of the following would be used by the auditor to address the

possibility of kiting?
c. Interbank transfer schedules
a. Bank confirmations of account balances.
b. Bank confirmations of loan guarantees.

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 Audit of cash and marketable securities
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c. Interbank transfer schedules.
d. Cut-off bank reconciliations.
Which of the following represents a typical substantive audit pro-
cedure for cash balances?

a. Review cash confirmations received by the client from the bank.

b. Foot cutoff bank statements provided by the financial institu-
tions.
c. Verify material deposits in transit to subsequent statements.
d. Perform kiting techniques to transfer cash between two client
accounts.
Internal audits are seldom an effective deterrent to the theft of
FALSE
cash. T/F
The auditor will send a standard bank confirmation to which of the
following?

a. Financial institutions for which the client has a balance greater

b. Financial institutions with which the client has transacted during
than $0 at the end of the year.
the year.
b. Financial institutions with which the client has transacted during
the year.
c. Financial institutions used by significant shareholders.
d. Financial institutions of customers using the lockbox.
Which of the following is not an internal control the auditor would
expect to find in place for all cash processing systems?
a. Walkthrough.
a. Walkthrough.
b. Restrictive endorsement of checks.
c. Independent reconciliation.
d. Prenumbered cash receipt documents.
Which of the following describes documents that accompany cus-
tomer payments to help the clerk identify the payments?
a. Receipts such as register tapes.
b. Turnaround documents such as remittance advices.
b. Turnaround documents such as remittance advices
c. Checks stamped with restrictive endorsements such as cus-
tomer signatures.
d. Accommodation certificates such as authenticated customer
tokens.
The recording of a marketable security depends, in large part, on
TRUE
management's intention with the investment. T/F
The standard bank confirmation should be sent to all banks used
by the client during the year except those banks holding client FALSE
accounts with a zero balance at year-end. T/F
How will the auditor most likely utilize the bank reconciliation as
evidence in the audit of cash?
a. The auditor tests deposits in transit and outstanding items to
other corroborating evidence.
b. The auditor traces the book balance of the reconciliation to the a. The auditor tests deposits in transit and outstanding items to
cutoff bank statement. other corroborating evidence.
c. The auditor performs the reconciliation for the client to record
the proper cash balance.
d. The auditor sends the reconciliation to the bank for independent
verification.
The existence or occurrence assertion as related to cash is con-
FALSE
cerned with proper classification on the balance sheet. T/F
Investments in securities are classified as which of the following?
a. Available-for-sale securities.
b. Trading securities. d. All of the above.
c. Held-to-maturity.
d. All of the above.

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 Audit of cash and marketable securities
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Which of the following items would not normally appear on bank
reconciliations?
a. Balance per books.
d. Outstanding deposits list.
b. Balance per bank.
c. Outstanding checks list.
d. Outstanding deposits list.
The standard bank confirmation is used by the auditor to test for
FALSE
lapping. T/F
Cash and cash equivalents reported on the balance sheet may
include debt securities that mature less than six months from the FALSE
balance sheet date. T/F
The ease with which cash can be stolen is most related to which
of the following risks?
a. Detection risk.
b. Inherent risk
b. Inherent risk.
c. Liquidity risk.
d. Control risk.
In assessing risk relating to fraud, auditors brainstorm about po-
TRUE
tential fraud risks. T/F
Auditors usually perform relatively limited substantive analytical
procedures for cash accounts and instead focus on substantive TRUE
tests of details. T/F
The ending price of securities can be verified through reliable
TRUE
publications and websites such as the Wall Street Journal. T/F
Under which of the following circumstances would the valuation
assertion for cash most likely have an increased level of inherent
risk?
a. Client has cash holdings in foreign currency in a politically a. Client has cash holdings in foreign currency in a politically
unstable country. unstable country.
b. Client has cash holdings in multiple U.S. financial institutions **NOT SURE**
over a wide geographic area.
c. All of the above.
d. Client holds investments in complex financial instruments.
What form of evidence is used by the auditor to verify bank
reconciliation items?

a. General ledger. b. Cutoff statement

b. Cutoff statement.
c. Cash counting observation.
d. Bank confirmation
Which of the following controls over cash would an auditor expect
to observe?

a. Reconciliation of the general ledger to the subsidiary ledger.

b. Authorization privileges given only to those employees using d. Checks permanently marked "for deposit only" with the proper
the accounting system. routing information.
c. Internal audits of marketable securities held in the company's
lockbox.
d. Checks permanently marked "for deposit only" with the proper
routing information.
The auditor obtains the current market value of marketable secu-
FALSE
rities by confirmation with the holder of the security. T/F
Planning analytical procedures for cash balances typically include
trend analysis and ratios for comparison with the auditor's expec- TRUE
tations. T/F
When auditing marketable securities, the auditor will do which of
the following?
a. Recompute income.
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 Audit of cash and marketable securities
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b. Foot schedule.
c. Both A and B.
d. All of the above.
d. All of the above.
e. Examine broker's advices evidencing purchase of securities.
Many financial instruments offer a potentially higher return for
FALSE
investors along with a reduced level of risk. T/F
The existence of debt covenants with restrictions related to cash
or working capital increase the risks of material misstatement in TRUE
cash accounts T/F
The cutoff bank statement is used by the auditor to address which
of the following concerns?
a. Omitting outstanding checks on reconciliations.
a. Omitting outstanding checks on
b. Lapping.
c. All of the above.
d. Kiting.
Which of the following would not be included as part of the doc-
umentation related to the substantive procedures for marketable
securities?
b. Policies over purchase or sale of marketable securities
a. Calculation of any potential impairments.
b. Policies over purchase or sale of marketable securities.
c. A schedule of marketable securities prepared by the client.
d. Reports of any outside valuation experts.
When testing cash balances at the balance sheet date, the auditor
foots the bank reconciliation and traces its reported book balance
to the trial balance and its bank balance to the standard confirma-
tion. Which of the following assertions is being tested with these
procedures?
d. All of the above.
a. Valuation.
b. Existence.
c. Rights.
d. All of the above
Client management's review of monthly bank reconciliations pre-
pared by employees is an example of a control over the accuracy TRUE
of cash balances that the auditor might test. T/F
Electronic authorization privileges for cash transactions may be
best assigned to individuals based on which of the following?

a. Encrypted passwords memorized by employees. a. Encrypted passwords memorized by employees.

b. The principle of "absolute knowledge." NOT SURE
c. Roles and activities falling within appropriate segregation of
duties.
d. Identification cards with picture identification.
Which of the following would the auditor use to test the existence
of investments?
a. Footing the schedule of recorded investments.
b. Confirming or examining recorded investments.
b. Confirming or examining recorded investments.
c. Recomputing interest and/or gains and losses.
d. Reviewing a schedule of investments sold during the year.
Thinly traded securities have a greater inherent risk related to
TRUE
valuation. T/F
An assessment of the client's internal control over cash and
marketable securities should take place during the performance FALSE
of the substantive tests on these accounts. T/F
In auditing cash accounts, auditors typically focus primarily on the
TRUE
existence/occurrence and completeness assertions. T/F

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When auditing financial hedges, the auditor should understand
the product, identify relevant risks and controls, and understand TRUE
the appropriate accounting. T/F
Which one of the following is not a fundamental internal control
the auditor would expect to find in place for a cash processing
system?
c. Electronic payments.
a. Segregation of duties.
b. Periodic internal audits.
c. Electronic payments.
d. Authorization of transactions.
Interbank transfer schedules are used by the auditor to address
which of the following concerns?
a. Kiting.
b. All of the above. a. Kiting.
c. Lapping.
d. Embezzlement by omitting outstanding checks on reconcilia-
tion.
Which of the following would not be used as part of analytical
procedures for marketable securities?

a. Develop expectations about the level of amounts in ending

balances.
b. Verify ending balances prior to calculating the percent change.
b. Verify ending balances prior to calculating the percent change.
c. Review changes in the balances, risk composition, and classi-
fication types.
d. Develop expectations about the relationship between the bal-
ances.
Effective internal control over the cash account requires that the
person responsible for making the bank deposit does not post the TRUE
increase to cash in the accounting system. T/F
A lockbox is a mailbox type of depository device that is located in
front of the client's premises, allowing customers to remit payment FALSE
in a timely manner. T/R
Which of the following is the most relevant assertion with regards
to the audit of cash?
a. Existence
a. Existence
b. Presentation and disclosure.
c. Rights and obligations.
d. Valuation and allocation.

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