IL- Audit of Cash and Cash Equivalents PROBLEM NO. 20 ~ Substantive audit procedures for cash and cash equivalents Select the best answer for each of the following: 1. The primary audit objective for cash is to establish that the balance is properly stated. This involves determining: a b. c. d. That cash on hand as shown in the general ledger is represented by currency and coins on hand Yes Yes Yes Yes Ownership and proper accountabilities No Yes No Yes ‘That cash balances are available without restrictions No Yes Yes No An auditor for a large service company is performing an audit of the company's cash balance. The auditor is considering the most appropriate audit procedure to use to ensure that the amount of cash is accurately recorded on the company's financial statements. ‘The most appropriate audit procedures for the objective are a. Examine bank reconciliations, confirm bank balances, and Verify cut off of receipts and disbursements; foot totals of reconciliations and compare to cash account balances. b. Review collection procedures and perform an analytical review of accounts receivable; confirm balances of accounts receivabl and verify the existence of appropriate procedures and facilitie: c. Compare cash receipt lists with the receipts journal and bank deposit slips; review the segregation of duties, observe, and test cash receipts. d. Review the organizational structure and functional responsibilities; verify the existence and describe protection procedures for unused checks, including security measures. 3. Cash receipts should be deposited on the day of receipt or the following business day. Select the most appropriate andit procedure to determine that cash is promptly deposited. a. Review the functions of cash receiving and disbursing for proper separation of duties. b. Review cash register tapes prepared for cach sale. c. Review the functions of cash handling and maintaining minting records for proper separation of duties. 75I- Audit of Cash and Cash Equivalents d. Compare the daily cash receipts totals with the bank deposits. 4. Which of the following sets of information does an auditor usually confirm on one form? a. Cash in bank and collateral for loans. b. Accounts payable and purchase commitments. ¢. Accounts receivable and accrued interest recei d, Inventory on consignment and contingent lial ties. 5. The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to. Corroborate information regarding deposit and loan balances. Provide the data necessary to prepare a proof of cash. Detect kiting activities that may otherwise not be discovered. Request information about contingent liabilities and secured transactions. PEST Sap: 6. An auditor ordinarily sends a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balance. A purpose of this procedure is to a. Request a cutoff bank statement and related checks be sent to the auditor. b. Detect kiting activities that may otherwise not be discovered. c. Seek information about contingent liabilities and security agreements. d. Provide the data nécessary to prepare a proof of cash. 7. As one of the year-end audit procedures, the auditor instructed the client’s personne! to prepare a standard bank confirmation request for a bank account that had been closed during the year. After the client’s treasurer had signed the request, it was mailed by the assistant treasurer. What is the major flaw in this audit procedure? a. The CPA did not sign the confirmation request before it was mailed. b. Sending the request was meaningless because the account was closed before year-end. c. The confirmation request was signed by the treasurer. d. The request was mailed by the assistant treasurer. 76I- Audit of Cash and Cash Equivalents 8. The usefulness of the standard bank confirmation request may he limited because the bank empioyee who compietes the form may a. Not believe that the bank is obligated to verify confidential information to a third party. Determine that the year end deposit in transit was credited by the bank on the first working day of the following accounting period. 11.A client maintains two bank accounts. One of the accounts, Banic ‘A, has an overdraft of P100,000. The other account, Bank B, has a positive balance of P50,000. To conceal the overdraft from the auditor, the client may decide to a. Draw a check for at least P100,000 on Bank A for deposit in Bank B. Record the receipt but not the disbursement and list the receipt as a deposit in transit. Record the disbursement at the beginning of the following year. >. Draw a check for at least P100,000 on Bank B.for deposit in Bank A. Record the receipt but not the disbursement and list the receipt as a deposit in transit, Record the disbursement at : ginning oi the following year. 7IL- Audit of Cash and Cash Equivalents c. Draw a check for P100,000 on Bank B for deposit in Bank ‘A. Record the disbursement but not the receipt. List the disbursement as an outstanding check, but do not list the receipt as a deposit in transit. Record the receipt at the beginning of the following period. d. Draw a check for at least P100,000 on Bank A for deposit in Bank B. Record the disbursement but not the receipt and list the disbursement as an outstanding check. Record the receipt at the beginning of the following year. 12. While performing an audit of cash, an auditor begins to suspect check kiting. Which of the following is the best evidence that the auditor could obtain concerning whether kiting is taking place? a. Documentary evidence obtained by vouching credits on’ the latest bank statement to supporting documents. b. Documentary evidence obtained by vouching entries in the cash account to supporting documents. c. Oral evidence obtained by discussion with controller personnel. d. Evidence obtained by preparing a schedule of interbank transfers. Use the following information for questions 13 and 14. The information below was taken from the bank transfer schedule prepared during the audit of Khaye Ting Company’s financial statements for the year ended December 31, 2010. Assume all checks are dated and issued on December 30, 2010. Disbursements Receipts Per Per Per Per No. From To Books Bank Books Bank 101 Pbcom HSBC 12/30 1/4 12/30 1/3 102 ~UCPB = MBank 1/3 1/2 12/30 12/31 103. HSBC PSBank 12/31 1/3 1/2 1/2 104 MBank PNB 1/2 1/2 ft eta fs1 13. Which of the following checks might indicate kitin; Check Nos. 101 and 103 104 Check Nos. 101 and 104 Check Nos. 102 and 103 pore 78H- Audit of Cash and Cash Equivalents 14. Which of the following checks illustrate deposits/transfers in transit at December 31, 2010? Check Nos. 101 and 102 Check Nos. 101 and 103 ‘Check Nos. 102 and 104 Check Nos. 103 and 104 pope 15. Two months before year-end, the ‘vookkeeper erroneously recorded the receipt of a long-term bank loxii by a debit to cash and a credit to sales. Which of the following is the most effective procedure for" detecting this type of error? a. Analyze bank confirmation information. b. Analyze the notes payable journal. ¢. Prepare year-end banik reconciliation. d. Prepare a year-end bank transfer schedule. 1 a Postdated checks received by mail in settlement of customer's accounts should be a. Returned to customer. b.. Stamped with restrictive endorsement. c. Deposited immediately by the cashier. d. Deposited the day after together with cash receipts. 17. The cashier of Weakness Company covered a shortage in the cash working fund with cash obtained at December 31 from a bank by ing but bank. How would you as an auditor discover the manipulation? a. By confirming all December 31 bank balances. b. By counting the cash working fund at the close of business on December 31. c. By investigating items returned with the bank cut-off statements of the succeeding month. 4. By preparing independent bank reconciliations as of December 31 18. An essential phase of the audit of the cash balance at the end of the year is the auditor's review of cutoff bank statement. This specific procedure is not useful in determining if a. Kiting has occurred. b. Lapping has occurred. c. The cash receipts journal was held oper. 79I1- Audit of Cash and Cash Bquivalents d. Disbursements per the bank statement can be reconciled with total checks written. 19. ‘ seine) is used by an auditor to Prove the correctness of the cash balance in the client's year-end statement of financial position. b. Prove that the client's bank did not make an error during the period under examination. c. Determine if there were any unauthorized disbursements or unrecorded deposits during the reconciliation period d. Comply with Philippine Auditing Practice Statements. 20. Witich of these is not required to be imcluded in an auditor’ cash count report. a, The audited balance of the fund. b. The date and time of the count. c. That the count was made in the presence of the custodian. d. That the items counted were returned intact to the custodian. Answers: 1B 6..C 1B 16.8 2A he D 12.D 17.C 3. D 8. B 13.B 18.B 4A 9c 14.B 19.C 5. A 10.B 15.A 20.A 380