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16 Chapter - 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 by all of the entity's business processes. True False 2. The general cash account is generally the principal account used to disburse payroll. True False 3. An imprest cash account is used for specific purposes and generally maintains a very small balance. True False 4. The auditor's use of analytical procedures for auditing cash is limited. True False 5. A major control that directly affects the audit of cash is the bank reconciliation prepared by the auditor. True False 6. A cutoff bank statement is used to verify the propriety of the reconciling items shown on the bank reconciliation. True False 7. Kiting is an audit procedure used to test the accuracy of the cash receipts. True False 16-1 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 8. It is generally more efficient to follow a substantive strategy for auditing investments. True False 9. If the client maintains custody of its investments, the auditor normally examines the actual securities. True False 10. Level 1 inputs are more risky and difficult to audit than Level 3 inputs to a valuation model. True False Multiple Choice Questions 11. Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity's employees? A. A bank lockbox system B. Prenumbered remittance advices C. Monthly bank reconciliations D. Daily deposit of cash receipts 12. The least crucial element of internal control over cash is A. Separation of cash record-keeping from custody of cash B. Preparation of the monthly bank reconciliation C. Batch processing of checks D. Separation of cash receipts from cash disbursements 16-2 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 13. Which of the following audit procedures is the most appropriate when internal control over cash is weak or when a client requests an investigation of cash transactions? A. Proof of cash B. Bank reconciliation C. Cash confirmation D. Evaluate ratio of cash to current liabilities 14. An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when the A. Check register for the last month is reviewed B. Cutoff bank statement is reconciled C. Bank confirmation is reviewed D. Search for unrecorded liabilities is performed 15. Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting between intercompany banks? A. Review the composition of authenticated deposit slips B. Review subsequent bank statements received directly from the banks C. Prepare a schedule of bank transfers D. Prepare year-end bank reconciliations 16. An interbank transfer schedule A. Is another name for the proof of cash B. Helps the auditor test for kiting C. Is on a standard bank confirmation D. Is used to examine client bank reconciliations 17. If fraud is suspected, auditors may complete all of the following procedures except A. Testing for kiting B. Footing the bank reconciliation and the outstanding check listing C. Performing a proof of cash D. Performing extended bank reconciliation procedures, including detailed examination of reconciling items 16-3 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 18. Of the following, which is the most efficient audit procedure for verification of interest earned on bond investments? A. Tracing interest declarations to an independent record book B. Recomputing interest earned using the interest rate and bond amount C. Confirming the interest rate with the issuer of the bonds D. Vouching the receipt and deposit of interest checks 19. An auditor testing long-term investments would ordinarily use substantive analytical procedures as the primary audit evidence to support the reasonableness of the A. Valuation of marketable equity securities B. Classification of gains and losses on the disposal of securities C. Completeness of recorded investment income D. Existence and ownership of investments 20. To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would A. Inspect the stock certificates evidencing the investment B. Examine the audited financial statements of the investee company C. Review the broker's advice or canceled check for the investment's acquisition D. Obtain market quotations from financial newspapers or periodicals 21. An auditor usually tests the reasonableness of dividend income from investments in publicly-held companies by computing the amounts that should have been received by referring to A. Dividend record books produced by investment advisory services B. Stock indentures published by corporate transfer agents C. Stock ledgers maintained by independent registrars D. Annual audited financial statements issued by the investee companies 16-4 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 22. Which of the following pairs of accounts would an auditor most likely analyze on the same working paper? A. Notes receivable and interest income B. Accrued interest receivable and accrued interest payable C. Notes payable and notes receivable D. Interest income and interest expense 23. In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client's name, an auditor most likely gathers evidence in support of management's financial statement assertions regarding A. Existence B. Rights and obligations C. Completeness D. All of the above 24. All of the following can assist the auditor in testing the existence assertion for investment securities except A. Physical examination B. Comparing fair value to cost C. Confirmation with the issuer D. Confirmation with the custodian 25. An imprest cash account is A. Used for investing in marketable securities B. The principal cash account for an entity C. One that contains a stipulated amount of money and is used for limited purposes D. The principal checking account for a branch of an entity 16-5 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 26. An auditor ordinarily should send 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, because this procedure A. Provides for confirmation regarding compensating balance arrangements B. Detects kiting activities that may not otherwise be discovered C. Seeks information about indebtedness to the bank D. Verifies securities held by the bank in safekeeping 27. Tracing a sample of remittance advices to entries in the cash receipts journal tests which of the following assertions for cash? A. Occurrence B. Completeness C. Authorization D. Cutoff 28. Examining a sample of cancelled checks for an authorized signature tests which of the following assertions for cash? A. Occurrence B. Completeness C. Cutoff D. Accuracy 29. The cashier of Brooke Company covered a shortage in the cash working fund with cash obtained on December 31 from a local bank by cashing, but not recording, a check drawn on the Company's out-of-town bank. How would the auditor discover this manipulation? A. Confirming all December 31 bank balances B. Counting the cash working fund at the close of business on December 31 C. Preparing independent bank reconciliations as of December 31 D. Preparing and detail testing a bank transfer schedule 16-6 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 30. The auditor should ordinarily mail confirmation requests to all banks with which the client has conducted any business during the year, regardless of the year-end balance, since A. The confirmation form also seeks information about indebtedness to the bank B. This procedure will detect kiting activities which would otherwise not be detected C. The mailing of confirmation forms to all such banks is required by generally accepted auditing standards D. This procedure relieves the auditor of any responsibility with respect to nondetection of forged checks 31. An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to A. Verify the cash balance reported on the bank confirmation inquiry form B. Verify reconciling items on the client's bank reconciliation C. Detect lapping D. Detect kiting 32. An auditor should trace interbank transfers for the last part of the audit period and first part of the subsequent period to detect whether A. The cash receipts journal was held open for a few days after the year-end B. The last checks recorded before the year end were actually mailed by the year-end C. Cash balances were overstated because of kiting D. Any unusual payments to or receipts from related parties occurred 33. To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine all of the following except the A. Cutoff bank statement B. Year-end bank statement C. Bank confirmation D. General ledger 16-7 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 34. A primary purpose of the proof of cash is to A. Prevent fraud B. Reconcile actual cash receipts and disbursements to budgeted receipts and disbursements C. Investigate variances from expected cash balances D. Ensure that all cash receipts recorded in the cash receipts journal were deposited in the bank account 35. A company has additional temporary funds to invest. The Board of Directors decided to purchase marketable securities and assigned the future purchase and sale decisions to a responsible financial executive. The best person(s) to make periodic reviews of the investment activity authorized by that executive should be A. An investment committee of the Board of Directors B. The chief operating officer C. The corporate controller D. The treasurer 36. A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and submission of coupons for periodic interest collections probably should be delegated to the A. Chief Accountant B. Internal Auditor C. Cashier D. Treasurer 37. Which of the following controls would an entity most likely use in safeguarding against the loss of marketable securities? A. An independent trust company that has no direct contact with the employees who have record keeping responsibilities has possession of the securities B. The internal auditor verifies the marketable securities in the entity's safe each year on the balance sheet date C. The independent auditor traces all purchases and sales of marketable securities through the subsidiary ledgers to the general ledger D. A designated member of the board of directors controls the securities in a bank safedeposit box 16-8 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 38. Which of the following procedures most likely would give the greatest assurance that securities held as investments are safeguarded? A. There is no access to securities between the year-end and the date of the auditor's security count B. Proceeds from the sale of investments are received by an employee who does not have access to securities C. Investment acquisitions are authorized by a member of the Board of Directors before execution D. Access to securities requires the presence of two designated officials 39. Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom? A. The cashier posts the receipts to the accounts receivable subsidiary ledger cards B. The cashier makes the daily deposit at a local bank C. The cashier prepares the daily deposit D. The cashier endorses the checks 40. When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the A. Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records B. Securities are registered in the name of the trust company, rather than the entity itself C. Interest and dividend checks are mailed directly to an entity employee who is authorized to sell securities D. Trust company places the securities in a bank safe-deposit vault under the custodian's exclusive control 41. In a manufacturing company, which one of the following audit procedures would give the least assurance for the existence of the general ledger balance of investment in stocks and bonds at the audit date? A. Confirmation from the broker B. Inspection and count of stocks and bonds C. Vouching all changes during the year to brokers' advices and statements D. Examination of canceled checks issued in payment of securities purchased 16-9 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 42. The auditor should insist that a representative of the client be present during the physical examination of securities in order to A. Lend authority to the auditor's directives B. Detect forged securities C. Coordinate the return of all securities to proper locations D. Acknowledge the receipt of securities returned 43. Which of the following is not one of the auditor's primary objectives in an examination of marketable securities? A. To determine whether securities are authentic B. To determine whether securities are the property of the client C. To determine whether securities actually exist D. To determine whether securities are properly classified on the balance sheet 44. Jones was engaged to examine the financial statements of Virginia Corporation for the year ended June 30. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income? A. Tracing recorded dividend income to cash receipts records and validated deposit slips B. Utilizing analytical procedures and statistical sampling C. Comparing recorded dividends with amounts appearing on federal information forms 1099 D. Comparing recorded dividends with a standard financial reporting service's record of dividends 45. A client has a large and active investment portfolio that is kept in a bank safe deposit box. If the auditor is unable to examine and count the securities at the balance sheet date but will examine and count the securities shortly thereafter, the auditor most likely will A. Request that the bank confirm to the auditor the contents of the safe deposit box at the balance sheet date B. Examine supporting evidence for transactions occurring during the year C. Count the securities at a subsequent date and confirm with the bank whether securities were added or removed since the balance sheet date D. Request that the client have the bank seal the safe deposit box until the auditor can count the securities at a subsequent date 16-10 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 46. In establishing the existence and ownership of a long-term investment in publicly-traded stock, an auditor should inspect the securities or A. Correspond with the investee company to verify the number of shares owned B. Inspect the audited financial statements of the investee company C. Confirm the number of shares owned that are held by an independent custodian D. Determine that the investment is carried at the lower of cost or market 47. Examining brokers' advices for a sample of securities purchased during the year is a test for the assertion of A. Completeness B. Disclosure C. Valuation and allocation D. Rights and Obligations 48. Under which of the following circumstances would an auditor be most likely to intensify an examination of a $1,000 petty cash fund maintained on an imprest basis? A. Reimbursement vouchers are not prenumbered B. Reimbursement of the fund from the general cash account occurs twice or more each week C. The custodian occasionally uses the cash fund to cash employee checks D. The custodian endorses reimbursement checks 49. As one of the year-end audit procedures, the auditor instructed the client's personnel 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 to the bank by the assistant treasurer. What is the major flaw in this audit procedure? A. The confirmation request was signed by the treasurer B. Sending the request was meaningless because the account was closed before the year-end C. The request was mailed by the assistant treasurer D. The CPA did not sign the confirmation request before it was mailed 16-11 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 50. The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to A. Detect kiting activities that may otherwise not be discovered B. Corroborate information regarding deposit and loan balances C. Provide the data necessary to prepare a proof of cash D. Request information about contingent liabilities and secured transactions 51. Which of the following control activities would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments? A. Senior management verifies that securities in the bank safe deposit box are registered in the entity's name B. The internal auditor compares the securities in the bank safe deposit box with recorded investments C. The treasurer vouches the acquisition of securities by comparing brokers' advices with canceled checks D. The controller compares the current market prices of recorded investments with the brokers' advices on file 52. Which of the following controls would a company most likely use to safeguard marketable securities when an independent trust agent is not employed? A. The investment committee of the board of directors periodically reviews the investment decisions delegated to the treasurer B. Two company officials must be present to access marketable securities, which are kept in a bank safe-deposit box C. The internal auditor and the controller independently trace all purchases and sales of marketable securities from the subsidiary ledgers to the general ledger D. The chairman of the board verifies the marketable securities, which are kept in a bank safedeposit box, each year on the balance sheet date 16-12 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 53. When there is a large number of negotiable securities in multiple locations, careful planning of the physical inspection and count of the securities by the auditor is necessary to guard against A. Unauthorized negotiation of the securities before they are counted B. Unrecorded sales of securities after they are counted C. Substitution of securities already counted at one location for other securities which should be on hand at a different location but are not D. Substitution of authentic securities with counterfeit securities 54. When an auditor is unable to inspect and count a client's investment securities until after the balance sheet date, the bank where the securities are held in a safe-deposit box should be notified on or before the balance sheet date that they will be asked to A. Verify any differences between the contents of the box and the balances in the client's subsidiary ledger B. Provide a list of securities added and removed from the box between the balance sheet date and the security-count date C. Confirm that there has been no access to the box between the balance sheet date and the security-count date D. Count the securities in the box so that the auditor will have an independent direct verification 55. Which of the following would provide the best form of evidential matter pertaining to the annual valuation of a long-term investment in which the independent auditor's client owns a 45 percent voting interest? A. Market quotations of the investee company's stock B. The current fair value of the investee company's assets C. Historical costs of the investee company's assets D. Audited financial statements of the investee company 56. Which of the following procedures would be most important in the audit of an investment valued at fair value? A. Compare the balance in the investment account to the prior year. B. Read the footnote disclosure related to the investment. C. Inquire of management's regarding the accuracy and reliability of the underlying data. D. Develop an independent estimate of the fair value measurement. 16-13 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 57. Auditor's will need to perform more substantive tests than normal to obtain sufficient appropriate evidence that a financial instrument is fairly stated if which of the following conditions exist: A. Management is objective and transparent in their assumptions. B. Management's key assumptions are subject to volatility. C. The entity's portfolio is composed of only stocks issued by Fortune 100 firms traded in an D. active market. E. The entity does not have control weaknesses in its valuation processes. Short Answer Questions 58. Explain how cash plays a role in all business processes. 59. Match the type of bank account with its definition: a. General cash account b. Imprest cash account c. Branch account d. Petty cash account 1) This account is typically immaterial in amount and is used for paying certain types of expenses and transactions. 2) This account is the principal cash account of an entity. 3) This account is a separate cash account maintained at the local bank of a branch of the entity. 4) This account contains a stipulated amount of cash and is used for limited purposes. 16-14 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 60. For each assertion about cash listed below, give an example of a test of transactions for cash receipts and for cash disbursements. a. Classification b. Occurrence c. Authorization d. Completeness 61. Explain the importance of the bank reconciliation to the audit and list some of the items found on the reconciliation. 62. Identify 3 of the 6 tests an auditor uses on the bank reconciliation. 16-15 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 63. You are the auditing cash for your client Moonbeam, Inc. In meeting with the CFO during the planning stages of the audit, she indicated that there was a high risk of misstatement due to fraud in the cash account, due to the lack of proper segregation of duties. As the auditor, what tests could you perform to detect fraudulent activities in the cash account? 64. The first step in auditing petty cash is to gain an understanding of the client's controls over petty cash. Describe some important controls a client should have over its petty cash fund. 65. Match the segregation of duties for investments with the misstatement (due error or fraud) it can help prevent. 1) The initiation function is separate from the final approval function. 2) The valuation-monitoring function is separate from the acquisition function. 3) The maintenance of the securities ledger is separate from that of the general ledger. 4) Custody of the securities is separate from accounting for the securities. a. An individual can conceal any defalcation that would normally be detected by reconciliation of subsidiary records with general ledger control accounts b. An individual can make fictitious transactions c. An individual can conceal a theft of securities d. An individual can improperly record securities values or not report the values to management 16-16 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 66. For each test of transactions and each test of account balances for investments listed below, identify the assertion for which the test provides evidence. 1) Determine whether there has been any permanent impairment in the value of the cost basis of an individual security. 2) Inspect securities if they are maintained by the client or obtain a confirmation from an independent custodian. 3) Search for purchases of securities by examining transactions for a few days after year-end. 4) Examine brokers' advices for a sample of securities purchased during the year. 67. What should an auditor look for when testing for proper classification of securities? 68. What are the factors that must be considered to determine if a permanent decline in the value of an investment security has occurred? 16-17 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments Chapter 16 Auditing the Financing/Investing Process: Cash and Investments Answer Key True / False Questions 1. The cash account is affected by all of the entity's business processes. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Knowledge Difficulty: Easy Learning Objective: 1 2. The general cash account is generally the principal account used to disburse payroll. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Knowledge Difficulty: Easy Learning Objective: 2 3. An imprest cash account is used for specific purposes and generally maintains a very small balance. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Knowledge Difficulty: Easy Learning Objective: 2 16-18 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 4. The auditor's use of analytical procedures for auditing cash is limited. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Knowledge Difficulty: Easy Learning Objective: 3 5. A major control that directly affects the audit of cash is the bank reconciliation prepared by the auditor. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Knowledge Difficulty: Easy Learning Objective: 4 6. A cutoff bank statement is used to verify the propriety of the reconciling items shown on the bank reconciliation. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Application Difficulty: Easy Learning Objective: 5 7. Kiting is an audit procedure used to test the accuracy of the cash receipts. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Knowledge Difficulty: Easy Learning Objective: 6 16-19 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 8. It is generally more efficient to follow a substantive strategy for auditing investments. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Knowledge Difficulty: Easy Learning Objective: 9 9. If the client maintains custody of its investments, the auditor normally examines the actual securities. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Application Difficulty: Easy Learning Objective: 10 10. Level 1 inputs are more risky and difficult to audit than Level 3 inputs to a valuation model. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Application Difficulty: Easy Learning Objective: 11 Multiple Choice Questions 16-20 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 11. Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity's employees? A. A bank lockbox system B. Prenumbered remittance advices C. Monthly bank reconciliations D. Daily deposit of cash receipts AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Application Difficulty: Easy Learning Objective: 1 12. The least crucial element of internal control over cash is A. Separation of cash record-keeping from custody of cash B. Preparation of the monthly bank reconciliation C. Batch processing of checks D. Separation of cash receipts from cash disbursements AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Application Difficulty: Easy Learning Objective: 1 13. Which of the following audit procedures is the most appropriate when internal control over cash is weak or when a client requests an investigation of cash transactions? A. Proof of cash B. Bank reconciliation C. Cash confirmation D. Evaluate ratio of cash to current liabilities AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Decision Making Bloom's: Application Difficulty: Easy Learning Objective: 3 Learning Objective: 6 16-21 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 14. An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when the A. Check register for the last month is reviewed B. Cutoff bank statement is reconciled C. Bank confirmation is reviewed D. Search for unrecorded liabilities is performed AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Difficulty: Easy Learning Objective: 4 15. Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting between intercompany banks? A. Review the composition of authenticated deposit slips B. Review subsequent bank statements received directly from the banks C. Prepare a schedule of bank transfers D. Prepare year-end bank reconciliations AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Decision Making Bloom's: Application Difficulty: Easy Learning Objective: 6 16. An interbank transfer schedule A. Is another name for the proof of cash B. Helps the auditor test for kiting C. Is on a standard bank confirmation D. Is used to examine client bank reconciliations AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Application Difficulty: Easy Learning Objective: 6 16-22 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 17. If fraud is suspected, auditors may complete all of the following procedures except A. Testing for kiting B. Footing the bank reconciliation and the outstanding check listing C. Performing a proof of cash D. Performing extended bank reconciliation procedures, including detailed examination of reconciling items AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Application Difficulty: Easy Learning Objective: 6 18. Of the following, which is the most efficient audit procedure for verification of interest earned on bond investments? A. Tracing interest declarations to an independent record book B. Recomputing interest earned using the interest rate and bond amount C. Confirming the interest rate with the issuer of the bonds D. Vouching the receipt and deposit of interest checks AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making Bloom's: Analysis Difficulty: Easy Learning Objective: 10 19. An auditor testing long-term investments would ordinarily use substantive analytical procedures as the primary audit evidence to support the reasonableness of the A. Valuation of marketable equity securities B. Classification of gains and losses on the disposal of securities C. Completeness of recorded investment income D. Existence and ownership of investments AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making Bloom's: Application Difficulty: Easy Learning Objective: 10 16-23 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 20. To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would A. Inspect the stock certificates evidencing the investment B. Examine the audited financial statements of the investee company C. Review the broker's advice or canceled check for the investment's acquisition D. Obtain market quotations from financial newspapers or periodicals AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Difficulty: Easy Learning Objective: 10 21. An auditor usually tests the reasonableness of dividend income from investments in publicly-held companies by computing the amounts that should have been received by referring to A. Dividend record books produced by investment advisory services B. Stock indentures published by corporate transfer agents C. Stock ledgers maintained by independent registrars D. Annual audited financial statements issued by the investee companies AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Application Difficulty: Easy Learning Objective: 10 22. Which of the following pairs of accounts would an auditor most likely analyze on the same working paper? A. Notes receivable and interest income B. interest Accrued receivable and accrued interest payable C. Notes payable and notes receivable D. Interest income and interest expense AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Analysis Difficulty: Easy Learning Objective: 10 16-24 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 23. In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client's name, an auditor most likely gathers evidence in support of management's financial statement assertions regarding A. Existence B. Rights and obligations C. Completeness D. All of the above AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Analysis Difficulty: Easy Learning Objective: 10 24. All of the following can assist the auditor in testing the existence assertion for investment securities except A. Physical examination B. Comparing fair value to cost C. Confirmation with the issuer D. Confirmation with the custodian AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Difficulty: Easy Learning Objective: 10 25. An imprest cash account is A. Used for investing in marketable securities B. The principal cash account for an entity C. One that contains a stipulated amount of money and is used for limited purposes D. The principal checking account for a branch of an entity AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Bloom's: Knowledge Difficulty: Moderate Learning Objective: 2 16-25 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 26. An auditor ordinarily should send 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, because this procedure A. Provides for confirmation regarding compensating balance arrangements B. Detects kiting activities that may not otherwise be discovered C. Seeks information about indebtedness to the bank D. Verifies securities held by the bank in safekeeping AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Difficulty: Moderate Learning Objective: 3 27. Tracing a sample of remittance advices to entries in the cash receipts journal tests which of the following assertions for cash? A. Occurrence B. Completeness C. Authorization D. Cutoff AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Application Difficulty: Moderate Learning Objective: 3 28. Examining a sample of cancelled checks for an authorized signature tests which of the following assertions for cash? A. Occurrence B. Completeness C. Cutoff D. Accuracy AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Application Difficulty: Moderate Learning Objective: 3 16-26 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 29. The cashier of Brooke Company covered a shortage in the cash working fund with cash obtained on December 31 from a local bank by cashing, but not recording, a check drawn on the Company's out-of-town bank. How would the auditor discover this manipulation? A. Confirming all December 31 bank balances B. Counting the cash working fund at the close of business on December 31 C. Preparing independent bank reconciliations as of December 31 D. Preparing and detail testing a bank transfer schedule AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Analysis Difficulty: Moderate Learning Objective: 4 30. The auditor should ordinarily mail confirmation requests to all banks with which the client has conducted any business during the year, regardless of the year-end balance, since A. The confirmation form also seeks information about indebtedness to the bank B. This procedure will detect kiting activities which would otherwise not be detected C. The mailing of confirmation forms to all such banks is required by generally accepted auditing standards D. This procedure relieves the auditor of any responsibility with respect to nondetection of forged checks AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Application Difficulty: Moderate Learning Objective: 4 16-27 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 31. An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to A. Verify the cash balance reported on the bank confirmation inquiry form B. Verify reconciling items on the client's bank reconciliation C. Detect lapping D. Detect kiting AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Comprehension Difficulty: Moderate Learning Objective: 4 32. An auditor should trace interbank transfers for the last part of the audit period and first part of the subsequent period to detect whether A. The cash receipts journal was held open for a few days after the year-end B. The last checks recorded before the year end were actually mailed by the year-end C. Cash balances were overstated because of kiting D. Any unusual payments to or receipts from related parties occurred AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Application Difficulty: Moderate Learning Objective: 4 33. To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine all of the following except the A. Cutoff bank statement B. Year-end bank statement C. Bank confirmation D. General ledger AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Analysis Difficulty: Moderate Learning Objective: 4 Learning Objective: 5 16-28 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 34. A primary purpose of the proof of cash is to A. Prevent fraud B. Reconcile actual cash receipts and disbursements to budgeted receipts and disbursements C. Investigate variances from expected cash balances D. Ensure that all cash receipts recorded in the cash receipts journal were deposited in the bank account AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Application Difficulty: Moderate Learning Objective: 4 Learning Objective: 6 35. A company has additional temporary funds to invest. The Board of Directors decided to purchase marketable securities and assigned the future purchase and sale decisions to a responsible financial executive. The best person(s) to make periodic reviews of the investment activity authorized by that executive should be A. An investment committee of the Board of Directors B. The chief operating officer C. The corporate controller D. The treasurer AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Analysis Difficulty: Moderate Learning Objective: 8 16-29 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 36. A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and submission of coupons for periodic interest collections probably should be delegated to the A. Chief Accountant B. Internal Auditor C. Cashier D. Treasurer AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Application Difficulty: Moderate Learning Objective: 8 37. Which of the following controls would an entity most likely use in safeguarding against the loss of marketable securities? A. An independent trust company that has no direct contact with the employees who have record keeping responsibilities has possession of the securities B. The internal auditor verifies the marketable securities in the entity's safe each year on the balance sheet date C. The independent auditor traces all purchases and sales of marketable securities through the subsidiary ledgers to the general ledger D. A designated member of the board of directors controls the securities in a bank safedeposit box AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Application Difficulty: Moderate Learning Objective: 8 16-30 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 38. Which of the following procedures most likely would give the greatest assurance that securities held as investments are safeguarded? A. There is no access to securities between the year-end and the date of the auditor's security count B. Proceeds from the sale of investments are received by an employee who does not have access to securities C. Investment acquisitions are authorized by a member of the Board of Directors before execution D. Access to securities requires the presence of two designated officials AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Analysis Difficulty: Moderate Learning Objective: 8 39. Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom? A. The cashier posts the receipts to the accounts receivable subsidiary ledger cards B. The cashier makes the daily deposit at a local bank C. The cashier prepares the daily deposit D. The cashier endorses the checks AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Analysis Difficulty: Moderate Learning Objective: 8 Learning Objective: 9 16-31 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 40. When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the A. Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records B. Securities are registered in the name of the trust company, rather than the entity itself C. Interest and dividend checks are mailed directly to an entity employee who is authorized to sell securities D. Trust company places the securities in a bank safe-deposit vault under the custodian's exclusive control AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Analysis Difficulty: Moderate Learning Objective: 8 Learning Objective: 9 41. In a manufacturing company, which one of the following audit procedures would give the least assurance for the existence of the general ledger balance of investment in stocks and bonds at the audit date? A. Confirmation from the broker B. Inspection and count of stocks and bonds C. Vouching all changes during the year to brokers' advices and statements D. Examination of canceled checks issued in payment of securities purchased AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Analysis Difficulty: Moderate Learning Objective: 10 16-32 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 42. The auditor should insist that a representative of the client be present during the physical examination of securities in order to A. Lend authority to the auditor's directives B. Detect forged securities C. Coordinate the return of all securities to proper locations D. Acknowledge the receipt of securities returned AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Application Difficulty: Moderate Learning Objective: 10 43. Which of the following is not one of the auditor's primary objectives in an examination of marketable securities? A. To determine whether securities are authentic B. To determine whether securities are the property of the client C. To determine whether securities actually exist D. To determine whether securities are properly classified on the balance sheet AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Analysis Difficulty: Moderate Learning Objective: 10 44. Jones was engaged to examine the financial statements of Virginia Corporation for the year ended June 30. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income? A. Tracing recorded dividend income to cash receipts records and validated deposit slips B. Utilizing analytical procedures and statistical sampling C. Comparing recorded dividends with amounts appearing on federal information forms 1099 D. Comparing recorded dividends with a standard financial reporting service's record of dividends AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Analysis Difficulty: Moderate Learning Objective: 10 16-33 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 45. A client has a large and active investment portfolio that is kept in a bank safe deposit box. If the auditor is unable to examine and count the securities at the balance sheet date but will examine and count the securities shortly thereafter, the auditor most likely will A. Request that the bank confirm to the auditor the contents of the safe deposit box at the balance sheet date B. Examine supporting evidence for transactions occurring during the year C. Count the securities at a subsequent date and confirm with the bank whether securities were added or removed since the balance sheet date D. Request that the client have the bank seal the safe deposit box until the auditor can count the securities at a subsequent date AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Application Difficulty: Moderate Learning Objective: 10 46. In establishing the existence and ownership of a long-term investment in publicly-traded stock, an auditor should inspect the securities or A. Correspond with the investee company to verify the number of shares owned B. Inspect the audited financial statements of the investee company C. Confirm the number of shares owned that are held by an independent custodian D. Determine that the investment is carried at the lower of cost or market AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Application Difficulty: Moderate Learning Objective: 10 16-34 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 47. Examining brokers' advices for a sample of securities purchased during the year is a test for the assertion of A. Completeness B. Disclosure C. Valuation and allocation D. Rights and Obligations AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Application Difficulty: Moderate Learning Objective: 10 48. Under which of the following circumstances would an auditor be most likely to intensify an examination of a $1,000 petty cash fund maintained on an imprest basis? A. Reimbursement vouchers are not prenumbered B. Reimbursement of the fund from the general cash account occurs twice or more each week C. The custodian occasionally uses the cash fund to cash employee checks D. The custodian endorses reimbursement checks AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making Bloom's: Analysis Difficulty: Hard Learning Objective: 2 Learning Objective: 6 16-35 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 49. As one of the year-end audit procedures, the auditor instructed the client's personnel 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 to the bank by the assistant treasurer. What is the major flaw in this audit procedure? A. The confirmation request was signed by the treasurer B. Sending the request was meaningless because the account was closed before the year-end C. The request was mailed by the assistant treasurer D. The CPA did not sign the confirmation request before it was mailed AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Risk Analysis Bloom's: Analysis Difficulty: Hard Learning Objective: 4 50. The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to A. Detect kiting activities that may otherwise not be discovered B. Corroborate information regarding deposit and loan balances C. Provide the data necessary to prepare a proof of cash D. Request information about contingent liabilities and secured transactions AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Knowledge Difficulty: Hard Learning Objective: 4 16-36 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 51. Which of the following control activities would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments? A. Senior management verifies that securities in the bank safe deposit box are registered in the entity's name B. The internal auditor compares the securities in the bank safe deposit box with recorded investments C. The treasurer vouches the acquisition of securities by comparing brokers' advices with canceled checks D. The controller compares the current market prices of recorded investments with the brokers' advices on file AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Analysis Difficulty: Hard Learning Objective: 8 52. Which of the following controls would a company most likely use to safeguard marketable securities when an independent trust agent is not employed? A. The investment committee of the board of directors periodically reviews the investment decisions delegated to the treasurer B. Two company officials must be present to access marketable securities, which are kept in a bank safe-deposit box C. The internal auditor and the controller independently trace all purchases and sales of marketable securities from the subsidiary ledgers to the general ledger D. The chairman of the board verifies the marketable securities, which are kept in a bank safedeposit box, each year on the balance sheet date AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Application Difficulty: Hard Learning Objective: 8 16-37 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 53. When there is a large number of negotiable securities in multiple locations, careful planning of the physical inspection and count of the securities by the auditor is necessary to guard against A. Unauthorized negotiation of the securities before they are counted B. Unrecorded sales of securities after they are counted C. Substitution of securities already counted at one location for other securities which should be on hand at a different location but are not D. Substitution of authentic securities with counterfeit securities AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making Bloom's: Analysis Difficulty: Hard Learning Objective: 10 54. When an auditor is unable to inspect and count a client's investment securities until after the balance sheet date, the bank where the securities are held in a safe-deposit box should be notified on or before the balance sheet date that they will be asked to A. Verify any differences between the contents of the box and the balances in the client's subsidiary ledger B. Provide a list of securities added and removed from the box between the balance sheet date and the security-count date C. Confirm that there has been no access to the box between the balance sheet date and the security-count date D. Count the securities in the box so that the auditor will have an independent direct verification AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Application Difficulty: Hard Learning Objective: 10 16-38 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 55. Which of the following would provide the best form of evidential matter pertaining to the annual valuation of a long-term investment in which the independent auditor's client owns a 45 percent voting interest? A. Market quotations of the investee company's stock B. The current fair value of the investee company's assets C. Historical costs of the investee company's assets D. Audited financial statements of the investee company AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Analysis Difficulty: Hard Learning Objective: 10 56. Which of the following procedures would be most important in the audit of an investment valued at fair value? A. Compare the balance in the investment account to the prior year. B. Read the footnote disclosure related to the investment. C. Inquire of management's regarding the accuracy and reliability of the underlying data. D. Develop an independent estimate of the fair value measurement. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Application Difficulty: Hard Learning Objective: 11 16-39 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 57. Auditor's will need to perform more substantive tests than normal to obtain sufficient appropriate evidence that a financial instrument is fairly stated if which of the following conditions exist: A. Management is objective and transparent in their assumptions. B. Management's key assumptions are subject to volatility. C. The entity's portfolio is composed of only stocks issued by Fortune 100 firms traded in an D. active market. E. The entity does not have control weaknesses in its valuation processes. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Analysis Difficulty: Hard Learning Objective: 11 Short Answer Questions 58. Explain how cash plays a role in all business processes. Cash is received by the entity through the revenue process, as well as from the sale of property, plant and equipment, and proceeds from the issuance of long-term debt or capital stock. Cash is disbursed through the purchasing process when buying inventory, materials, and equipment and through the human resource process through payroll. Cash is also disbursed in the financing process when the entity pays off long term debt or buys back stock. AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Comprehension Difficulty: Easy Learning Objective: 1 16-40 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 59. Match the type of bank account with its definition: a. General cash account b. Imprest cash account c. Branch account d. Petty cash account 1) This account is typically immaterial in amount and is used for paying certain types of expenses and transactions. 2) This account is the principal cash account of an entity. 3) This account is a separate cash account maintained at the local bank of a branch of the entity. 4) This account contains a stipulated amount of cash and is used for limited purposes. 1. d; 2. a; 3. c; 4. b AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Bloom's: Knowledge Difficulty: Easy Learning Objective: 2 16-41 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 60. For each assertion about cash listed below, give an example of a test of transactions for cash receipts and for cash disbursements. a. Classification b. Occurrence c. Authorization d. Completeness Student answers will vary: a. Cash receipts - Examine a sample of remittance advices for proper account classification Cash disbursements - Examine a sample of canceled checks for proper account classification b. Cash receipts - Trace a sample of entries in the cash receipts journal to remittance advices, daily deposit slips, and the bank statement Cash disbursements - Trace a sample of entries in the cash disbursements journal to canceled checks, the voucher packet, and the bank statement c. Cash receipts - For a sample of days, examine the signature on the deposit slip and the check endorsements for proper authorization Cash disbursements - Examine a sample of canceled checks for authorized signature and proper endorsement d. Cash receipts - Trace a sample of remittance advices to the cash receipts journal and, if necessary, to deposit slips Cash disbursements - Trace a sample of canceled checks to the cash disbursements journal AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Application Difficulty: Moderate Learning Objective: 3 16-42 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 61. Explain the importance of the bank reconciliation to the audit and list some of the items found on the reconciliation. The completion of a monthly bank reconciliation is an important control that affects the audit of the cash. The reconciliation ensures that the client's books reflect the same amount of cash as the bank's after the consideration of reconciling items. A proper reconciliation can reduce the amount of audit time spent on cash. The reconciliation contains the balance per the client's books and the balance per the bank, as well as reconciling items such as outstanding checks and deposits in transit. It may also include bank service charges and checks returned because the customer did not have sufficient cash in its account to cover the payment of the check. AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Comprehension Difficulty: Easy Learning Objective: 5 62. Identify 3 of the 6 tests an auditor uses on the bank reconciliation. (Only 3 are required for the student's answer) Test the mathematical accuracy of the bank reconciliation working paper and agree the balance per the books to the general ledger. Agree the bank balance on the bank reconciliation with the balance shown on the standard bank confirmation. Trace the deposits in transit on the bank reconciliation to the cutoff bank statement. Compare the outstanding checks on the bank reconciliation working paper with the canceled checks contained in the cutoff bank statement for proper payee, amount, and endorsement. Agree any charges included on the bank statement to the bank reconciliation. Agree the adjusted book balance to the cash account lead schedule. AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Knowledge Difficulty: Moderate Learning Objective: 5 16-43 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 63. You are the auditing cash for your client Moonbeam, Inc. In meeting with the CFO during the planning stages of the audit, she indicated that there was a high risk of misstatement due to fraud in the cash account, due to the lack of proper segregation of duties. As the auditor, what tests could you perform to detect fraudulent activities in the cash account? There are three tests used for detecting fraud in the cash accounts. The first is extended bank reconciliation procedures. The auditor examines disposition of the reconciling items included on the prior months' reconciliations and the reconciling items included in the current bank reconciliation. These procedures can locate a fraud that used reconciling items to cover a cash defalcation. A second test is a proof of cash. A proof of cash reconciles the cash receipts and disbursements recorded on the client's books with the cash deposited into and disbursed from the client's bank account for a specific time period. Its primary purpose is to ensure that all cash receipts recorded in the client's cash receipts journal were deposited in the client's bank account, to ensure that all cash disbursements recorded in the cash disbursements journal have cleared the bank account and to ensure that no bank transactions have been omitted from the client's accounting records. It can detect cash stolen after being recorded on the client's books. A third test is a test for kiting. Kiting is the process of covering a cash shortage by transferring money from one bank account to another and recording the transactions improperly on the client's books. A test for kiting is completed through the use of an intertransfer schedule that lists all the transfers made between cash accounts. Each transfer is followed through from one account to another, noting the dates recorded on the client's book and the dates on the bank statements. AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Decision Making Bloom's: Application Difficulty: Moderate Learning Objective: 6 16-44 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 64. The first step in auditing petty cash is to gain an understanding of the client's controls over petty cash. Describe some important controls a client should have over its petty cash fund. The petty cash fund should be maintained by an independent custodian. If this custodian is involved in other cash functions, the petty cash activity should be reviewed by another person. Prenumbered vouchers should be used for withdrawing from the fund. A limit should be placed on the size of reimbursements made to petty cash. An additional person should conduct surprise counts of the fund. AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Comprehension Difficulty: Easy Learning Objective: 6 65. Match the segregation of duties for investments with the misstatement (due error or fraud) it can help prevent. 1) The initiation function is separate from the final approval function. 2) The valuation-monitoring function is separate from the acquisition function. 3) The maintenance of the securities ledger is separate from that of the general ledger. 4) Custody of the securities is separate from accounting for the securities. a. An individual can conceal any defalcation that would normally be detected by reconciliation of subsidiary records with general ledger control accounts b. An individual can make fictitious transactions c. An individual can conceal a theft of securities d. An individual can improperly record securities values or not report the values to management 1. b; 2. d; 3. a; 4. c AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Comprehension Difficulty: Moderate Learning Objective: 9 16-45 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 66. For each test of transactions and each test of account balances for investments listed below, identify the assertion for which the test provides evidence. 1) Determine whether there has been any permanent impairment in the value of the cost basis of an individual security. 2) Inspect securities if they are maintained by the client or obtain a confirmation from an independent custodian. 3) Search for purchases of securities by examining transactions for a few days after year-end. 4) Examine brokers' advices for a sample of securities purchased during the year. 1) Valuation and allocation; 2) Existence; 3) Completeness; 4) Rights and obligations AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Application Difficulty: Moderate Learning Objective: 10 67. What should an auditor look for when testing for proper classification of securities? First, the securities need to be properly classified as trading, available-for-sale, or held-tomaturity. Then, those securities that are classified as trading must be listed as current assets. Proper classification of the available-for-sale and held-to-maturity securities as current or long-term should also be considered. AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Application Difficulty: Easy Learning Objective: 10 16-46 Chapter 16 - Auditing the Financing/Investing Process: Cash and Investments 68. What are the factors that must be considered to determine if a permanent decline in the value of an investment security has occurred? The auditor must determine if there has been any permanent decline in the value of an investment security. Auditing standards provide guidance for determining whether a decline in value below amortized cost is other than temporary. The following factors are citied as indicating other-than-temporary impairments: 1. Fair value is significantly below cost. 2. The decline in fair value is attributable to specific adverse conditions affecting a particular investment. 3. The decline in fair value is attributable to specific conditions, such as conditions in an industry or in geographic areas. 4. Management does not possess both the intent and the ability to hold the investment long enough to allow for any anticipated recovery in fair value. 5. The decline in fair value has existed for an extended period. 6. A debt security has been downgraded by a rating agency. 7. The financial condition of the issuer has deteriorated. 8. Dividends have been reduced or eliminated, or scheduled interest payments on debt securities have not been made. If the investment value is determined to be permanently impaired, the security should be written down and a new carrying amount established. In addition, the auditor should examine the sale of any security to ensure that proper values were used to record the sale and any realized gain or loss. AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Application Difficulty: Easy Learning Objective: 10 16-47 ... View Full Document

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