Chapter 12: Audit of Cash and Other Liquid Assets
Chapter 12: Audit of Cash and
Other Liquid Assets
1. An imprest payroll account should never reach a zero balance.
2. When the year-end cash balance is immaterial, the audit of the cash account is unnecessary.
3. Cash flow is often managed by organizations through the use of lockboxes and outsourced cash management
arrangements with banks.
4. The risk of the company issuing checks near year-end and mailing them subsequently is not important to the
auditor as the action does not affect cash balances.
5. The auditor places more emphasis on the audit of the cash account because of the account's susceptibility to
6. Working capital may be tied to certain debt covenants causing cash to be considered material for audit
7. Cash is no longer considered highly susceptible to theft because of the advent of computers, safes and
8. A lockbox is a mailbox type of depository device that is located in front of the client's premises, allowing
customers to remit payment in a timely manner.
9. An analysis of the client's internal control over cash and marketable securities should take place during the
performance of the substantive tests on these accounts.
10. The deposit of cash directly at the bank to speed collections often involves the use of a lockbox.
11. To ensure that all customer remittances received by the bank are posted when a lockbox is being used,
control procedures should require that all remittance advices be sent by the bank to the client.
12. The auditor is responsible for auditing the necessary disclosures when material lines of credit and
compensating balance arrangements have been made by the client with a lender.
13. Electronic Funds Transfers have controls built into the process and do not require further reconciliation by
14. Strong internal control over the cash account requires that the same person who is responsible for making
the bank deposit also prepare the bank reconciliation since that person is most experienced with the
15. Customer checks received at the client company should be restrictively endorsed within one week of receipt
in the mail.
16. A turnaround document is an effective control because it lists useful information for further processing of
the collection on account.
17. A possible intentional overstatement of cash may be covered up by omitting large balance-outstanding
checks from the bank reconciliation.
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