Chapter 10 - Cash and Financial Investments Chapter 10 Cash and Financial Investments True / False Questions 1. The auditors should count small petty cash funds at year-end to make sure that balance is not understated on the financial statements. True False 2. Control over the receipt of cash sales is best achieved when two or more employees participate in each transaction. True False 3. Mailroom personnel of a company should prepare a control listing of incoming cash receipts and deposit them intact daily. True False 4. Signed checks should be returned to the cash disbursements clerk for mailing. True False 5. Lapping of accounts receivable by an employee is not possible when there is adequate segregation of duties with respect to cash disbursements. True False 6. Confirmations for cash balances should be mailed only to the financial institutions with which the client has a cash balance at year-end. True False 7. A proof of cash is an audit procedure that is performed on almost every engagement. True False 10-1
Chapter 10 - Cash and Financial Investments 8. A compensating balance agreement generally requires that cash be reclassified as a noncurrent asset. True False 9. Verification of cash and other liquid assets be verified on the same date may prevent substitution of one form of asset for another. True False 10. For investments in securities accounted for by the equity method, the auditors are primarily concerned with verifying the market value of the investments. True False Multiple Choice Questions 11. An auditor's analytical procedures have revealed that the accounts receivable of a client have doubled since the end of the prior year. However, the allowance for doubtful accounts, as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor? A. Credit standards were liberalized in the current year. B. Twice as many accounts receivable were written off in the prior year as compared to this year. C. A greater percentage of accounts were currently listed in the "more than 90 days overdue" category than in the prior year. D. The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet. 12. By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally be able to detect: A. An unrecorded deposit made at the bank at the end of the month. B. A second payment of an account payable which had already been paid in full two months earlier. C. An embezzlement of cash receipts not recorded in the cash receipts journal before they had been deposited into the bank. D. A receivable collected that had previously been written off as uncollectible.
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