Test Bank Docx Auditing Cash And Investments Ch13 - Auditing Canada 4e | Test Bank with Answers by Robyn Moroney. DOCX document preview.
CHAPTER 13
AUDITING CASH AND INVESTMENTS
CHAPTER LEARNING OBJECTIVES
1. Identify the audit objectives applicable to cash.
Cash normally includes cash balances at the bank or similar institutions, cash on hand, and cash equivalents. In the auditing of cash, the key issues are to ensure that the cash exists and is owned by the client and that all cash transactions at the end of the reporting period are complete and properly disclosed.
2. Discuss considerations relevant to determining the audit strategy for cash.
The verification of cash balances is an important part of the financial statement audit. Even though the balances at the end of the reporting period may appear immaterial, the amount of cash flowing through the accounts can be very material. The high volume of transactions contributes to a significant level of inherent risk for cash balance assertions, particularly existence and completeness. While the audit approach to cash is usually substantive, the auditor should understand the procedures the client uses for maintaining accountability over cash. This often includes independently performed bank reconciliations and the use of imprest accounts.
3. Design and execute an audit program for cash balances.
Several types of substantive procedures to test cash balances are performed during most audits, including conducting cash cut-off tests, tracing bank transfers, counting cash on hand, confirming certain balances and other arrangements with banks, reviewing bank reconciliations, obtaining and using subsequent period bank statements, and determining the adequacy of management’s disclosures for cash balances.
4. Describe special considerations when auditing cash balances, including lapping, petty cash funds, and imprest bank accounts.
Lapping is an irregularity that results in the misappropriation of cash receipts for personal use. The auditor should assess the likelihood of lapping in obtaining an understanding about the segregation of duties in the receiving and recording of collections from customers. Three procedures that should detect lapping include confirming accounts receivable on a surprise basis at an interim date, making surprise cash counts, and comparing details of cash receipts journal entries with the details of corresponding daily deposit slips.
The balance of petty cash is rarely material and for this reason the majority of audits do not involve an audit of petty cash. Generally, the only time this part of the audit is performed is when the company expects or requests petty cash to be audited. When auditing petty cash, the auditor performs tests of details of transactions and tests of balances. The auditor tests a number of replenishing transactions.
An entity may use an imprest bank account for payroll and dividends. Substantive tests should include confirming the balance with the bank, reviewing the bank reconciliations, and using the subsequent period’s bank statement.
5. Identify the audit objectives applicable to investments.
In the auditing of investments, the key issues are to ensure that the investments exist, are owned, are properly recorded (including profits or losses on any sales) and disclosed, and are properly valued at the end of the reporting period.
6. Discuss considerations relevant to determining the audit strategy for investments.
Investing transactions occur infrequently and internal control over the processing of transactions is generally good. However, because transactions are infrequent and usually individually significant, it is common for the auditor to use a substantive approach.
7. Design and execute an audit program for investments.
Auditors usually vouch purchases and sales of investments by examining brokers’ advices and evidence of appropriate approval. Tests of details of balances involve inspecting or confirming recorded investments, verifying income from investments, and checking their market value.
8. Explain the special considerations applicable to the audit of investments in subsidiaries, associates, and joint ventures.
Where a company controls another company, consolidated financial statements must be prepared. The auditor generally uses a substantive approach in verifying the consolidation of investments in group entities in the consolidated financial statements of the economic entity.
TRUE-FALSE STATEMENTS
1. In the auditing of cash, the key issues are to ensure that the cash exists
and is owned by the client and that all cash transactions at the end of the reporting period
are complete and properly disclosed.
Difficulty: Easy
Learning Objective: Identify the audit objectives applicable to cash.
Section Reference: 13.1 Audit objectives for cash
CPA Competency: Audit and Assurance
AACSB: Analytic
2. In the auditing of investments, the key issues are to ensure that the investments exist, are
owned, are properly recorded (including profits or losses on any sales) and disclosed, and
are properly valued at the end of the reporting period.
Difficulty: Easy
Learning Objective: Identify the audit objectives applicable to cash.
Section Reference: 13.1 Audit objectives for cash
CPA Competency: Audit and Assurance
AACSB: Analytic
3. For many entities, cash balances represent a large proportion of assets. However, the
amount of cash flowing through the accounts over a period of time is usually smaller than for
any other account in the financial statements.
Difficulty: Easy
Learning Objective: Discuss considerations relevant to determining the audit strategy for cash.
Section Reference: 13.2 Audit strategy for cash
CPA Competency: Audit and Assurance
AACSB: Analytic
4. An imprest petty cash fund is a cash fund maintained at a constant level via
replenishment with the value of receipts paid out of the fund.
Difficulty: Easy
Learning Objective: Discuss considerations relevant to determining the audit strategy for cash.
Section Reference: 13.2 Audit strategy for cash
CPA Competency: Audit and Assurance
AACSB: Analytic
5. The significance of cash to the entity’s liquidity and the fact that the balance is relatively
small mean that the acceptable level of detection risk in verifying cash balances is invariably
set as low.
Difficulty: Easy
Learning Objective: Design and execute an audit program for cash balances.
Section Reference: 13.3 Substantive procedures for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
6. Cash balances do not normally show a stable or predictable relationship with other current
or historical financial or operating data. As a result, the auditor will often not perform any
analytical review procedures in this part of the audit.
Difficulty: Easy
Learning Objective: Design and execute an audit program for cash balances.
Section Reference: 13.3 Substantive procedures for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
7. Lapping is an irregularity that results in the deliberate misappropriation of cash receipts,
either temporarily or permanently, for the personal use of the individual perpetrating the
unauthorized act.
Difficulty: Easy
Learning Objective: Describe special considerations when auditing cash balances, including lapping, petty cash funds, and imprest bank accounts.
Section Reference: 13.4 Special considerations for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
8. The balance of petty cash is generally material and for this reason the majority of audits
involve a significant audit of petty cash.
Difficulty: Easy
Learning Objective: Identify the audit objectives applicable to investments.
Section Reference: 13.5 Audit objectives for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
9. Entities commonly invest in other entities, and these investments take a variety of forms
including equity securities such as preference or ordinary shares, or debt securities such as
corporate debentures or government bonds.
Difficulty: Easy
Learning Objective: Identify the audit objectives applicable to investments.
Section Reference: 13.5 Audit objectives for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
10. Ensuring that investment transactions are recorded in the correct accounts is an
example of testing the accuracy audit objective.
Difficulty: Easy
Learning Objective: Identify the audit objectives applicable to investments.
Section Reference: 13.5 Audit objectives for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
11. Often the purchase and sale of investments are processed separately from other
purchases and sales, especially for entities holding substantial investment portfolios where
specific control procedures over investments are likely implemented.
Difficulty: Easy
Learning Objective: Discuss considerations relevant to determining the audit strategy for investments.
Section Reference: 13.6 Audit strategy for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
12. Where substantial investments are held, a separate investment subsidiary ledger or
investment register may be maintained. This records details of acquisitions and disposals,
the receipt of interest and dividends, and market values.
Difficulty: Easy
Learning Objective: Discuss considerations relevant to determining the audit strategy for investments.
Section Reference: 13.6 Audit strategy for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
13. Investment transactions rarely present cut-off problems, so the auditor may perform
many substantive procedures before or after the end of the reporting period. Income
statement account balances relating to investments are usually verified at the same time.
Difficulty: Easy
Learning Objective: Design and execute an audit program for investments.
Section Reference: 13.7 Substantive procedures for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
14. Auditors usually vouch purchases and sales of investments by examining brokers’
advices and evidence of appropriate approval. Purchases and sales of non-current
investments, for example, should be vouched to authorizations in the minutes of directors’
meetings.
Difficulty: Easy
Learning Objective: Design and execute an audit program for investments.
Section Reference: 13.7 Substantive procedures for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
15. When a company (or other entity) controls another company (or other entity),
under IFRS, consolidated financial statements must be prepared for the economic entity.
Difficulty: Easy
Learning Objective: Explain the special considerations applicable to the audit of investments in subsidiaries, associates, and joint ventures.
Section Reference: 13.8 Auditing consolidated financial statements
CPA Competency: Audit and Assurance
AACSB: Analytic
16. To verify the amounts included in the consolidated financial statements, the auditor must
obtain and verify the financial statements of each group entity. Where the auditor is not also
the auditor of another group entity, consideration must be given to the extent of
reliance that may be placed on the work of the other auditor.
Difficulty: Easy
Learning Objective: Explain the special considerations applicable to the audit of investments in subsidiaries, associates, and joint ventures.
Section Reference: 13.8 Auditing consolidated financial statements
CPA Competency: Audit and Assurance
AACSB: Analytic
MULTIPLE CHOICE QUESTIONS
17. The account balance audit objective, “Year-end transfers of cash between banks are recorded in the proper period”, is derived from the
a) occurrence assertion.
b) cut-off assertion.
c) completeness assertion.
d) classification assertion.
Difficulty: Easy
Learning Objective: Identify the audit objectives applicable to cash.
Section Reference: 13.1 Audit objectives for cash
CPA Competency: Audit and Assurance
AACSB: Analytic
18. Which of following assertions are key concerns for cash?
a) classification and presentation
b) existence and classification
c) completeness and rights and obligations
d) existence and completeness
Difficulty: Easy
Learning Objective: Identify the audit objectives applicable to cash.
Section Reference: 13.1 Audit objectives for cash
CPA Competency: Audit and Assurance
AACSB: Analytic
19. Cash should be correctly identified and classified in the balance sheet. The classification that is correct is
a) cash on deposit is always a non-current asset.
b) cash on deposit is always a current asset.
c) fixed-term deposits are always non-current assets.
d) fixed-term deposits are always current assets.
Difficulty: Easy
Learning Objective: Identify the audit objectives applicable to cash.
Section Reference: 13.1 Audit objectives for cash
CPA Competency: Audit and Assurance
AACSB: Analytic
20. Which of these statements is the most correct? In the bank reconciliation,
a) the difference between the balance on the entity’s bank statement and the balance recorded in the entity’s records will be due to outstanding cheques and bank charges.
b) the difference between the balance on the entity’s bank statement and the balance recorded in the entity’s records will be due to outstanding cheques and direct debits and credits on the bank statement.
c) the difference between the balance on the entity’s bank statement and the balance recorded in the entity’s records will be due to deposits in transit and outstanding cheques.
d) the difference between the balance on the entity’s bank statement and the balance recorded in the entity’s records will be due to bank charges and direct debits and credits on the bank statement.
Difficulty: Medium
Learning Objective: Discuss considerations relevant to determining the audit strategy for cash.
Section Reference: 13.2 Audit strategy for cash
CPA Competency: Audit and Assurance
AACSB: Analytic
21. Which of these statements is the most correct?
a) A high volume of transactions flowing through an entity’s cash account contributes to a significant level of inherent risk for cash balance assertions.
b) A high volume of transactions flowing through an entity’s cash account contributes to a significant level of detection risk for cash balance assertions.
c) A high volume of transactions flowing through an entity’s cash account contributes to a significant level of risk particularly for the disclosure assertion.
d) A high volume of transactions flowing through an entity’s cash account contributes to a significant level of risk particularly for the rights and obligations assertion.
Difficulty: Medium
Learning Objective: Discuss considerations relevant to determining the audit strategy for cash.
Section Reference: 13.2 Audit strategy for cash
CPA Competency: Audit and Assurance
AACSB: Analytic
22. In the planning of an audit, it was decided that cash would not be audited because it comprised only 1 per cent of total assets. How would you respond to this decision?
a) Whether or not this was acceptable would depend on the company and the type of industry.
b) Cash is always going to be material, no matter what amount it is.
c) An amount of 1 per cent of total assets is likely to be immaterial.
d) It is probable that this amount would still be considered material, due to the nature of cash.
Difficulty: Medium
Learning Objective: Discuss considerations relevant to determining the audit strategy for cash.
Section Reference: 13.2 Audit strategy for cash
CPA Competency: Audit and Assurance
AACSB: Analytic
23. A bank confirmation request provides information to the auditor about
a) account balances.
b) loan documents.
c) the client’s securities.
d) all of the answers are correct
Difficulty: Easy
Learning Objective: Design and execute an audit program for cash balances.
Section Reference: 13.3 Substantive procedures for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
24. Which of these is a substantive test of details of balances used for cash balances?
a) verifying the bank reconciliation
b) obtaining and using the subsequent period’s bank statement
c) confirming bank balances
d) all of the answers are correct
Difficulty: Easy
Learning Objective: Design and execute an audit program for cash balances.
Section Reference: 13.3 Substantive procedures for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
25. In performing analytical procedures in the cash area, the auditor will usually
a) compare this year’s balance(s) to the operating profit.
b) compare this year’s balance(s) to total assets.
c) compare this year’s balance(s) to the level of sales as a percentage.
d) often won’t perform any analytical review.
Difficulty: Medium
Learning Objective: Design and execute an audit program for cash balances.
Section Reference: 13.3 Substantive procedures for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
26. The auditor should trace bank transfers using a bank transfer schedule primarily to determine if
a) cash has been understated due to kiting.
b) cash has been understated due to lapping.
c) cash has been overstated due to kiting.
d) cash has been overstated due to lapping.
Difficulty: Medium
Learning Objective: Design and execute an audit program for cash balances.
Section Reference: 13.3 Substantive procedures for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
27. During the count of cash on hand, it is not necessary for the auditor to
a) insist on the presence of an internal auditor throughout the count.
b) insist on the presence of the custodian of the cash throughout the count.
c) obtain a signed receipt from the custodian on return of the funds.
d) ascertain that all undeposited funds are payable to the order of the client, either directly or through endorsement.
Difficulty: Medium
Learning Objective: Design and execute an audit program for cash balances.
Section Reference: 13.3 Substantive procedures for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
28. The control of all funds during the count of cash on hand is meant primarily to prevent
a) any chance of double counting.
b) transfers by the entity’s personnel of counted to uncounted funds.
c) unauthorized disbursements.
d) unrecorded cash.
Difficulty: Easy
Learning Objective: Design and execute an audit program for cash balances.
Section Reference: 13.3 Substantive procedures for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
29. Since the custodian may have substituted personal cash to cover a cash shortage, the count of cash on hand provides weak evidence for the
a) existence assertion.
b) completeness assertion.
c) rights and obligations assertion.
d) accuracy and valuation assertion.
Difficulty: Easy
Learning Objective: Design and execute an audit program for cash balances.
Section Reference: 13.3 Substantive procedures for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
30. The standard bank confirmation requests information about all of the following except
a) account balances.
b) loan balances.
c) other arrangements that the client may have with the bank.
d) secondary endorsements.
Difficulty: Easy
Learning Objective: Design and execute an audit program for cash balances.
Section Reference: 13.3 Substantive procedures for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
31. Information concerning ‘other arrangements’ with banks is obtained from the client’s banks, in the bank confirmation form. This information is likely to include
a) compensating liabilities.
b) cash on hand.
c) unused facilities.
d) average daily balances.
Difficulty: Easy
Learning Objective: Design and execute an audit program for cash balances.
Section Reference: 13.3 Substantive procedures for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
32. The practice where a cheque is paid into a bank account of an entity in a group of companies before balance sheet date but recorded by the payer as a disbursement that occurred after balance sheet date is known as
a) kiting.
b) lapping.
c) low-balling.
d) cash control.
Difficulty: Easy
Learning Objective: Design and execute an audit program for cash balances.
Section Reference: 13.3 Substantive procedures for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
33. Kiting is possible when
a) one person handles cash receipts and another maintains the accounts receivable ledger.
b) one person handles cash receipts and maintains the accounts receivable ledger.
c) one person issues cheques and another records them.
d) one person issues cheques and records them.
Difficulty: Easy
Learning Objective: Design and execute an audit program for cash balances.
Section Reference: 13.3 Substantive procedures for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
34. Initial substantive procedures for cash balance assertions may include all of the following except
a) trace opening balances for cash on hand and in bank to the previous year’s working papers.
b) review activity in general ledger accounts for cash and investigate entries that appear unusual in amount or source.
c) obtain entity-prepared summaries of cash on hand and in bank, verify mathematical accuracy, and determine agreement with general ledger.
d) count undeposited cash on hand.
Difficulty: Easy
Learning Objective: Design and execute an audit program for cash balances.
Section Reference: 13.3 Substantive procedures for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
35. Unlike other balance sheet accounts, cash account balances
a) are not liquid.
b) may be an asset or a liability.
c) cannot have a credit balance.
d) cannot have a debit balance.
Difficulty: Easy
Learning Objective: Design and execute an audit program for cash balances.
Section Reference: 13.3 Substantive procedures for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
36. The starting point for verifying cash balances is to
a) review the current period’s activity in the general ledger cash accounts for any significant entries that are unusual.
b) determine the mathematical accuracy of cash balances in the general ledger.
c) trace the current period’s opening balances to the closing audited balances in the previous year’s working papers.
d) obtain any schedules that might have been prepared by the entity showing undeposited cash receipt summaries.
Difficulty: Easy
Learning Objective: Design and execute an audit program for cash balances.
Section Reference: 13.3 Substantive procedures for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
37. Which of the following would not normally be done by the auditor in connection with the subsequent period’s bank statement?
a) use a bank statement for a period ending at least 7 days after year end
b) trace deposits in transit on the bank reconciliation to deposits on the bank statement.
c) scan the cut-off statement for unusual items
d) agree ending balance on the subsequent period’s bank statement to the general ledger.
Difficulty: Medium
Learning Objective: Design and execute an audit program for cash balances.
Section Reference: 13.3 Substantive procedures for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
38. In working with the bank reconciliation and the subsequent period’s bank statement, the auditor finds that a prior-period cheque was not on the reconciliation as an outstanding cheque. This may be an indication of
a) lapping.
b) kiting.
c) window dressing.
d) an attempt to conceal a cash shortage.
Difficulty: Easy
Learning Objective: Design and execute an audit program for cash balances.
Section Reference: 13.3 Substantive procedures for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
39. In working with the bank reconciliation and the subsequent period’s bank statement, the auditor finds that many of the cheques on the outstanding cheque list did not clear during the cut-off period. This may be an indication of
a) lapping.
b) kiting.
c) window dressing.
d) an attempt to conceal a cash shortage.
Difficulty: Easy
Learning Objective: Design and execute an audit program for cash balances.
Section Reference: 13.3 Substantive procedures for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
40. Audit tests to detect lapping involve which of the following?
a) confirm accounts payable
b) compare details of cash payments journal entries with the details of corresponding daily deposit slips
c) use a bank cut-off statement
d) make a surprise cash count of currency and customers cheques on hand and oversee the banking of these amounts
Difficulty: Medium
Learning Objective: Describe special considerations when auditing cash balances, including lapping, petty cash funds, and imprest bank accounts.
Section Reference: 13.4 Special considerations for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
41. If the petty cash account is tested in detail by the auditor, it is usually because
a) it is always material.
b) it is quickly and easily tested.
c) of the possibility of unrecorded disbursements.
d) the company requested a petty cash audit.
Difficulty: Easy
Learning Objective: Describe special considerations when auditing cash balances, including lapping, petty cash funds, and imprest bank accounts.
Section Reference: 13.4 Special considerations for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
42. A procedure the auditor can employ to detect ‘lapping’ is
a) confirming accounts on a surprise basis at an interim date.
b) making a surprise cash count.
c) comparing details of cash receipts journal entries with the details of corresponding daily deposit slips.
d) all of the answers are correct
Difficulty: Medium
Learning Objective: Describe special considerations when auditing cash balances, including lapping, petty cash funds, and imprest bank accounts.
Section Reference: 13.4 Special considerations for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
43. Which of the following would be the best protection for an entity that wishes to prevent the ‘lapping’ of trade accounts receivable?
a) Request that customers’ payment cheques be made payable to the entity and addressed to the chief financial officer.
b) Have customers send payments directly to the entity’s bank.
c) Segregate duties so that no employee has access to both the cheques from customers and currency from daily cash receipts.
d) Make sure that the same person always deals with cash receipts.
Difficulty: Medium
Learning Objective: Describe special considerations when auditing cash balances, including lapping, petty cash funds, and imprest bank accounts.
Section Reference: 13.4 Special considerations for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
44. Which statement is the most correct?
a) The imprest petty cash fund should be in the custody of no more than two individuals.
b) The imprest petty cash fund should be maintained at the imprest amount.
c) The balance of the petty cash fund should always be audited.
d) Use of an imprest petty cash fund enables small items to be purchased with no documentation required.
Difficulty: Easy
Learning Objective: Describe special considerations when auditing cash balances, including lapping, petty cash funds, and imprest bank accounts.
Section Reference: 13.4 Special considerations for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
45. One ‘red flag’ that may indicate fraud in relation to cash register operations is
a) unusually low inventory shrinkage.
b) increasing cash sales, relative to credit card sales.
c) cashiers who cannot issue refunds without supervision.
d) multiple refunds or voids just under the review limit.
Difficulty: Easy
Learning Objective: Describe special considerations when auditing cash balances, including lapping, petty cash funds, and imprest bank accounts.
Section Reference: 13.4 Special considerations for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
46. Audit evidence for share holdings on the investment brokerage register is normally the
a) debenture certificate.
b) company’s investment register.
c) brokerage account holdings statement.
d) cancelled (or presented) cheque.
Difficulty: Easy
Learning Objective: Identify the audit objectives applicable to investments.
Section Reference: 13.5 Audit objectives for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
47. The correct statement concerning the materiality of securities is:
a) short-term investments may be immaterial to the solvency position but material to the income statement.
b) long-term investments may be immaterial to both the financial position and the income statement.
c) long-term investments may be immaterial to the financial position but material to the income statement.
d) short-term investments may be material to the solvency position but immaterial to the income statement.
Difficulty: Easy
Learning Objective: Discuss considerations relevant to determining the audit strategy for investments.
Section Reference: 13.6 Audit strategy for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
48. Which of these controls would be the most effective in assuring that the proper custody of assets in the investing cycle is maintained?
a) The purchase and sale of investments are executed on the specific authorization of the board of directors.
b) The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safety deposit box by independent personnel.
c) Direct access to securities in the safety deposit box is limited to only one corporate officer.
d) Personnel who post investment transactions to the general ledger are not permitted to update the investment subsidiary ledger.
Difficulty: Medium
Learning Objective: Discuss considerations relevant to determining the audit strategy for investments.
Section Reference: 13.6 Audit strategy for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
49. The substantive approach is generally used for investing transactions because of
a) infrequent transactions.
b) high volume of transactions.
c) ineffective controls.
d) effective controls.
Difficulty: Easy
Learning Objective: Design and execute an audit program for investments.
Section Reference: 13.7 Substantive procedures for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
50. Analytical procedures applied to investment balance sheet accounts provide
a) evidence for the existence assertion.
b) evidence for the completeness assertion.
c) evidence for the presentation assertion.
d) little or no evidence.
Difficulty: Easy
Learning Objective: Design and execute an audit program for investments.
Section Reference: 13.7 Substantive procedures for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
51. In auditing tests of details of balances for investments, the auditor’s procedures may include all of the following except
a) inspecting and confirming banking records.
b) inspecting and counting securities on hand.
c) recalculating investment revenue earned.
d) vouching purchases and sales of investments to brokers’ advices.
Difficulty: Medium
Learning Objective: Design and execute an audit program for investments.
Section Reference: 13.7 Substantive procedures for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
52. The inspecting and counting of securities on hand is ordinarily performed simultaneously with the auditor’s
a) counting of cash.
b) observing of the inventory counting.
c) conducting analytical procedures.
d) checking the bank reconciliation.
Difficulty: Easy
Learning Objective: Design and execute an audit program for investments.
Section Reference: 13.7 Substantive procedures for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
53. Which of the following is correct concerning the inspecting and counting of securities on hand?
a) a receipt should be provided by the auditor to the custodian when the securities are returned
b) the auditor should observe the broker’s advice number on the document
c) all securities should be controlled by the auditor until the count is completed
d) confirmation of securities should be sent to the internal auditors
Difficulty: Medium
Learning Objective: Design and execute an audit program for investments.
Section Reference: 13.7 Substantive procedures for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
54. The statement that is not true concerning the confirmation of securities held by outsiders for safekeeping is
a) either positive or negative confirmations can be used.
b) confirmations should be requested as of the date other securities are counted.
c) the auditor should receive responses directly from the custodian.
d) the data confirmed are the same as the data that should be noted when the auditor is able to inspect the securities.
Difficulty: Medium
Learning Objective: Design and execute an audit program for investments.
Section Reference: 13.7 Substantive procedures for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
55. Verification procedures for investment income are least likely to include
a) recalculation by the auditor.
b) direct confirmation with the investee.
c) inspection of debenture certificates.
d) inspection of dividend record books.
Difficulty: Easy
Learning Objective: Design and execute an audit program for investments.
Section Reference: 13.7 Substantive procedures for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
56. When inspecting securities on hand the auditor needs to record all these matters except
a) the name of the owner.
b) the certificate number of the document
c) the description of the security
d) All of the above need to be recorded.
Difficulty: Medium
Learning Objective: Design and execute an audit program for investments.
Section Reference: 13.7 Substantive procedures for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
57. For infrequently traded securities, which are material in amount, the auditor should ordinarily
a) estimate the market price themselves.
b) require the security to be classified as a long-term investment.
c) obtain direct confirmation from an independent broker.
d) inspect the books of the investee directly.
Difficulty: Medium
Learning Objective: Design and execute an audit program for investments.
Section Reference: 13.7 Substantive procedures for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
58. Tests of details of balances for investment balance assertions include all of these except
a) inspect and count securities on hand.
b) confirm securities held by others.
c) vouch entries in investment and related income and equity accounts.
d) recalculate investment revenue earned.
Difficulty: Easy
Learning Objective: Design and execute an audit program for investments.
Section Reference: 13.7 Substantive procedures for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
59. For most entities investment transactions are
a) infrequent, but individual transactions can be substantial.
b) frequent, but individual transactions are usually substantial.
c) infrequent, but individual transactions are usually small.
d) frequent, but individual transactions are usually small.
Difficulty: Easy
Learning Objective: Design and execute an audit program for investments.
Section Reference: 13.7 Substantive procedures for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
60. Which of these procedures do auditors usually perform as a test of details of transactions to verify all management assertions relating to investments?
a) trace purchases of investments to brokers’ advices
b) vouch purchases and sales of investments to brokers’ advices
c) inspect the minutes of directors meetings
d) both b and c
Difficulty: Medium
Learning Objective: Design and execute an audit program for investments.
Section Reference: 13.7 Substantive procedures for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
61. Which check could not be carried out for securities held by a client?
a) check of paper certificate of legal title for securities held in listed companies
b) check with the bank of securities held in safety deposit boxes
c) check against records in the investment register
d) check with confirmation for securities held by outsiders
Difficulty: Medium
Learning Objective: Design and execute an audit program for investments.
Section Reference: 13.7 Substantive procedures for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
62. CAS 600 recommends that in the audit of group entities, where the auditor is not also the auditor of another group entity, the principal auditor may
a) be able to rely solely on the work and conclusions of the other auditor.
b) ask the other auditor about the independence requirements, and offer representations as to compliance.
c) send a detailed questionnaire to the other auditor.
d) ignore the findings of the other auditor.
Difficulty: Easy
Learning Objective: Explain the special considerations applicable to the audit of investments in subsidiaries, associates, and joint ventures.
Section Reference: 13.8 Auditing consolidated financial statements
CPA Competency: Audit and Assurance
AACSB: Analytic
SHORT ANSWER QUESTIONS
63. Identify the assertion relating to classes of transactions that corresponds with the following audit objectives for cash.
- Payments and receipts are recorded in the correct accounts.
- Recorded receipt and payment transactions represent cash inflows and outflows during the period.
- All cash inflows and outflows made during the period have been recorded.
- Payments and receipts are accurately recorded.
- Year-end transfers of cash between banks and bank accounts are recorded in the proper period.
Assertion | Audit Objective |
Classification | Payments and receipts are recorded in the correct accounts. |
Occurrence | Recorded receipt and payment transactions represent cash inflows and outflows during the period. |
Completeness | All cash inflows and outflows made during the period have been recorded. |
Accuracy | Payments and receipts are accurately recorded. |
Cut-off | Year-end transfers of cash between banks and bank accounts are recorded in the proper period. |
Difficulty: Medium
Learning Objective: Identify the audit objectives applicable to cash
Section Reference: 13.1 Audit objectives for cash
CPA Competency: Audit and Assurance
AACSB: Analytic
64. Identify the assertion relating to account balances that corresponds with the following audit objectives for cash.
- Recorded cash balances are realizable at the amounts stated on the balance sheet and agree with supporting schedules.
- Recorded cash balances include the effects of all cash transactions that have occurred.
- The entity has legal title to all cash balances shown at the end of the reporting period.
- Recorded cash balances exist at the end of the reporting period.
- Cash balances are appropriately presented and information disclosed is clearly expressed.
Assertion | Audit Objective |
Accuracy, valuation, and allocation | Recorded cash balances are realizable at the amounts stated on the balance sheet and agree with supporting schedules. |
Completeness | Recorded cash balances include the effects of all cash transactions that have occurred. |
Rights and obligations | The entity has legal title to all cash balances shown at the end of the reporting period. |
Existence | Recorded cash balances exist at the end of the reporting period. |
Classification | Cash balances are appropriately presented and information disclosed is clearly expressed. |
Difficulty: Medium
Learning Objective: Identify the audit objectives applicable to cash
Section Reference: 13.1 Audit objectives for cash
CPA Competency: Audit and Assurance
AACSB: Analytic
65. Describe two internal control features applied to the management of an imprest petty cash fund.
Difficulty: Medium
Learning Objective: Discuss considerations relevant to determining the audit strategy for cash
Section Reference: 13.2 Audit strategy for cash
CPA Competency: Audit and Assurance
AACSB: Analytic
66. Are there any issues that may arise with the valuation of cash balances?
Difficulty: Medium
Learning Objective: Discuss considerations relevant to determining the audit strategy for cash.
Section Reference: 13.2 Audit strategy for cash
CPA Competency: Audit and Assurance
AACSB: Analytic
67. Although the auditor primarily adopts a substantive approach to the audit of cash balances, an understanding of procedures for maintaining accountability over cash is necessary for the design of substantive tests of details. Name and describe the two main procedures for internal control of cash.
Difficulty: Medium
Learning Objective: Discuss considerations relevant to determining the audit strategy for cash.
Section Reference: 13.2 Audit strategy for cash
CPA Competency: Audit and Assurance
AACSB: Analytic
68. Why is detection risk for verifying cash balances invariably low? Why does the auditor not often use analytical procedures for the audit of cash balances?
Difficulty: Medium
Learning Objective: Design and execute an audit program for cash balances.
Section Reference: 13.3 Substantive procedures for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
69. One of the commonly used substantive tests for cash balances is to confirm the bank balance directly with the bank Name five categories of information requested on a standard bank confirmation request.
Difficulty: Medium
Learning Objective: Design and execute an audit program for cash balances.
Section Reference: 13.3 Substantive procedures for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
70. One of the commonly used substantive tests for cash balances is to verify bank reconciliations performed by the entity. Name the five steps in verifying the bank reconciliation. Are there circumstances under which auditors might perform the bank reconciliation for themselves? If not, why not? If so, what are they?
Difficulty: Medium
Learning Objective: Design and execute an audit program for cash balances.
Section Reference: 13.3 Substantive procedures for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
71. What is the purpose of ‘window dressing’? How would it be perpetrated? What is the main indicator of window dressing, and why does the indicator work?
Difficulty: Medium
Learning Objective: Design and execute an audit program for cash balances.
Section Reference: 13.3 Substantive procedures for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
72. What should the auditor do to perform cash counts properly? Why are they important to the audit of cash on hand? Why is a cash count often not performed?
Difficulty: Medium
Learning Objective: Design and execute an audit program for cash balances.
Section Reference: 13.3 Substantive procedures for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
73. Describe three procedures an auditor would perform when verifying a client’s bank reconciliation.
Difficulty: Medium
Learning Objective: Discuss considerations relevant to determining the audit strategy for inventory.
Section Reference: 13.3 Substantive procedures for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
74. Identify the assertion relating to classes of transactions that corresponds with the following audit objectives for investments.
- Investment revenues, gains, and losses resulted from transactions and events that occurred during the period.
- All purchases of investments during the period have been recorded as additions.
- Investment transactions are recorded in the correct accounts.
- Investment revenues, gains, and losses are reported at proper amounts.
Assertion | Audit Objective |
Occurrence | Investment revenues, gains, and losses resulted from transactions and events that occurred during the period. |
Completeness | All purchases of investments during the period have been recorded as additions. |
Classification | Investment transactions are recorded in the correct accounts. |
Accuracy | Investment revenues, gains, and losses are reported at proper amounts. |
Difficulty: Medium
Learning Objective: Identify the audit objectives applicable to investments
Section Reference: 13.5 Audit objectives for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
75. Identify the assertion relating to account balances that corresponds with the following audit objectives for investments.
- Recorded cash balances are realizable at the amounts stated on the balance sheet and agree with supporting schedules.
- The income statement includes the effects of all investment transactions and events during the period.
- All recorded investments are owned by the reporting entity.
- Recorded investment balances represent investments that exist at the end of the reporting period.
- Investment balances are properly identified and classified in the financial statements.
Assertion | Audit Objective |
Accuracy, valuation, and allocation | Recorded cash balances are realizable at the amounts stated on the balance sheet and agree with supporting schedules. |
Completeness | The income statement includes the effects of all investment transactions and events during the period. |
Rights and obligations | All recorded investments are owned by the reporting entity. |
Existence | Recorded investment balances represent investments that exist at the end of the reporting period. |
Classification | Investment balances are properly identified and classified in the financial statements. |
Difficulty: Medium
Learning Objective: Identify the audit objectives applicable to investments
Section Reference: 13.5 Audit objectives for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
76. Name and describe five possible internal controls related to the investment function.
Difficulty: Medium
Learning Objective: Discuss considerations relevant to determining the audit strategy for investments.
Section Reference: 13.6 Audit strategy for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
77.
- Identify the matters the auditor should observe when inspecting securities.
- List the requirements for the presentation of investments in securities that would conform to the disclosure requirements of accounting standards.
Difficulty: Medium
Learning Objective: Design and execute an audit program for investments.
Section Reference: 13.7 Substantive procedures for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
78. Why is a substantive approach used for most entities in the audit of investment balances? Why is it rarely possible to obtain much evidence from analytical procedures in the audit of investment balances?
Difficulty: Medium
Learning Objective: Design and execute an audit program for investments.
Section Reference: 13.7 Substantive procedures for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
79. From the list of substantive procedures provided below, classify each as either a procedure relating to cash or a procedure relating to investments.
List of substantive procedures:
- Trace opening balances for investment accounts to the previous year’s working papers.
- Review activity in all investment-related balance sheet and income statement accounts, and investigate entries that appear unusual in amount or source.
- Trace opening balances for cash on hand and in the bank to previous year’s working papers.
- Review activity in general ledger accounts for cash and investigate entries that appear unusual in amount or source.
- Perform analytical procedures by comparing cash balances with expected amounts.
- Vouch entries in investment and related income and equity accounts.
- Recalculate investment revenue earned.
- Obtain entity-prepared summaries of cash on hand and in the bank, verify mathematical accuracy, and determine agreement with general ledger.
Cash | Investments |
Trace opening balances for cash on hand and in the bank to previous year’s working papers. | Trace opening balances for investment accounts to the previous year’s working papers. |
Review activity in general ledger accounts for cash and investigate entries that appear unusual in amount or source. | Review activity in all investment-related balance sheet and income statement accounts, and investigate entries that appear unusual in amount or source. |
Obtain entity-prepared summaries of cash on hand and in the bank, verify mathematical accuracy, and determine agreement with general ledger. | Vouch entries in investment and related income and equity accounts. |
Perform analytical procedures by comparing cash balances with expected amounts. | Recalculate investment revenue earned. |
Difficulty: Easy
Learning Objective: Design and execute an audit program for cash
Learning Objective: Design and execute an audit program for investments
Section Reference: 13.4 Special considerations for cash balances
Section Reference: 13.7 Substantive procedures for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
80. From the list of substantive procedures provided below, classify each as either a procedure relating to cash or a procedure relating to investments.
List of substantive procedures:
- Confirm securities held by others.
- Observe that all cash received by the close of business on the last day of the financial year is included in cash and that no receipts of the subsequent period are included.
- Inspect and count securities on hand.
- Observe the last cheque issued and mailed on the last day of the financial year and trace to the accounting records to determine the accuracy of the cash payments cut-off.
- Confirm bank balances.
- Obtain and use the subsequent period’s statements to verify bank reconciliation items and look for evidence of window dressing.
- Obtain entity-prepared schedules of investments and determine that they accurately represent the underlying accounting records from which they are prepareevaluating the conclusd by adding and cross-adding the schedules.
- Perform analytical procedures by analyzing interest and dividend yields relative to expectations.
Cash | Investments |
Observe that all cash received by the close of business on the last day of the financial year is included in cash and that no receipts of the subsequent period are included. | Confirm securities held by others. |
Observe the last cheque issued and mailed on the last day of the financial year and trace to the accounting records to determine the accuracy of the cash payments cut-off. | Inspect and count securities on hand. |
Confirm bank balances. | Obtain entity-prepared schedules of investments and determine that they accurately represent the underlying accounting records from which they are prepared by adding and cross-adding the schedules. |
Obtain and use the subsequent period’s statements to verify bank reconciliation items and look for evidence of window dressing. | Perform analytical procedures by analyzing interest and dividend yields relative to expectations. |
Difficulty: Medium
Learning Objective: Design and execute an audit program for cash
Learning Objective: Design and execute an audit program for investments
Section Reference: 13.4 Special considerations for cash balances
Section Reference: 13.7 Substantive procedures for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
ESSAY QUESTIONS
81. Describe the audit process for cash transactions, indicating the audit risks that need to be addressed and the mitigating controls that can be implemented.
Difficulty: Medium
Learning Objective: Design and execute an audit program for cash balances.
Section Reference: 13.3 Substantive procedures for cash balances
CPA Competency: Audit and Assurance
AACSB: Analytic
82. Describe the audit process for investment transactions, indicating the audit risks that need to be addressed and the mitigating controls that can be implemented.
Difficulty: Medium
Learning Objective: Design and execute an audit program for investments.
Section Reference: 13.7 Substantive procedures for investments
CPA Competency: Audit and Assurance
AACSB: Analytic
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