Q&A Hero

Q: When manufacturing labour affects inventory valuation, a knowledgeable manager should approve wage rate allocations to make sure that labour is distributed to the proper accounts. Which of the following controls helps to prevent error in the resulting job costing? A) comparison of wage rates to the authorized payroll master file B) independent comparison of the approved amounts to the data entered C) continuity check of the payroll cheque numbers issued D) reconciliation of gross pay on the payroll register with gross pay according to the payroll master file

Q: The internal auditor is running a computer-assisted audit test that compares names and wage rates in the personnel files (stored on optical disk) with the wage rates in the payroll master file and the whole year's payroll transaction files. What is the purpose of these tests? A) determine whether any employees were not paid in the most recent pay B) check for wage rates that are under the amount specified by the union contract C) help with the reconciliation of wage rates to the T4 summary D) determine whether terminated employees are still being paid

Q: Which of the following controls could help to prevent unauthorized overtime? A) review by payroll supervisor of a report that lists all employees whose wage rate does not match the permanent file B) print a gap report for all employees who have not submitted their time reports for the current pay period C) review by payroll supervisor of a report that lists all employees working more than 44 hours per week D) have a calculation check for payroll calculations (gross pay less deductions = net pay)

Q: Which of the following controls best prevents employees from checking in for more than one employee? The use of A) numerically controlled punch-in cards. B) placing the punch clock in full view of the receptionist. C) time cards stored in a wall rack. D) a personalized swipe card.

Q: Which of the following controls will help to detect unauthorized changes to payroll master files, and help to detect whether terminated employees are still being paid? A) use of authorized change forms B) periodic review of master files C) use of master files to print T4's D) use of master files to print payroll cheques

Q: Which of the following controls helps to prevent error with set up of access rights, and also helps to prevent unauthorized changes to the access rights? A) independent comparison to check that they have been set up properly B) access rights forms that are signed by the user's manager C) tracking all accesses in an access log by user identification code D) using audit software to provide a list of who has accessed sensitive data

Q: Access rights management is important because it is the organizations method of A) establishing data tables usage. B) identifying master file data. C) identifying transaction file data. D) enforcing segregation of duties.

Q: Ricky recently got an internal transfer from payroll analyst to assistant regional manager of production. An employee at the production facility came to see Ricky since he was not paid on the last payroll cheque for the overtime he had done. Ricky apologized for this mistake and logged into the payroll system to modify the next paycheque for the employee to ensure that he would be paid for the additional hours. A) The company did not properly allocate access rights. B) The company did not properly complete the access rights approval form. C) The company did not properly check employee background when they hired Ricky. D) Ricky did not do anything wrong since the employee had worked the hours.

Q: A wage rate form that also documents a change in job responsibility for one of the warehouse employees should be approved by the A) human resources and the corporate controller. B) warehouse supervisor and human resources. C) warehouse supervisor. D) human resources.

Q: A form issued for each employee summarizing the earnings record for the calendar year is the A) rate authorization form. B) summary payroll report. C) payroll master file. D) T-4 form.

Q: The file for recording each payroll transaction for each employee and maintaining total employee wages paid for the year to date is the A) payroll master file. B) payroll transaction file. C) payroll journal. D) job time ticket.

Q: Master file data is the semi-permanent data in an employee's file. Changes to master file changes A) should be adequately supported. B) should be checked by the originator. C) would be entered only once per month. D) would be implemented on an annual basis.

Q: Which of the following best describes proper internal control over payroll? The A) preparation of the payroll must be under the control of the personnel department. B) confidentiality of employee payroll data should be carefully protected to prevent fraud. C) duties of hiring, payroll computation, and payment to employees should be segregated. D) payment by cheque to employees should be replaced with payment by automatic deposits.

Q: The most important control in the payroll cycle is clear, properly documentation of the employee's job responsibilities and wages by the appropriate level of authority. This control is associated with which audit objective? A) completeness B) classification C) valuation D) occurrence

Q: Which of the following is an example of semi-permanent information that would be included in personnel records? A) gross pay for the monthly pay issued in September B) met pay for the weekly pay issued in the first week of October C) category of job the person is employed in D) income tax deducted for the current pay

Q: The human resources department would likely provide which of the following internal controls for the human resources and payroll cycle? A) recalculation of net pay for every pay B) independent verification of wage rate C) account for the continuity of employee numbers D) account for the continuity of payroll check numbers

Q: If there is an error in wage rates, such errors can typically escalate into material amounts. What characteristic of the human resources and payroll cycle causes this? A) many repeated transactions B) the presence of independent verification C) the use of outsourcing organizations for payroll D) an error in the starting cheque number in a cheque run

Q: In auditing the imprest payroll account, which of the following procedures will take the least amount of auditor time? A) tests of controls B) risk analysis and obtaining an understanding of controls C) analytical procedures D) tests of details of balances

Q: In most audits, the amounts of the balance sheet accounts related to payroll are A) large and require substantial effort to audit. B) small compared with the transactions. C) large on the liability side but small on the asset side. D) significantly larger than the related accounts on the income statement.

Q: Which of the following describes the class of transactions associated with payroll? A) Posting costs of purchasing inventory B) Payment of employee services C) Payment of withholding taxes and benefits D) Write-off of damaged inventory dropped by employees

Q: Payroll and personnel costs at ABC Manufacturing are a major expense. This means that improper allocation or misclassification of labour costs could result in A) a material misstatement of net income. B) a net effect that is negligible when costing inventory. C) quality control problems with respect to the production of finished products. D) incorrect payment of payroll to employees.

Q: The human resources and payroll cycle is the transaction cycle that begins with A) processing the payment to the employees. B) the creation of the employee profile in the payroll master file. C) the employee performing work for the company. D) hiring of personnel.

Q: Auditing, 12e (Arens) 15.1 Explain the importance of the human resources and payroll cycle

Q: Outline the audit procedures that would be performed when testing electronic receipts and payments.

Q: Petty cash tests can ordinarily be performed at any time during the year, but as a matter of convenience they are typically done A) on the balance sheet date. B) near the end of the field work. C) at the same time as the observation of inventory, since both auditor and client must be present at that time. D) on any interim date.

Q: The most important internal control for petty cash is A) the use of an imprest fund that is the responsibility of one individual. B) keeping it in a safe or locked drawer. C) keeping the amount of cash to a minimum. D) accessibility so that cheques won't have to be written for small amounts.

Q: Stella is auditing the electronic receipts and payments. The extent of her audit work conducted on the bank reconciliation will A) be less extensive than if the company did not engage in electronic receipts and payments. B) be more extensive than if the company did not engage in electronic receipts and payments. C) depend on the assessed quality of internal controls. D) be significantly diminished if Stella can determine that the receipts and payments come from a reputable bank with proper internal controls.

Q: Electronic data interchange (EDI) represents the electronic transfer of A) funds. B) business documents. C) data between accounting systems of the company's entities. D) information between the bank and the company.

Q: When examining the bank reconciliation for the imprest payroll account, it is normal for the only reconciling item to be A) outstanding cheques. B) direct deposits from customers. C) outstanding deposits. D) corrections to payroll amounts.

Q: A) Explain what is meant by kiting and discuss how it is performed. B) Discuss how an auditor can test for kiting.

Q: A) Many auditors prove the subsequent period bank statement if a cutoff statement is not received directly from the bank. Discuss the purpose of proving the subsequent period statement, and explain the audit procedures performed during the proof of cash. B) Discuss the circumstances in which an auditor would prepare a proof of cash.

Q: In addition to the possibility of kiting, inaccurate handling of bank transfers could result in A) a misclassification between cash and accounts receivable. B) an incorrect balance in the accounts receivable account. C) a misclassification between cash and accounts payable. D) an incorrect balance in the bank loan account.

Q: What audit objective is associated with the comparison of disbursement and receipt information on a bank transfer schedule to the cash disbursements and cash receipts journals? A) Accuracy B) Classification C) Occurrence D) Completeness

Q: Disbursements on the bank transfer schedule should be correctly included in or excluded from year-end bank reconciliations as outstanding cheques. Understating outstanding cheques on the bank reconciliation indicates A) the possibility of kiting. B) a cut-off error in the bank account. C) an understatement of the bank balance. D) an increase in inherent risks associated with cash.

Q: On the last day of the fiscal year, the cash disbursements clerk drew a company cheque on bank A and deposited the cheque in the company account in bank B to cover a previous theft of cash. The disbursement had not been recorded. The auditor will best detect this form of kiting by A) comparing the detail of cash receipts as shown by the cash receipts records with the detail on the confirmed duplicate deposit tickets for three days prior to and subsequent to year-end. B) preparing from the cash disbursements book a summary of bank transfers for one week prior to and subsequent to year-end. C) examining the composition of deposits in both bank A and B subsequent to year-end. D) examining paid cheques returned with the bank statement of the next account period after year-end.

Q: On a bank transfer schedule, if a cash disbursement was recorded in the current fiscal year, and the receipt in the subsequent fiscal year, this might be A) the best way to record this type of transaction. B) an indication of increased inherent risk with respect to cash. C) an attempt to cover a cash shortage. D) an indication of an error in recording information by the bank.

Q: Testing to ensure that bank transfers are recorded in both the receiving and disbursing banks helps to detect evidence A) that would reduce inherent risk to a minimum. B) associated with an attempt to conceal a theft of cash. C) that increases reliability with respect to the accuracy of the transfer schedule. D) that would warrant decreasing control risk to a minimum.

Q: The process of transferring money from one bank account to another and improperly recording the transaction in both accounts is called A) lapping. B) embezzling. C) kiting. D) a scam.

Q: What type of audit test is a proof of cash? A) Test of control B) Test of details C) Dual-purpose D) Analytical review

Q: The auditor uses a proof of cash to determine whether A) internal controls over cash have been functioning effectively in the period under audit. B) all recorded cash receipts were deposited and whether all recorded cash disbursements were paid by the bank. C) accounts receivable was properly recorded and whether cash receipts transactions were properly recorded. D) accounts payable was properly recorded and whether cash disbursement transactions were properly recorded.

Q: A four-column proof of cash can be performed for A) one or more interim months. B) the entire year. C) the last month of the year. D) any specified time period for which bank statements are available and which the auditor chooses to designate.

Q: Under what circumstances would an auditor prepare a proof of cash? When A) the client has material internal control weaknesses in cash. B) control risk is set at minimum. C) inherent risk in cash is considered to be low. D) an enterprise resource system is in use for processing of cash transactions.

Q: What is the purpose of an extended test of the bank reconciliation? To A) verify whether all transactions included in the journals for the last month of the year were correctly allocated to the bank reconciliation. B) compensate for material weaknesses in internal control with respect to segregation of duties. C) increase detection risk for the audit of cash. D) verify whether specific transactions that flowed through the cash account were correctly recorded.

Q: A major consideration in the audit of the general cash balance is the possibility of fraud. The auditor must extend his or her procedures in the audit of year-end cash to determine the possibility of a material fraud when there are A) large cash balances at the end of the year. B) large cash receipts and disbursements during the year. C) no imprest accounts used for payroll. D) material internal control weaknesses.

Q: Serena is the assistant controller of Opus Inc. As a result of a recent expansion the controller has been very busy and delegated the signing authority of the cheques to Serena. Further, due to the cash accountant leaving on maternity leave, Serena was asked to perform the bank reconciliation until they found someone to replace the cash accountant. Serena is a qualified accountant and has been able to handle all of these additional tasks. However, she asked her boss for a raise to compensate her for the additional responsibilities that she currently has. Her boss indicated that this was only temporary and the company could not afford a raise for now. Serena created a vendor in the system with her home address. She has been paying this vendor $2,000 for the past 3 months as a means of compensating herself. This theft has yet to be discovered by Opus. Required: A) What internal controls are missing to enable the theft to occur? B) What audit procedures might detect the theft?

Q: Following are situations that an auditor might find by means of tests of controls or tests of details of cash balances for a company with a December year end. A) The accountant did not record or deposit a cash receipt for $50,000 that was received on December 28. Cash is prelisted by the receptionist. B) Cheques prepared up to January 6 were dated December 31 and recorded in the cash disbursements journal. C) A cheque was issued for office supplies that were never received by the client. Required: List a substantive audit procedure that could uncover each of the preceding situations.

Q: A) Explain what is meant by a cutoff bank statement and discuss the purpose of the cutoff bank statement in the audit of cash. B) Explain the purpose of testing the client's bank reconciliation and discuss the major audit procedures involved.

Q: A) Discuss the methodology for designing tests of details of balances for cash in the bank. B) An effective monthly bank reconciliation by client personnel includes nine procedures. List these nine bank reconciliation procedures. C) Discuss two analytical procedures commonly performed during the audit of the cash account.

Q: You are the auditor of Brody Grass Inc. The CEO expressed a concern that the audit fees for the year were very high. You then explained that this is largely due to poor internal controls in the cash and transaction cycle and that the audit fees could decrease if better controls were in place. Provide 5 examples of general cash account controls that Brody Grass Inc. could implement.

Q: After testing the bank reconciliation and inspecting the cut-off bank statement received from the bank, the auditor has determined that there are two outstanding cheques from the list on the bank reconciliation that have still not cleared the bank. The auditor's next step should be to A) trace the details of the two cheques to the cash disbursements journal. B) trace the details of the two cheques to their associated expense accounts. C) reperform the calculations in the bank reconciliation. D) compare the total of the bank reconciliation to the bank confirmation.

Q: If the auditor does not obtain a cut-off statement directly from the bank for testing, an alternative procedure that the auditor can use is to A) account for a continuity of cheques that covers the year end. B) reconcile cash paid to the cash disbursements journal for the last month of the year. C) reconcile cash received to the cash receipts journal for the last month of the year. D) prove the bank statement for the period after the year end.

Q: 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.

Q: The reason for testing the client's bank reconciliation is to verify whether the client's recorded bank balance is the same amount as the actual cash in the bank, except for deposits in transit, cheques outstanding, and other reconciling items. The information needed to complete the tests of the reconciliation are provided by the A) journals and ledgers of client for the year under audit. B) cutoff bank statement. C) journals and ledgers of client for the subsequent year. D) cancelled cheques for the year under audit.

Q: A partial-period bank statement and the related cancelled cheques, duplicate deposit slips, and other documents included in bank statements, mailed by the bank directly to the public accounting firm's office, is called a A) four-column proof of cash. B) bank statement. C) cutoff bank statement. D) short-period bank statement.

Q: After the bank confirmation has been received by the auditor, the auditor should A) recalculate the bank reconciliation in its entirety. B) verify that cash cutoff was correct for that bank account. C) trace the general ledger cash account balance to the amount confirmed. D) trace the bank reconciliation cash amount to the amount confirmed.

Q: The auditor has examined the financial statements, particularly the cash flow statement, and the notes to the financial statements to determine that all relevant information is presented clearly. Which audit assertion is associated with this audit test? A) classification B) allocation C) understandability D) valuation

Q: During his examination of a January 19, 2013 cutoff bank statement, an auditor noticed that the majority of cheques listed as outstanding at December 31, 2012 had not cleared the bank. This would indicate A) a high probability of lapping. B) a high probability of kiting. C) that the cash disbursements journal had been held open past December 31, 2012. D) that the cash disbursements journal had been closed prior to December 31, 2012.

Q: The audit procedure which requires the auditor to record the last cheque number used on the last day of the year and subsequently trace to the outstanding cheques and the cash disbursements journal is performed to satisfy the audit objective of A) detail tie-in. B) existence. C) completeness. D) allocation.

Q: The test of balances procedure that requires the auditor to trace the unadjusted book balance on the reconciliation to the general ledger is an attempt to satisfy the audit objective of A) detail tie-in. B) existence. C) completeness. D) accuracy.

Q: Which of the following audit tests pertains to the accuracy assertion? A) prepare proof of cash B) test a cut-off bank statement C) examine minutes and loan agreements D) read the notes to the financial statements

Q: In an effort to satisfy the completeness objective, the auditor could perform which of the following test of details of balance procedures? A) Trace the book balance on the reconciliation to the general ledger. B) Trace outstanding cheques to subsequent period bank statements. C) Obtain and test a cut-off bank statement. D) Review financial statements to make sure that material savings accounts and certificates of deposit are disclosed separately.

Q: The starting point for the verification of the balance in the general bank account is to obtain A) the client's December bank statement and reconcile it. B) a bank reconciliation from the client. C) a cutoff bank statement directly from the bank. D) the client's cash account balance from the general ledger.

Q: Jane works for Middle Co. She is responsible for opening the mail, and preparing the bank deposit for cheques received, which she then gives to the owner. After the owner has deposited the cash, he gives Jane the stamped bank deposit slip, which she uses to record the cash received in the accounts receivable records. How does this allocation of responsibilities affect the audit process? The auditor should A) increase control testing with respect to the accuracy assertion. B) do substantive tests (compare the deposit slip to the accounts receivable records). C) consider the possibility of material fraud. D) increase control testing with respect to the completeness assertion.

Q: Bank reconciliations are normally verified on a 100-percent basis. Testing the reasonableness of the cash balance is therefore A) less important than for most other audit areas. B) more important than for other audit areas. C) equally important than for other audit areas. D) less important than for the audit of other assets, but more important than the audit of liabilities.

Q: Which of the following is a common analytical procedure that may detect misstatements in cash? A) Calculation of inventory turnover and gross profit B) Review of amounts included in the earnings per share calculations C) Comparison of outstanding cheques and deposits in transit with the prior year bank reconciliation D) Comparison of gross sales on a month by month basis with the prior year

Q: What is the best way to prevent potential alteration, deletion or addition of cancelled cheques, duplicate deposit slips or other documents provided with the bank statement? Have the A) bank statements provided unopened to an independent reconciler. B) person responsible for recording cash receipts does the bank reconciliation. C) signing officer(s) review the bank reconciliation. D) bank statements are provided to the accounts payable supervisor.

Q: What is an important benefit of independent preparation of bank reconciliations? A) An opportunity to independently check that cheques have two signatures B) The client being able to check that the bank is processing transactions correctly C) The ability to internally verify cash receipts and disbursements transactions D) The best time to carefully serially account for cheques issued

Q: Which of the following situations would indicate a susceptibility at the client to the potential of fraud that pertains to theft of cash? A) lack of segregation of duties between the handling of cash and the recording of cash B) cash disbursements cheques requiring only one authorizing signature C) payroll rates being approved by the corporate controller D) customer master file changes being handled by the controller's executive assistant

Q: Which of the following is an essential internal control in the cash cycle? A) Use of two signatures on payroll cheques and payables cheques B) Independent receipt of the bank statement from the bank C) Careful accounting of the continuity of cheques returned from the bank D) Independent preparation of bank reconciliations

Q: Because cash is the most desirable asset for people to steal, it has a higher A) inherent risk. B) control risk. C) detection risk. D) materiality.

Q: Which of the following statements best describes the position of cash on the balance sheet at most organizations that utilize effective cash management practices? It is usually A) immaterial. B) highly material. C) dispersed among many different accounts. D) affected by many different capital asset accounts.

Q: Sandra is analyzing the cash cycle of her audit client. Which of the following indicator could lead to a liquidity problem? A) Obsolete inventory B) High level of inventory C) Inventory on consignment D) Backordered inventory

Q: Toasted Tomato is a restaurant in Ottawa. You walk by this restaurant frequently and noticed it is usually empty. When you came in to do the audit, you were surprised to see that they had a large cash balance and high sales. Toasted Tomato might A) have a going concern issue. B) be engaging in money laundering. C) have lower business risk than initially anticipated. D) have weak internal controls.

Q: A) Distinguish between (i) risks of error, (ii) risks of fraud, and (iii) risks of inadequate presentation or disclosure of financial information. B) For each of the three types of risks described in (A), provide three examples of major risks of error or fraud in the cash cycle.

Q: A) "Failure to bill a customer" is an example of an error that results in the failure to receive cash, but would not be discovered as part of the audit of the bank reconciliation. State three other examples of errors or irregularities that result in the improper payment of, or failure to receive, cash, but would not be discovered during the audit of the bank reconciliation. How are these types of misstatements normally uncovered in the audit? B) State three examples of errors or irregularities that normally would be uncovered during the audit of the bank reconciliation.

Q: A) Describe each of the major types of cash accounts maintained by business entities. B) Discuss the advantages of using an imprest bank account for payroll transactions.

Q: The auditor has determined exchange rates used by the client to present cash in foreign currencies and has recalculated the amounts. Which audit assertion is associated with this audit procedure? A) existence B) valuation C) allocation D) classification

Q: Which one of the following misstatements could be detected as part of the tests of a bank reconciliation? A) Payment of interest to a related party at an incorrect rate B) Exclusion of mortgage interest receivable from the balance sheet C) Deposits recorded as cash receipts at the end of year, but included as outstanding deposits (deposits in transit) D) A defalcation of cash by interception of collections before they are recorded

Q: Which of the following misstatements in the payroll cycle could be detected during the audit of payroll transactions (but would not be discovered as part of the audit of the bank reconciliation)? A) failure to include outstanding payroll cheques on the outstanding cheque list B) overpayment of Receiver General payments received after the year end but recorded as cash receipts in the current year C) unclaimed payroll cheques recorded as a deposit near the end of the year, but reconciled as deposits in transit D) payment to fictitious employees that had been set up by the payroll supervisor

Q: Certain types of misstatements that affect cash may be detected in the audit of tests of controls. Which of the following misstatements would be detected in the audit of the acquisition and payment cycle? A) Failure to bill a customer for goods shipped B) Billing a customer at the incorrect price C) Improper reimbursement of an officers' personal expenses D) Paying an employee at the incorrect wage rate