Q&A Hero

Q: Custody of the securities is separate from accounting for the securities An individual can make fictitious transactions 2

Q: Match the segregation of duties for investments with the misstatement (due to error or fraud) it can help prevent. The valuation-monitoring function is separate from the acquisition function An individual can improperly record securities values or not report the values to management The initiation function is separate from the final approval function An individual can conceal a theft of securities Custody of the securities is separate from accounting for the securities An individual can make fictitious transactions The maintenance of the securities ledger is separate from that of the general ledger An individual can conceal any defalcation that would normally be detected by reconciliation of subsidiary records with general ledger control accounts

Q: This account is a separate cash account maintained at the local bank of the entity Branch account 4

Q: Match the type of bank account with its definition: This account is typically immaterial in amount and is used for paying certain types of expenses and transactions General cash account This account contains a stipulated amount of cash and is used for limited purposes Imprest cash account This account is the principal cash account of an entity Petty cash account This account is a separate cash account maintained at the local bank of the entity Branch account 4

Q: Dividends have been reduced or eliminated, or scheduled interest payments on debt securities have not been made.

Q: You are auditing cash for 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, given the lack of proper segregation of duties. As the auditor, what tests could you perform to detect fraudulent activities in the cash account?

Q: Explain how cash plays a role in all business processes.

Q: Auditors 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 active market. D. The entity does not have control weaknesses in its valuation processes.

Q: 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.

Q: 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 entity 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.

Q: When an auditor is unable to inspect and count an entity'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 it will be asked to A. verify any differences between the contents of the box and the balances in the entity'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.

Q: 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 that should be on hand at a different location but are not. D. substitution of authentic securities with counterfeit securities.

Q: 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 safe-deposit box, each year on the balance sheet date.

Q: 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.

Q: The primary purpose of sending a standard confirmation request to financial institutions with which the entity 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.

Q: As one of the year-end audit procedures, the auditor instructed the entity's personnel to prepare a standard bank confirmation request for a bank account that had been closed during the year. After the entity'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.

Q: 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.

Q: 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.

Q: In establishing the existence and ownership of a long-term investment in stock of a publicly traded company, 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.

Q: An entity 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 entity have the bank seal the safe-deposit box until the auditor can count the securities at a subsequent date.

Q: 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.

Q: 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 entity. C. To determine whether securities actually exist. D. To determine whether securities are properly classified on the balance sheet.

Q: The auditor should insist that a representative of the entity 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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 recordkeeping 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 safe-deposit box.

Q: A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and submission of coupons for collections of periodic interest probably should be delegated to the A. chief Accountant. B. internal Auditor. C. cashier. D. treasurer.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily to A. verify the cash balance reported on the bank confirmation inquiry form. B. verify reconciling items on the entity's bank reconciliation. C. detect lapping. D. detect kiting.

Q: The auditor should ordinarily mail confirmation requests to all banks with which the entity 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 that 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 non-detection of forged checks.

Q: 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.

Q: Examining a sample of cancelled checks for an authorized signature tests which of the following assertions for cash? A. Authorization. B. Completeness. C. Cutoff. D. Accuracy.

Q: 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.

Q: An auditor ordinarily should send a standard confirmation request to all banks with which the entity 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.

Q: 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.

Q: 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.

Q: In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the entity'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. existence, rights and obligations, and completeness.

Q: 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.

Q: An auditor usually tests the reasonableness of dividend income from investments in stock of public 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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 checks listing. C. performing a proof of cash. D. performing extended bank reconciliation procedures, including detailed examination of reconciling items.

Q: 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 entity bank reconciliations.

Q: 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.

Q: 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.

Q: Which of the following audit procedures is the most appropriate when internal control over cash is weak or when an entity requests an investigation of cash transactions? A. Proof of cash. B. Bank reconciliation. C. Cash confirmation. D. Evaluate ratio of cash to current liabilities.

Q: 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.

Q: 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.

Q: Level 1 inputs are more risky and difficult to audit than Level 3 inputs to a valuation model.

Q: If the entity maintains custody of its investments, the auditor normally examines the actual securities.

Q: It is generally more efficient to follow a substantive strategy for auditing investments.

Q: Kiting is an audit procedure used to test the accuracy of the cash receipts.

Q: A cutoff bank statement is used to verify the propriety of the reconciling items shown on the bank reconciliation.

Q: A major control that directly affects the audit of cash is the bank reconciliation prepared by the auditor.

Q: The auditor's use of analytical procedures for auditing cash is limited.

Q: An imprest cash account is used for specific purposes and generally maintains a very small balance.

Q: The general cash account is normally the principal account used to disburse payroll.

Q: The cash account is affected by all of the entity's business processes.

Q: Match the balance sheet account with the income statement account that is typically audited at the same time. Investments Interest expense Property, Plant, and Equipment Insurance expense Bonds Payable Depreciation expense Prepaid Insurance Investment income Accounts Receivable Bad debt expense

Q: Match each of the following controls with the assertion for long-term debt that it supports. The portion of long-term debt due in the next year is classified as a short-term liability Occurrence and Authorization A subsidiary ledger is maintained that contains information about all the long-term debt and the amount recorded in this ledger is reconciled to the general ledger Valuation Premiums and discounts on bond and notes payables are properly amortized using the effective interest rate method Disclosure - Classification Any significant debt commitments are approved by the board of directors or delegated executives Completeness

Q: Of the following, which is the most important procedure that an auditor should use when making an overall review of the income statement? A. Select sales and expense items and trace amounts to related supporting documents. B. Compare actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences. C. Obtain, from the proper entity representative, inventory certificates for the beginning and ending inventory amounts that were used to determine cost of sales. D. Ascertain that the net income amount in the statement of cash flows agrees with the net income amount in the income statement.

Q: Overall analysis of income statement accounts may bring to light errors, omissions, and inconsistencies not disclosed in the overall analysis of balance sheet accounts. The income statement analysis can best be accomplished by comparing monthly A. income statement ratios to balance sheet ratios. B. revenue and expense account balances to the monthly reported net income. C. income statement ratios to published industry averages. D. revenue and expense account totals to the corresponding figures of the preceding years.

Q: Which of the following is the most important consideration of an auditor when examining the stockholders' equity section of an entity's balance sheet? A. Changes in the capital stock account are verified by an independent stock transfer agent. B. Stock dividends and/or stock splits during the year under audit were approved by the stockholders. C. Stock dividends are capitalized at par or stated value on the dividend declaration date. D. Entries in the capital stock account can be traced to a resolution in the minutes of the board of directors' meetings.

Q: Many of Granada Corporation's convertible bond holders have converted their bonds into stock during the year under examination. The independent auditor should review Granada Corporation's statement of cash flows to ascertain that it shows A. only cash used to reduce convertible debt. B. only cash provided by issuance of stock. C. cash provided by the issuance of stock and used to reduce convertible debt. D. nothing relating to the conversion because it does not affect cash.

Q: Before expressing an opinion concerning the results of operations, the auditor would most likely proceed with the examination of the income statement by A. applying a rigid measurement standard designed to test for understatement of net income. B. analyzing the beginning and ending balance sheet inventory amounts. C. making net income comparisons to published industry trends and ratios. D. examining income statement accounts concurrently with the related balance sheet accounts.

Q: Which of the following transactions is an auditor most likely to examine when auditing the retained earnings account? A. Changing from one method of depreciation to another. B. Adjusting the percentage used to estimate the allowance for doubtful accounts. C. Changing from the FIFO to LIFO method of inventory valuation. D. Correcting an error in depreciation in a prior year.

Q: An audit program for the examination of the retained earnings account should include a step that requires verification of the A. gain or loss resulting from disposition of treasury shares. B. market value used to charge retained earnings to account for a two-for-one stock split. C. authorization for both cash and stock dividends. D. approval of the adjustment to the beginning balance as a result of a write-down of an account receivable.

Q: Which audit procedure is most closely related to management's assertions about the presentation and disclosure of stockholders' equity? A. Determining whether restrictions have been imposed on retained earnings. B. Counting treasury stock certificates. C. Inspecting minutes of the board of directors to verify that cash dividends were declared. D. Establishing that treasury stock is valued at cost.

Q: An audit of stockholders' equity ordinarily should include A. tracing individual dividend payments to the capital stock records. B. reviewing minutes of board meetings to determine the number of shares outstanding. C. confirming shares outstanding with state officials. D. determining that dividend declarations comply with debt agreements.

Q: Examining cancelled stock certificates addresses the assertion of A. occurrence. B. disclosures. C. valuation. D. completeness.

Q: In performing tests concerning the granting of stock options, an auditor should A. confirm the transaction with the Secretary of State in the state of incorporation. B. verify the existence of option holders in the entity's payroll records or stock ledgers. C. determine that sufficient treasury stock is available to cover any new stock issued. D. trace the authorization for the transaction to a vote of the board of directors.

Q: Where no independent stock transfer agents are employed and the corporation issues its own stocks and maintains stock records, canceled stock certificates should A. be defaced to prevent reissuance and attached to their corresponding stubs. B. not be defaced, but segregated from other stock certificates and retained in a canceled certificates file. C. be destroyed to prevent fraudulent reissuance. D. be defaced and sent to the Secretary of State.

Q: Two months before year-end, the bookkeeper erroneously recorded the receipt of a long-term bank loan by a debit to cash and a credit to sales. Which of the following is the most effective procedure for detecting this type of error? A. Analysis of the notes payable journal. B. Analysis of bank confirmation information. C. Preparation of a year-end bank reconciliation. D. Preparation of a year-end bank transfer schedule.

Q: During the course of an audit, a CPA observes that the recorded interest expense seems to be excessive in relation to the balance in the long-term debt account. This observation could lead the auditor to suspect that A. long-term debt is understated. B. discount on bonds payable is overstated. C. long-term debt is overstated. D. premium on bonds payable is understated.