Chapter 17

Question 1

What varies in the auditing approach regarding cash accounts?

Answer 1

The type of cash accounts

Understanding the client’s business is essential for effective auditing.

Question 2

What is a general cash account used for?

Answer 2

To make payments

Typically used only by smaller companies.

Question 3

What is the purpose of an imprest payroll account?

Answer 3

To pay employees and improve control over cash

It helps reduce the time needed to reconcile bank accounts.

Question 4

What advantage does a branch bank account provide?

Answer 4

More rapid deposit at the local level

It helps build business relationships with local banks.

Question 5

What is an imprest petty cash fund used for?

Answer 5

For small cash purchases

Question 6

What are cash equivalents used for?

Answer 6

Manage fluctuating cash balance for short-term needs

Question 7

In which cycles should cash transactions be considered? (3)

Answer 7

• Revenue
• Acquisition and payment
• Human resources and payroll

Question 8

Cash balance is often considered material or immaterial?

Answer 8

Immaterial

Question 9

Cash transaction affecting the balance is often very material or immaterial

Answer 9

Material

Question 10

What inherent risks should be identified in cash management? (3)

Answer 10

• Impact of seasonality
• Policies and budgeting practices
• Risk from client investment policies and strategies

Question 11

Other significant risks

Answer 11

• Cash flow problem
• Particular debt covenants

Question 12

What causes high inherent risk for the existence assertion

Answer 12

Cash’s susceptibility to theft

Question 13

What factors are considered when assessing control risk for cash? (2)

Answer 13

• Management attitude towards cash
• Nature of the treasury management function

Question 14

What is the most important internal control over cash balance?

Answer 14

Independent bank reconciliations

Question 15

What kind of evidences are important for assessing control risk in internal control? (2)

Answer 15

• Cash receipts
• Cash disbursements

Question 16

What does electronic funds transfer (EFT) do?

Answer 16

E-transfer funds (payment or receipt)

Question 17

What does electronic data interchange (EDI) do?

Answer 17

E-transfer business documents

Question 18

How does electronic cash transaction help improve internal controls?

Answer 18

No cash handling

Question 19

Which internal controls can be implemented to secure the recording of cash receipts and disbursements? (3)

Answer 19

• Segregation of duties
• Cheques signed by authorized person
• Prenumbered cheques on specialized paper

Question 20

What are the attributes of the independent bank reconciliation process? (4)

Answer 20

• Monthly reconciliations
• Matching amounts in GL and bank account
• Independent internal verification of transactions
• Review by responsible employee

Question 21

True or False? Test of control is needed in each cycle, because cash is affected by other cycles

Answer 21

True

Question 22

What common misstatements can occur in cash balance? (3)

Answer 22

• Not all cash accounts are on the GL
• Errors in bank reconciliation
• Improper cutoff

Question 23

When are substantive analytical procedures still needed?

Answer 23

When comparing ending balance with prior periods

Question 24

When do you rely on tests of control for cutoff?

Answer 24

If controls over cutoff for cash receipt and disbursement are strong

Question 25

What to do when internal controls are weak when testing cutoff?

Answer 25

Perform own cutoff procedures at year-end

Question 26

What are the major tests of details of cash balances? (2)

Answer 26

* Testing the bank reconciliation * Confirming the bank balance

Question 27

What is the purpose of the test of details for bank reconciliation?

Answer 27

Verify that the balance are the same for the client and the bank

Question 28

What is the purpose of confirming cash balances?

Answer 28

To get confirmation letters directly from every bank the client uses.

Question 29

What happens when the client has many inactive bank accounts in regards to cash balance confirmation?

Answer 29

Skip the confirmation on them

Question 30

What should be reviewed to ensure cash presentation assertion?

Answer 30

* Cash classified as current assets * Bank overdraft classified as current liabilities

Question 31

What is a standard bank confirmation

Answer 31

A request from the auditor on information from the client's bank

Question 32

Which is more reliable: Bank confirmation or bank statement from the client?

Answer 32

Bank confirmation

Question 33

What to test if a cutoff bank statement is not received directly from the bank

Answer 33

Look if the document has been altered

Question 34

How to check if documents have been altered? (3)

Answer 34

* Footing all cancelled cheques * Check when the footed totals are used * Review item in the footing to make sure they were cancelled

Question 35

How should cash and bank overdraft be presented on the FS? (2)

Answer 35

* Cash in CA * Bank overdraft in CL

Question 36

What can show risk of misstatement in the presentation assertion?

Answer 36

Existence of restriction and compensating balances

Question 37

What are major indicators of cash fraud? (2)

Answer 37

* Improper segregation of duties between handling cash and recording cash * Lack of independent bank reconciliation

Question 38

What are the considerations when designing fraud procedures for cash? (4)

Answer 38

* Nature of deficiencies in internal control * Type of fraud * Potential materiality of fraud * Audit procedures to uncover fraud

Question 39

What procedures can help uncover fraud in cash management? (3)

Answer 39

* Confirmation of accounts receivable * Tests to detect lapping * Review general ledger

Question 40

True or False? It is very easy to detect theft of cash and fraudulent financial reporting

Answer 40

False

Question 41

Why do we conduct extended test of BR?

Answer 41

When we believe that the BR was intentionally misstated

Question 42

When is proof of cash used? (3)

Answer 42

* High risk of misstatement * Suspicious cash transaction * Material internal control weakness in cash

Question 43

What to working paper reconcile on bank records? (4)

Answer 43

* Client beginning balance * Cash deposit * Cleared cheque * Ending balance

Question 44

What are the key components of a proof of cash? (4)

Answer 44

* Reconciliation of bank statement balance with general ledger at beginning * Reconciliation of cash receipts with the cash receipts journal * Reconciliation of cancelled cheques/e-payments with the cash disbursements journal * Reconciliation of bank statement balance with general ledger at end

Question 45

When can proof of cash be performed? (3)

Answer 45

* One or more interim months * Entire year * Last month of the year

Question 46

What does proof of cash help determine? (4)

Answer 46

* Deposited cash receipts * Recorded bank deposits * Recorded paid disbursement * Recorded amount paid by the bank

Question 47

What is a specific concern when performing proof of cash for an interim month?

Answer 47

Reconciling the accounting records with the bank balance

Question 48

Why is it good to compare recorded cash receipts and disbursements with both the bank account and bank reconciliation?

Answer 48

To ensure completeness and accuracy of recorded cash flows

Question 49

What is one limitation of proof of cash in detecting fraud?

Answer 49

Not useful for uncovering theft of cash

Question 50

What does testing interbank transfers (kiting) involve?

Answer 50

Tracing bank transfers made close to the balance sheet date to ensure proper recording.

Question 51

Why do we test kiting?

Answer 51

People transfer money from one bank to another and improperly record the transaction, causing cash overstatement

Question 52

How can ADA help detect cash fraud? (4)

Answer 52

* Search for large rounded data * Match Dr. & Cr. transactions * Identify large cash deposit * Cross-check account holder address against address listing