Question 1

The bank reconciliation should be completed by someone with primary responsibility for cash receipts and payments.

Accepted Answer

The bank reconciliation should be completed by someone who does not have direct responsibilities for cash receipts and payments to ensure independence and reduce the risk of fraud or error.

Question 2

The audit of the bank reconciliation will normally lead to the discovery of theft of cash by interception of cash receipts from customers before they are recorded, with the account written off as a bad debt.

Accepted Answer

The audit of the bank reconciliation primarily focuses on verifying the accuracy of the bank's ending balance and the company's book balance by identifying outstanding checks, deposits in transit, and other reconciling items. It may not directly uncover theft of cash by interception before recording, as this type of fraud involves manipulating records before they reach the reconciliation process. Detection of such theft often requires additional audit procedures targeting internal controls, receipt processes, and review of write-offs.

Question 3

The transfer of money from one bank account to another and improperly recording the transfer so that the amount is recorded as an asset in both accounts is referred to as lapping.

Accepted Answer

Lapping refers to the fraudulent practice of delaying the recording of cash receipts to cover up the theft of funds, not the improper recording of transfers between bank accounts as assets.

Question 4

The audit procedure 'foot the schedule of fixed assets acquisitions and trace the total to the general ledger' relates most closely to the accuracy objective for fixed assets acquisitions.

Accepted Answer

The answer of The audit procedure 'foot the schedule of...

Question 5

It is not difficult to be sure that each intercompany transfer is correctly handled.

Accepted Answer

Intercompany transfers can be complex and involve multiple subsidiaries or departments. It can be challenging to ensure that each transfer is accurately recorded, and errors can result in incorrect accounting and financial reporting. Therefore, it is not always easy to be sure that intercompany transfers are correctly handled.

Question 6

The primary documents used to test the existence of current year acquisitions of property, plant, and equipment are vendors' invoices and receiving reports.

Accepted Answer

Vendors' invoices and receiving reports are the primary documents used to test the existence of current year acquisitions of property, plant, and equipment.

Question 7

The auditor's physical examination of property, plant, and equipment is commonly used when verifying the existence objective for acquisitions of property, plant, and equipment.

Accepted Answer

The physical examination of property, plant, and equipment is a commonly used procedure to verify the existence objective during the audit of acquisitions.

Question 8

The audit objectives for tests of cash balances are completeness, accuracy, and cutoff.

Accepted Answer

The audit objectives for tests of cash balances typically include existence, completeness, rights and obligations, valuation and allocation, and presentation and disclosure.

Question 9

Deposits recorded as cash receipts near the end of the year, deposited in the bank in the same month and included in the bank reconciliation as a deposit in transit, are a type of misstatement in cash that will not normally be discovered as part of the audit of tests of a bank reconciliation.

Accepted Answer

Deposits recorded as cash receipts and included in the bank reconciliation as deposit in transit are not discovered in the audit of bank reconciliation as they are considered to be a timing difference. These deposits will be cleared in the subsequent period, and the auditor needs to ensure that they are indeed cleared in the subsequent period to avoid misstatement in the financial statements.

Question 10

Kiting involves transferring money from one bank to another and incorrectly recording the transaction.

Accepted Answer

Kiting is a form of check fraud that involves transferring funds between different accounts and intentionally recording the transfer inaccurately to artificially inflate the account balance. It is illegal and can result in serious consequences.

Question 11

It is relatively easy to verify the client's reconciliation of the balance in the bank account to the general ledger.

Accepted Answer

It is generally straightforward to compare the bank statement balance with the balance in the general ledger to ensure they match. This process is called bank reconciliation, and it helps to identify any errors or discrepancies that need to be resolved.

Question 12

The cash balance is immaterial in many audits, but cash transactions affecting the balance are almost always extremely material.

Accepted Answer

Cash balances may not be material for some audits, but cash transactions that impact the balance can be material. Therefore, it is crucial to assess the significance of individual transactions rather than solely examining the cash balance.

Question 13

If internal controls over cash-related transactions are operating effectively, control risk is increased.

Accepted Answer

If internal controls over cash-related transactions are operating effectively, control risk is reduced. Effective internal controls decrease the risk of errors or fraud occurring in cash-related transactions. Therefore, the overall control risk would be lower, not increased.

Question 14

Improper payments of officers' personal expenditures are a type of misstatement in cash that will normally be discovered as part of the audit of the bank reconciliation.

Accepted Answer

Improper payments of officers' personal expenditures are typically identified through the examination of expense accounts and supporting documentation, not through the audit of the bank reconciliation, which focuses on reconciling bank statements with the company's cash records.

Question 15

The primary accounting record for manufacturing equipment and other property, plant, and equipment accounts is generally an asset register.

Accepted Answer

An asset register is the primary accounting record for property, plant, and equipment accounts, including manufacturing equipment. It provides a detailed summary of all assets owned by a company, including their purchase price, acquisition date, accumulated depreciation, and current value. This helps companies keep track of their assets and ensures that they are properly recorded and accounted for in financial statements.

Question 16

Proof of cash is prepared in the audit when the client has a significant deficiency in internal control in cash.

Accepted Answer

Proof of cash is a procedure performed by auditors to verify the accuracy of the cash balance in a company's financial statements. It is typically done when the auditor identifies a significant deficiency in the internal control over cash. Therefore, the statement is true.

Question 17

Banks are responsible for searching their records for bank balances or loans beyond those included on the confirmation form.

Accepted Answer

Banks respond to the specific information requested on the confirmation form; it is not their responsibility to search for additional accounts or loans not listed by the requester.

Question 18

Tests for kiting are performed using a list of all bank transfers made within a few days of the balance date.

Accepted Answer

Kiting tests involve examining a list of bank transfers made within a few days of the balance date to detect any fraudulent activity that artificially inflates the account balance.

Question 19

The term 'property, plant, and equipment' normally includes land, buildings, and equipment, but does not include furniture or motor vehicles.

Accepted Answer

Property, plant, and equipment typically include land, buildings, equipment, furniture, and motor vehicles, as long as these assets are used for operations and not for resale.

Question 20

Most companies are unlikely to have significant client business risks affecting cash balances.

Accepted Answer

Most companies have significant client business risks affecting cash balances, such as credit risk, liquidity risk, and operational risk.

Quiz 16: Audit of transaction cycles and financial statement balances II