Question 1

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?

Accepted Answer

When management's key assumptions are subject to volatility, there is a higher risk that the financial instrument may not be fairly stated. Therefore, auditors will need to perform more substantive tests to obtain sufficient appropriate evidence. Option A is incorrect because it indicates that management is objective and transparent, which would reduce the risks associated with financial instruments. Option C is incorrect because if the stocks are issued by Fortune 100 firms traded in an active market, there is a lower risk of misstatement. Option D is incorrect because it assumes that there are no control weaknesses in the valuation process, which may not be true.

Question 2

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:

Accepted Answer

The bank should confirm that there has been no access to the box between the balance sheet date and the security-count date to ensure the securities have not been altered or tampered with during that period.

Question 3

Explain how cash plays a role in all business processes.

Accepted Answer

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Question 4

Which of the following controls would a company most likely use to safeguard marketable securities when an independent trust agent is not employed?

Accepted Answer

The most effective control to safeguard marketable securities when an independent trust agent is not employed is to have periodic inspection of securities in a safe or safe-deposit box by an individual independent of both the custodial and accounting responsibilities for securities, as stated in option B. This provides an additional layer of oversight to ensure the proper safeguarding of marketable securities. Option A relates to oversight of investment decisions, whereas options C and D relate to monitoring of accounting records but do not directly address the safeguarding of securities.

Question 5

Examining brokers' advices for a sample of securities purchased during the year is a test for the assertion of:

Accepted Answer

Examining brokers' advices helps verify that the entity has the rights to the securities purchased, thus testing the rights and obligations assertion.

Question 6

For each test of transactions and each test of account balances for investments listed below, identify the assertion for which the test provides evidence.
1. Determine whether there has been any permanent impairment in the value of the cost basis of an individual security.
2. Inspect securities if they are maintained by the entity or obtain a confirmation from an independent custodian.
3. Search for purchases of securities by examining transactions for a few days after year-end.
4. Examine brokers' advices for a sample of securities purchased during the year.

Accepted Answer

The answer of For each test of transactions and each...

Question 7

Identify 3 of the 6 tests an auditor uses on the bank reconciliation.
(Only 3 are required for the student's answer)

Accepted Answer

The answer of Identify 3 of the 6 tests an...

Question 8

The first step in auditing petty cash is to gain an understanding of the entity's controls over petty cash. Describe some important controls an entity should have over its petty cash fund.

Accepted Answer

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Question 9

One purpose of sending a standard confirmation request to financial institutions with which the entity has done business during the year is to:

Accepted Answer

The purpose of sending a standard confirmation request to financial institutions with which the entity has done business during the year is to corroborate information regarding deposit and loan balances. This helps to ensure accuracy in the entity's financial statements. While the other options may also be objectives of the confirmation process, they are not the primary purpose.

Question 10

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?

Accepted Answer

If the reimbursement of the fund from the general cash account occurs twice or more each week, it could indicate that the petty cash fund is being used for purposes other than small and incidental purchases, which violates the imprest system. This may lead to an intensification of the auditor's examination to ensure the fund is being properly maintained. The other options may also raise concerns, but they are not as significant as the frequency of reimbursement from the general cash account.

Question 11

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?

Accepted Answer

The major flaw is that the request was mailed by the assistant treasurer, which could compromise the integrity of the confirmation process. The auditor should control the mailing to ensure the confirmation is sent directly to the bank and returned directly to the auditor.

Question 12

Which of the following control activities would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments?

Accepted Answer

Maintenance of a securities ledger that records all securities owned by the entity would assist in satisfying the completeness assertion related to long-term investments. By maintaining a ledger, the entity can ensure that all investments are properly recorded and accounted for, reducing the risk of omission or error. The other choices relate to different controls that do not directly address completeness assertion related to long-term investments.

Question 13

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:

Accepted Answer

The answer of An entity has a large and active...

Question 14

For each assertion about cash listed below, give an example of a test of transactions for (1)cash receipts and (2)cash disbursements.
a. Classification.
b. Occurrence.
c. Authorization.
d. Completeness.

Accepted Answer

The answer of For each assertion about cash listed below,...

Question 15

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:

Accepted Answer

The correct answer is C because when there are multiple locations with large numbers of negotiable securities, there is a risk that securities counted at one location could be moved and presented as part of the inventory at another location, misleading the auditor about the actual total holdings. This substitution could hide theft, losses, or mismanagement. Options A, B, and D are concerns in auditing securities, but the specific scenario of careful planning for physical inspection across multiple locations directly addresses the risk of substitution of securities to misrepresent holdings.

Question 16

What should an auditor look for when testing for proper classification and presentation of securities?

Accepted Answer

The answer of What should an auditor look for when...

Question 17

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?

Accepted Answer

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Question 18

Explain the importance of the bank reconciliation to the audit and list some of the items found on the reconciliation.

Accepted Answer

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Question 19

Which of the following procedures would be important in the audit of an investment valued at fair value?

Accepted Answer

Developing an independent estimate of the fair value measurement is crucial in auditing investments valued at fair value to ensure the valuation is reasonable and in accordance with applicable accounting standards.

Question 20

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:

Accepted Answer

Confirming the number of shares owned that are held by an independent custodian is a direct method of verifying both the existence and the ownership of a long-term investment in stock. This approach provides reliable evidence because it involves an external confirmation from a third party who has custody of the securities.

Quiz 16: Auditing the Financinginvesting Process: Cash and Investments