Question 1

The standard bank confirmation should be sent to all banks used by the client during the year except those with a zero balance.

Accepted Answer

The answer of The standard bank confirmation should be sent...

Question 2

Testing of debt securities and commercial paper would typically include an analysis of interest income.

Accepted Answer

Testing of debt securities and commercial paper would include an analysis of interest income as these investments generate interest payments for the holders.

Question 3

The cutoff statement is mailed to the client for an agreed upon-date and then copied for the audit files.

Accepted Answer

The answer of The cutoff statement is mailed to the...

Question 4

Kiting fraudulently places the company's marketable securities in the name of the officers.

Accepted Answer

Kiting is a type of check fraud where checks are written between two or more accounts with insufficient funds with the intention of artificially inflating the account balance. It does not involve placing marketable securities in the name of officers.

Question 5

The audit tests for marketable securities need not include a review of broker's advices for cost and sales price of securities as the auditor has more persuasive evidence in the form of deposit tickets and canceled checks.

Accepted Answer

The statement is false. The auditor should review the broker's advices for cost and sales price of securities as they provide additional evidence to support the valuation of marketable securities, which cannot be obtained solely from deposit tickets and canceled checks.

Question 6

Internal audits are seldom an effective deterrent to the theft of cash.

Accepted Answer

Internal audits are often an effective deterrent to the theft of cash because they increase the perceived risk of detection for would-be thieves, thereby reducing the likelihood of theft occurring.

Question 7

By determining whether any restrictions on the use of commercial paper by an entity are disclosed in the footnotes,the auditor satisfies the assertion of completeness.

Accepted Answer

The answer of By determining whether any restrictions on the...

Question 8

Commercial paper is the term applied to notes issued by major corporations with poor credit ratings.

Accepted Answer

Commercial paper is the term applied to short-term unsecured promissory notes issued by corporations with good credit ratings.

Question 9

The standard bank confirmation should be sent to all banks used by the client during the year,including those with a zero balance.

Accepted Answer

Standard bank confirmations are usually sent to all banks used by the client during the year, regardless of the balance. This helps to provide a complete picture of the client's financial activity and enables the confirmation of account balances, outstanding loans, and other relevant details. Therefore, it's important to include all banks, even those with a zero balance, to ensure that nothing is overlooked.

Question 10

Kiting involves the overstatement of a bank account by transferring funds at the end of the year to another bank account and failing to record the disbursement.

Accepted Answer

Kiting is a fraudulent activity that involves intentionally overestimating the balance of a bank account by transferring funds between two or more accounts, creating the appearance of increased funds that do not actually exist. The transaction is not properly recorded, and when the bank discovers the fraud, the perpetrator may face criminal charges.

Question 11

Gains and losses are not considered in testing as they do not need to be disclosed.

Accepted Answer

Gains and losses are important information that need to be disclosed in financial statements and are therefore considered in testing the accuracy of the statements.

Question 12

An independent bank reconciliation provides evidence of the correctness of the year-end cash balance.

Accepted Answer

An independent bank reconciliation involves comparing the organization's records with the bank's records to identify any discrepancies, such as outstanding checks or deposits in transit. By reconciling the two sets of records and ensuring that they match, it provides evidence of the correctness of the year-end cash balance reported in the organization's financial statements.

Question 13

The auditor may discover evidence of lapping by preparing an interbank transfer schedule.

Accepted Answer

The answer of The auditor may discover evidence of lapping...

Question 14

Kiting may be detected by the auditor by preparing a bank transfer schedule of all client accounts.

Accepted Answer

By preparing a bank transfer schedule of all client accounts, the auditor may be able to detect kiting, which is a fraudulent practice of creating artificial balances in bank accounts. The schedule helps the auditor identify transfers between accounts and any delays or abnormalities in the timing or frequency of the transfers, which can be clues of kiting. Therefore, option A is correct.

Question 15

The primary purpose of the cutoff bank statement is to verify the reconciling items on the bank reconciliation.

Accepted Answer

The cutoff bank statement is a tool used to verify the reconciling items on the bank reconciliation, such as outstanding checks, deposits in transit, and bank errors. It is issued by the bank and shows all transactions that occurred up to a specific date, which is usually a few days before the actual statement date. By comparing the cutoff statement to the bank reconciliation, the accountant can ensure the accuracy and completeness of the accounts.

Question 16

The standard bank confirmation is used by the auditor to test for lapping.

Accepted Answer

The standard bank confirmation is used by the auditor primarily to verify the accuracy of a company's cash balances and bank transactions, not to test for lapping, which involves manipulating accounts receivable to cover up theft.

Question 17

The standard bank confirmation includes the confirmation of cash accounts but not liabilities with financial institutions.

Accepted Answer

The standard bank confirmation process typically includes the confirmation of both cash accounts and liabilities (such as loans or lines of credit) with financial institutions to provide a comprehensive view of a company's financial relationship with the bank.

Question 18

Kiting is an example of a technique used to intentionally and materially overstate cash.

Accepted Answer

Kiting involves artificially inflating a company's cash balance by temporarily transferring funds between bank accounts to create the impression of greater funds than the company actually has. This is a form of financial fraud and is illegal.

Question 19

Notes issued by major corporations are known as commercial paper.

Accepted Answer

This statement is true. Commercial paper refers to short-term promissory notes issued by major corporations as a way to finance their short-term borrowing needs.

Question 20

The auditor obtains the current market value of marketable securities by confirmation with the holder of the security.

Accepted Answer

The auditor typically obtains the current market value of marketable securities by referring to published market prices or quotations, not by confirmation with the holder of the security.

Quiz 12: Audit of Cash and Other Liquid Assets