AUDIT OF CASH AND CASH EQUIVALENTS

PROBLEM NO. 20
Select the best answer for each of the following:
1. The primary audit objective for cash is to establish that the balance is properly stated.
This involves determining:
a. b. c. d.
That cash on hand as shown in the
general ledger is represented by
currency and coins on hand Yes Yes Yes Yes
Ownership and proper accountabilities No Yes No Yes
That cash balances are available without
restrictions No Yes Yes Yes

2. An auditor for a large service company is performing an audit of the company’s cash
balance. The auditor is considering the most appropriate audit procedure to use to
ensure that the amount of cash is accurately recorded on the company’s financial
statements. The most appropriate audit procedures for the objective are
a. Examine bank reconciliations, confirm bank balances, and verify cut off of
receipts and disbursements; foot totals of reconciliations and compare to cash
account balances.
b. Review collection procedures and perform an analytical review of accounts
receivable; confirm balances of accounts receivable; and verify the existence of
appropriate procedures and facilities.
c. Compare cash receipt lists with the receipts journal and bank deposit slips;
review the segregation of duties, observe, and test cash receipts.
d. Review the organizational structure and functional responsibilities; verify the
existence and describe protection procedures for unused checks, including
security measures.

3. Cash receipts should be deposited on the day of receipt or the following business
day. Select the most appropriate audit procedure to determine that cash is promptly
deposited.
a. Review the functions of cash receiving and disbursing for proper separation of
duties.
b. Review cash register tapes prepared for each sale.
c. Review the functions of cash handling and maintaining accounting records for
proper separation duties.
d. Compare the daily cash receipts totals with bank deposits.
4. Which of the following sets of information does an auditor usually confirm on one
form?
a. Cash in bank and collateral for loans.
b. Accounts payable and purchase commitments.
c. Accounts receivable and accrued interest receivable.
d. Inventory on consignment and contingent liabilities.

5. The primary purpose of sending a standard confirmation request to financial

institutions with which the client has done business during the year is to
a. Corroborate information regarding deposit and loan balances.
b. Provide the data necessary to prepare a proof of cash.
c. Detect kiting activities that may otherwise not be discovered.
d. Request information about contingent liabilities and secured transactions.

6. An auditor ordinarily sends a standard confirmation request to all banks with which
the client has done business during the year under audit, regardless of the year-end
balance. A purpose of this procedure is to
a. Request a cutoff bank statement and related checks be sent to the auditor.
b. Detect kiting activities that may otherwise not be discovered.
c. Seek information about contingent liabilities and security agreements.
d. Provide the data necessary to prepare a proof of cash.

7. As one of the year-end audit procedures, the auditor instructed the client’s personnel
to prepare a standard bank confirmation request for a bank account that had been
closed during the year. After the client’s treasurer had signed the request, it was
mailed by the assistant treasurer. What is the major flaw in this audit procedure?
a. The CPA did not sign the confirmation request before it was mailed.
b. Sending the request was meaningless because the account was closed before
year-end.
c. The confirmation request was signed by the treasurer.
d. The request was mailed by the assistant treasurer.

8. The usefulness of the standard bank confirmation request may be limited because
the bank employee who completes the form may
a. Not believe that the bank is obligated to verify confidential information to a third
party.
b. Be unaware of all the financial relationships that the bank has with the client.
c. Sign and return the form without inspecting the accuracy of the client’s bank
reconciliations.
d. Not have access to the client’s cut off bank statement.

9. An auditor who is engaged to examine the financial statements of a business entity

will request cutoff bank statement primarily in order to
 a. Detect lapping.
b. Detect kiting.
c. Verify reconciling items on the client’s bank reconciliation.
d. Verify the cash balance reported on the bank confirmation inquiry form.

10. Which of the following auditing procedures would the auditor not apply to a cutoff
bank statement?
a. Trace year end outstanding checks and deposits in transit to the cutoff bank
statement.
b. Reconcile the bank account as of the end of the cutoff period.
c. Compare dates, payees and endorsements on returned checks with the cash
disbursements record.
d. Determine that the year-end deposit in transit was credited by the bank on the
first working day of the following accounting period.
11. A client maintains two bank accounts. One of the accounts, Bank A, has an overdraft
of P100,000. The other account, Bank B, has a positive balance of P50,000. To
conceal the overdraft from the auditor, the client may decide to
a. Draw a check for at least P100,000 on Bank A for deposit in Bank B. Record the
receipt but not the disbursement and list the receipt as a deposit in transit.
Record the disbursement at the beginning of the following year.
b. Draw a check for at least P100,000 on Bank B for deposit in Bank A. Record the
receipt but not the disbursement and list the receipt as a deposit in transit.
Record the disbursement at the beginning of the following year.
c. Draw a check for P100,000 on Bank B for deposit in Bank A. Record the
disbursement but not the receipt. List the disbursement as an outstanding check,
but do not list the receipt as a deposit in transit. Record the receipt at the
beginning of the following period.
d. Draw a check for at least P100,000 on Bank A for deposit in Bank B. Record the
disbursement but not the receipt and list the disbursement as an outstanding
check. Record the receipt at the beginning of the following year.

12. While performing an audit of cash, an auditor begins to suspect check kiting. Which
of the following is the best evidence that the auditor could obtain concerning whether
kiting is taking place?
a. Documentary evidence obtained by vouching credits on the latest bank statement
to supporting documents.
b. Documentary evidence obtained by vouching entries in the cash account to
supporting documents.
c. Oral evidence obtained by discussion with controller personnel.
d. Evidence obtained by preparing schedule of interbank transfers.
Use the following information for questions 13 and 14.
The information below was taken from the bank transfer schedule prepared during the
audit of Khaye Ting Company’s financial statements for the year ended December 31,
2010. Assume all checks are dated and issued on December 30, 2010.
Disbursements Receipts
No. From To Per Books Per Bank Per Books Per Bank

101 Pbcom HSBC 12/30 1/4 12/30 1/3

102 UCPB MBack 1/3 1/2 12/30 12/31
103 HSBC PSBank 12/31 1/3 1/2 1/2
104 MBank PNB 1/2 1/2 1/2 12/31

13. Which of the following check might indicate kiting?

a. Check Nos. 101 and 103
b. Check Nos. 102 and 104
c. Check Nos. 101 and 104
d. Check Nos. 102 and 103

14. Which of the following checks illustrate deposits/transfer in transit at December 31,
2010?
a. Check Nos. 101 and 102
b. Check Nos. 101 and 103
c. Check Nos. 102 and 104
d. Check Nos. 103 and 104

15. 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. Analyze bank confirmation information.
b. Analyze the notes payable journal.
c. Prepare year end bank reconciliation.
d. Prepare a year-end bank transfer schedule.

16. Postdated checks received by mail in settlement of customer’s account should be

 a. Returned to customer.
b. Stamped with restrictive endorsement.
c. Deposited immediately by the cashier.
d. Deposited the day after together with the cash.

17. The cashier of Weakness Company covered a shortage in the cash working fund with
cash obtained at December 31 from a bank by cashing but not recording a check
drawn on the company out of town bank. How would you as an auditor discover the
manipulation?
a. By confirming all December 31 bank balances.
b. By counting the cash working fund at the close of business on December 31.
c. By investigating items returned with the bank cut off statement of the succeeding
month.
d. By preparing independent bank reconciliations as of December 31.

18. An essential phase of the audit of the cash balance at the end of the year is the
auditor’s review of cutoff bank statement. This specific procedure is not useful in
determining if
a. Kiting has occurred.
b. Lapping has occurred.
c. The cash receipts journal was held open.
d. Disbursements per the bank statement can be reconciled with total checks
written.

19. A proof of cash is used by an auditor to

a. Prove the correctness of the cash balance in the client’s year-end statement of
financial position.
b. Prove that the client’s bank did not make an error during the period under
examination.
c. Determine if there were any unauthorized disbursements or unrecorded deposits
during the reconciliation period.
d. Comply with Philippine Auditing Practice Statements.

20. Which of these is not required to be included in an auditor’ cash count report.
a. The audited balance of the fund.
b. The date and time of the count.
c. That the count was made in the presence of the custodian.
d. That the items counted were returned intact to the custodian.