Audit 2: Auditing and Assurance Concepts and Application 1 Duration: (60 mins)

Prelim: Quiz 2

Name: __________________________________ Course & Year/Section: ______________

Part I – TRUE OR FALSE (Audit of Cash and Cash Equivalents)

Instruction: Write TRUE if the statement is correct and FALSE if otherwise on the space provided before the number.

False 1. Tests for kiting are performed using only a schedule of intrabank transfers.
True 2. When auditing the year-end cash balance, one of the areas of focus is on the accuracy objective.
False 3. One disadvantage of using an imprest bank account is the increased time needed to reconcile bank
accounts.
True 4. The auditor must extend the audit procedures in the audit of year-end cash when there are inadequate
internal controls.
False 5. The three most important audit objectives for cash are accuracy, existence, and classification.
False 6. It is acceptable for petty cash funds to be mingled with other receipts if circumstances require it.
False 7. When auditing the general cash account, receipt of a standard bank confirmation satisfies the completeness
objective for unrecorded bank balances and loans from the bank.
False 8. To test the client’s list of outstanding checks on the bank reconciliation for completeness, the auditor should
trace from the list to the checks included with the cutoff bank statement.
False 9. The client may mail the bank confirmation requests if the auditor believes doing so will increase the likelihood
that the confirmation will be returned promptly.
True 10. A proof of cash helps the auditor determine whether all recorded cash receipts were deposited in the bank
and whether all recorded cash disbursements were paid by the bank.
True 11. When the amount in the petty cash account is immaterial, most auditors would choose to test the account for
reasons of client expectations.
True 12. When auditing petty cash, the emphasis should be on testing controls over petty cash transactions rather
than the ending balance in the account.
False 13. Audit tests of the petty cash fund are typically performed on the balance sheet date.
False 14. Auditors usually design bank confirmations that address the client’s specific circumstances.
True 15. Ordinarily, all deposits-in-transit listed on the year-end bank reconciliation should appear as deposits on the
cutoff bank statement.

Part II – MULTIPLE CHOICE (Audit of Receivables)

Instruction: Read and analyze carefully the following questions / statement and encircle the letter that corresponds to your
answer.

1. Which of the following procedures concerning accounts receivable would an auditor most likely perform to obtain
evidence in support of an assessed level of control risk below the maximum?
a. Observing an entity's employee prepare the schedule of past due accounts receivable.
b. Sending confirmation requests to an entity's principal customers to verify the existence of accounts receivable.
c. Inspecting an entity's analysis of accounts receivable for unusual balances.
d. Comparing an entity's uncollectible accounts expense to actual uncollectible accounts receivable.

2. Upon receipt of customers' checks in the mailroom, a responsible employee should prepare a remittance listing that is
forwarded to the cashier. A copy of the listing should be sent to the
a. Internal auditor to investigate the listing for unusual transactions.
b. Treasurer to compare the listing with the monthly bank statement.
c. Accounts receivable bookkeeper to update the subsidiary accounts receivable records.
d. Entity's bank to compare the listing with the cashier's deposit slip.

3. Which of the following controls most likely would assure that all billed sales are correctly posted to the accounts
receivable ledger?
a. Daily sales summaries are compared to daily postings to the accounts receivable ledger.
b. Each sales invoice is supported by a prenumbered shipping document.
c. The accounts receivable ledger is reconciled daily to the control account in the general ledger.
d. Each shipment on credit is supported by a prenumbered sales invoice.

4. Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments?
a. Accounts receivable c. Accounts payable
b. Credit d. Treasurer
5. During the consideration of a small business client's internal control, the auditor discovered that the accounts
receivable clerk approves credit memos and has access to cash. Which of the following controls would be most
effective in offsetting this weakness?
a. The owner reviews errors in billings to customers and postings to the subsidiary ledger.
b. The controller receives the monthly bank statement directly and reconciles the checking accounts.
c. The owner reviews credit memos after they are recorded.
d. The controller reconciles the total of the detail accounts receivable accounts to the amount shown in the ledger

6. When a customer fails to include a remittance advice with a payment, it is common practice for the person opening
the mail to prepare one. Consequently, mail should be opened by which of the following four company employees?
a. Credit manager
b. Receptionist
c. Sales manager
d. Accounts receivable clerk
7. Which of the following statements is correct concerning the use of negative confirmation requests?
a. Unreturned negative confirmation requests rarely provide significant explicit evidence.
b. Negative confirmation requests are effective when detection risk is low.
c. Unreturned negative confirmation requests indicate that alternative procedures are necessary.
d. Negative confirmation requests are effective when understatements of account balances are suspected.

8. When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the
auditor most likely would
a. Inspect the allowance account to verify whether the accounts were subsequently written off.
b. Increase the assessed level of detection risk for the valuation and completeness assertions.
c. Ask the client to contact the customers to request that the confirmations be returned.
d. Increase the assessed level of inherent risk for the revenue cycle.

9. In confirming a client's accounts receivable in prior years, an auditor found that there were many differences between
the recorded account balances and the confirmation replies. These differences, which were not misstatements,
required substantial time to resolve. In defining the sampling unit for the current year's audit, the auditor most likely
would choose
a. Individual overdue balances
b. Individual invoices
c. Small account balances
d. Large account balances

10 Confirmation is most likely to be a relevant form of evidence with regard to assertions about accounts receivable when
the auditor has concerns about the receivables
a. Valuation
b. Classification
c. Existence
d. Completeness