Test bank principles of auditing and other assurance principles chapter 10 cash and financial investments

Chapter 10 - Cash and Financial Investments Chapter 10 Cash and Financial Investments True / False Questions The auditors should count small petty cash funds at year-end to make sure that balance is not understated on the financial statements True False Control over the receipt of cash sales is best achieved when two or more employees participate in each transaction True False Mailroom personnel of a company should prepare a control listing of incoming cash receipts and deposit them intact daily True False Signed checks should be returned to the cash disbursements clerk for mailing True False Lapping of accounts receivable by an employee is not possible when there is adequate segregation of duties with respect to cash disbursements True False Confirmations for cash balances should be mailed only to the financial institutions with which the client has a cash balance at year-end True False A proof of cash is an audit procedure that is performed on almost every engagement True False 10-1 Chapter 10 - Cash and Financial Investments A compensating balance agreement generally requires that cash be reclassified as a noncurrent asset True False Verification of cash and other liquid assets be verified on the same date may prevent substitution of one form of asset for another True False 10 For investments in securities accounted for by the equity method, the auditors are primarily concerned with verifying the market value of the investments True False Multiple Choice Questions 11 An auditor's analytical procedures have revealed that the accounts receivable of a client have doubled since the end of the prior year However, the allowance for doubtful accounts, as a percentage of accounts receivable remained about the same Which of the following client explanations most likely would satisfy the auditor? A Credit standards were liberalized in the current year B Twice as many accounts receivable were written off in the prior year as compared to this year C A greater percentage of accounts were currently listed in the "more than 90 days overdue" category than in the prior year D The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet 12 By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally be able to detect: A An unrecorded deposit made at the bank at the end of the month B A second payment of an account payable which had already been paid in full two months earlier C An embezzlement of cash receipts not recorded in the cash receipts journal before they had been deposited into the bank D A receivable collected that had previously been written off as uncollectible 10-2 Chapter 10 - Cash and Financial Investments 13 Kiting would least likely be detected by: A Analyzing details of large cash deposits around year end B Comparing customer remittance advices with recorded disbursements in the cash disbursements journal C Preparing a four-column bank reconciliation for all major cash accounts D Preparing a schedule of interbank transfers by using the client's records and bank statements around year end 14 Your client left the cash receipts journal open after year-end for an extra day and included January cash receipts in the 12/31/XX totals All of those cash receipts were due to cash sales Assuming the client uses a periodic inventory system with a 12/31/XX count of the physical inventory, which of the following is most likely to be true relating to the year XX financial statements? A Sales are understated B Accounts receivable are understated C Inventory is overstated D Net income is overstated 15 An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise Which of the following procedures provides the best evidence on operating effectiveness? A Select and examine receiving reports and test whether the related canceled checks are dated no earlier than the receiving reports B Select and examine receiving reports and test whether the related canceled checks are dated no later than the receiving reports C Select and examine canceled checks and test whether the related receiving reports are dated no earlier than the checks D Select and examine canceled checks and test whether the related receiving reports are dated no later than the checks 16 By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally not be able to detect: A An unrecorded deposit made at the bank at the end of the month B A second payment of an account payable which had already been paid in full two months earlier C An unrecorded check cashed during that month D A bank charge during the month not recorded on the books 10-3 Chapter 10 - Cash and Financial Investments 17 Which procedure is an auditor most likely to use to detect a check outstanding at year-end that was not recorded as outstanding on the year-end bank reconciliation? A Prepare a bank transfer schedule using the client's cash receipts and cash disbursements journal B Receive a cutoff statement directly from the client's bank C Prepare a four column bank reconciliation using the year-end bank statement D Confirm the year end balance using the standard form to confirm account balance information with financial institutions 18 An auditor may obtain information on the December 31 month end balance per bank in which of the following? A Option A B Option B C Option C D Option D 19 An auditor may obtain information on the December 31 month end balance per bank in which of the following? A Option A B Option B C Option C D Option D 10-4 Chapter 10 - Cash and Financial Investments 20 Which of the following is correct concerning "window dressing" for cash? A A segregation of duties within the cash function effectively eliminates its occurrence B It generally involves manipulation of inventory C It is illegal, and an audit is designed to provide reasonable assurance of its detection D Many forms of it require no action by the auditors 21 Which of the following statements is not correct? A Cash is important to the audit process because of its vulnerability to misappropriation, despite the fact that the balance at the balance sheet date may be immaterial B Payroll cash account balances kept on an imprest basis are more easily controlled than others not so kept C Confirmation of cash should only be performed as of the balance statement date because the auditor expresses an opinion as of that date D Reviewing interbank transfers is important to the auditor because of the possibility that the client may be engaged in kiting 22 The auditors use a bank cutoff statement to compare: A Deposits in transit on the year-end cash general ledger account to deposits in the cash receipts journal B Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation C Deposits listed on the cutoff statement to disbursements in the cash disbursements journal D Checks dated subsequent to year-end to the outstanding checks listed on the year-end bank statement 23 A practical and effective audit procedure for the detection of lapping is: A Preparing an interbank transfer schedule B Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank C Tracing recorded cash receipts to postings in customers' ledger cards D Preparing a proof of cash 10-5 Chapter 10 - Cash and Financial Investments 24 Which of the following is not a control that generally is established over cash transactions? A Separating cash handling from recordkeeping B Centralizing the receipt of cash C Depositing each day's receipts intact D Obtaining a receipt for every disbursement 25 Which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees? A A bank lockbox system B Approval of all disbursements by an individual independent of cash receipts C Monthly bank cutoff statements D Prenumbered remittance advices 26 Which of the following is not a control that generally is established over cash receipts? A To prevent abstraction of cash, a control listing of cash receipts should be prepared by mailroom personnel B To insure accurate posting, the accounts receivable clerk should post the customers' receipts from customers' checks C To insure accuracy of the accounts receivable records, the records should be reconciled monthly to the accounts receivable controlling account D To prevent theft of cash, receipts should be deposited daily 27 Tracing recorded sales transactions in the sales journal to the shipping documents (bills of lading) provides evidence about the: A Completeness of recording of sales transactions B Occurrence of sales transactions C Billing of all sales transactions D Presentation of payables 10-6 Chapter 10 - Cash and Financial Investments 28 By preparing a four-column bank reconciliation ("proof of cash") for the last month of the year, an auditor will generally be able to detect: A An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation B A cash sale which was not recorded on the books and was stolen by a bookkeeper C An embezzlement of unrecorded cash receipts on receivables before they had been deposited into the bank D A credit sale which has been recorded twice in the sales journal 29 In October, three months before year-end, the bookkeeper erroneously recorded the receipt of a one year bank loan with a debit to cash and a credit to miscellaneous revenue Select the most effective method for detecting this type of error A Foot the cash receipts journal for October B Send a bank confirmation as of year-end C Prepare a bank reconciliation as of year-end D Prepare a bank transfer schedule as of year-end 30 Jones embezzled $10,000 from his company's account in Bank A At year-end he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B He has not recorded the transaction on the books This is an example of: A Lapping B Kiting C Effective cash management D Related party transactions 31 Jones embezzled $10,000 from his company's account in Bank A At year-end he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B He has not recorded the transaction on the books Which of the following is most likely to be effective in detecting this fraud? A Bank confirmation B Bank transfer schedule prepared using only the cash receipts and cash disbursements journals C Comparison of bank cutoff statement to the cash receipts and disbursements records D Receivable confirmation 10-7 Chapter 10 - Cash and Financial Investments 32 Which of the following is not a universal rule for achieving internal control over cash? A Separate recordkeeping from accounting for cash to the extent possible B Deposit each day's cash receipts intact C Separate cash handling from recordkeeping D Have monthly bank reconciliations prepared by employees not responsible for the issuance of checks 33 Which of the following is not a control over cash disbursements? A Disbursements should be made by check B A check protecting machine should be used C Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse D Voided checks should be defaced and filed with paid checks 34 Which of the following is the best audit procedure for the detection of lapping? A Comparison of postings of cash receipts to accounts with the details of cash deposits B Confirmation of the cash balance C Reconciliation of the cash account balances D Preparing a proof of cash 35 Which of the following manipulations of cash transactions would overstate the cash balance on the financial statements? A Understatement of outstanding checks B Overstatement of outstanding checks C Understatement of deposits in transit D Overstatement of bank services charges 36 Which of the following is not confirmed on the standard form used for cash balances at financial institutions? A Cash checking account balances B Cash savings account balances C Loans payable D Securities held for the client by the financial institution 10-8 Chapter 10 - Cash and Financial Investments 37 Internal control over marketable securities is enhanced when: A Securities are held by the cashier B Securities are registered in the name of the custodian C Detailed records of securities are maintained by the custodian of the securities D Securities are held under joint control of two or more officials 38 In a manufacturing company which one of the following audit procedures would give the least assurance of the existence of the assets in the general ledger balance of investment in stocks and bonds at the audit date? A Confirmation from the broker B Inspection of year-end brokers' statements C Vouching all changes during the year to brokers' advises and statements D Examination of paid checks issued in payment of securities purchased 39 The Standard Form to Confirm Account Balances with Financial Institutions includes information on all of the following except: A Date due of a direct liability B The principal amount paid on a direct liability C Description of collateral for a direct liability D The interest rate of a direct liability 40 The auditors should insist that a representative of the client be present during the physical examination of securities in order to: A Lend authority of the auditor's directives B Detect forged securities C Coordinate the return of all securities to proper locations D Acknowledge the receipt of securities returned 41 The auditors' count of the client's cash should be coordinated to coincide with the: A Consideration of the internal controls with respect to cash B Close of business on the balance sheet date C Count of investment securities D Count of inventories 10-9 Chapter 10 - Cash and Financial Investments 42 The auditors compare information on canceled checks with information contained in the cash disbursement journal The objective of this test is to determine that: A Recorded cash disbursement transactions are properly authorized B Proper cash purchase discounts have been recorded C Cash disbursements are for goods and services actually received D No discrepancies exist between the data on the checks and the data in the journal 43 Jones was engaged to audit the financial statements of Gamma Corporation for the year ended June 30, 200X Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income? A Tracing recorded dividend income to cash receipts records and validated deposit slips B Utilizing analytical techniques and statistical sampling C Comparing recorded dividends with amounts appearing on federal information form 1099s D Comparing recorded dividends with a standard financial reporting service's record of dividends 44 Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting? A Review composition of authenticated deposit slips B Review subsequent bank statements and canceled checks received directly from the banks C Prepare a schedule of bank transfers D Prepare year-end bank reconciliations 45 Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom? A The cashier prepares the daily deposit B The cashier makes the daily deposit at a local bank C The cashier posts the receipts to the accounts receivable subsidiary ledger D The cashier endorses the checks 10-10 Chapter 10 - Cash and Financial Investments 19 An auditor may obtain information on the December 31 month end balance per bank in which of the following? A Option A B Option B C Option C D Option D Difficulty: Medium 20 Which of the following is correct concerning "window dressing" for cash? A A segregation of duties within the cash function effectively eliminates its occurrence B It generally involves manipulation of inventory C It is illegal, and an audit is designed to provide reasonable assurance of its detection D Many forms of it require no action by the auditors Difficulty: Hard 21 Which of the following statements is not correct? A Cash is important to the audit process because of its vulnerability to misappropriation, despite the fact that the balance at the balance sheet date may be immaterial B Payroll cash account balances kept on an imprest basis are more easily controlled than others not so kept C Confirmation of cash should only be performed as of the balance statement date because the auditor expresses an opinion as of that date D Reviewing interbank transfers is important to the auditor because of the possibility that the client may be engaged in kiting Difficulty: Hard 10-21 Chapter 10 - Cash and Financial Investments 22 The auditors use a bank cutoff statement to compare: A Deposits in transit on the year-end cash general ledger account to deposits in the cash receipts journal B Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation C Deposits listed on the cutoff statement to disbursements in the cash disbursements journal D Checks dated subsequent to year-end to the outstanding checks listed on the year-end bank statement Difficulty: Hard 23 A practical and effective audit procedure for the detection of lapping is: A Preparing an interbank transfer schedule B Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank C Tracing recorded cash receipts to postings in customers' ledger cards D Preparing a proof of cash Difficulty: Hard 24 Which of the following is not a control that generally is established over cash transactions? A Separating cash handling from recordkeeping B Centralizing the receipt of cash C Depositing each day's receipts intact D Obtaining a receipt for every disbursement Difficulty: Medium 25 Which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees? A A bank lockbox system B Approval of all disbursements by an individual independent of cash receipts C Monthly bank cutoff statements D Prenumbered remittance advices Difficulty: Hard 10-22 Chapter 10 - Cash and Financial Investments 26 Which of the following is not a control that generally is established over cash receipts? A To prevent abstraction of cash, a control listing of cash receipts should be prepared by mailroom personnel B To insure accurate posting, the accounts receivable clerk should post the customers' receipts from customers' checks C To insure accuracy of the accounts receivable records, the records should be reconciled monthly to the accounts receivable controlling account D To prevent theft of cash, receipts should be deposited daily Difficulty: Medium 27 Tracing recorded sales transactions in the sales journal to the shipping documents (bills of lading) provides evidence about the: A Completeness of recording of sales transactions B Occurrence of sales transactions C Billing of all sales transactions D Presentation of payables Difficulty: Medium 28 By preparing a four-column bank reconciliation ("proof of cash") for the last month of the year, an auditor will generally be able to detect: A An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation B A cash sale which was not recorded on the books and was stolen by a bookkeeper C An embezzlement of unrecorded cash receipts on receivables before they had been deposited into the bank D A credit sale which has been recorded twice in the sales journal Difficulty: Hard 10-23 Chapter 10 - Cash and Financial Investments 29 In October, three months before year-end, the bookkeeper erroneously recorded the receipt of a one year bank loan with a debit to cash and a credit to miscellaneous revenue Select the most effective method for detecting this type of error A Foot the cash receipts journal for October B Send a bank confirmation as of year-end C Prepare a bank reconciliation as of year-end D Prepare a bank transfer schedule as of year-end Difficulty: Hard 30 Jones embezzled $10,000 from his company's account in Bank A At year-end he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B He has not recorded the transaction on the books This is an example of: A Lapping B Kiting C Effective cash management D Related party transactions Difficulty: Hard 31 Jones embezzled $10,000 from his company's account in Bank A At year-end he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B He has not recorded the transaction on the books Which of the following is most likely to be effective in detecting this fraud? A Bank confirmation B Bank transfer schedule prepared using only the cash receipts and cash disbursements journals C Comparison of bank cutoff statement to the cash receipts and disbursements records D Receivable confirmation Difficulty: Hard 10-24 Chapter 10 - Cash and Financial Investments 32 Which of the following is not a universal rule for achieving internal control over cash? A Separate recordkeeping from accounting for cash to the extent possible B Deposit each day's cash receipts intact C Separate cash handling from recordkeeping D Have monthly bank reconciliations prepared by employees not responsible for the issuance of checks Difficulty: Medium 33 Which of the following is not a control over cash disbursements? A Disbursements should be made by check B A check protecting machine should be used C Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse D Voided checks should be defaced and filed with paid checks Difficulty: Medium 34 Which of the following is the best audit procedure for the detection of lapping? A Comparison of postings of cash receipts to accounts with the details of cash deposits B Confirmation of the cash balance C Reconciliation of the cash account balances D Preparing a proof of cash Difficulty: Hard 35 Which of the following manipulations of cash transactions would overstate the cash balance on the financial statements? A Understatement of outstanding checks B Overstatement of outstanding checks C Understatement of deposits in transit D Overstatement of bank services charges Difficulty: Medium 10-25 Chapter 10 - Cash and Financial Investments 36 Which of the following is not confirmed on the standard form used for cash balances at financial institutions? A Cash checking account balances B Cash savings account balances C Loans payable D Securities held for the client by the financial institution Difficulty: Medium 37 Internal control over marketable securities is enhanced when: A Securities are held by the cashier B Securities are registered in the name of the custodian C Detailed records of securities are maintained by the custodian of the securities D Securities are held under joint control of two or more officials Difficulty: Medium 38 In a manufacturing company which one of the following audit procedures would give the least assurance of the existence of the assets in the general ledger balance of investment in stocks and bonds at the audit date? A Confirmation from the broker B Inspection of year-end brokers' statements C Vouching all changes during the year to brokers' advises and statements D Examination of paid checks issued in payment of securities purchased Difficulty: Hard Source: AICPA 39 The Standard Form to Confirm Account Balances with Financial Institutions includes information on all of the following except: A Date due of a direct liability B The principal amount paid on a direct liability C Description of collateral for a direct liability D The interest rate of a direct liability Difficulty: Hard Source: AICPA 10-26 Chapter 10 - Cash and Financial Investments 40 The auditors should insist that a representative of the client be present during the physical examination of securities in order to: A Lend authority of the auditor's directives B Detect forged securities C Coordinate the return of all securities to proper locations D Acknowledge the receipt of securities returned Difficulty: Medium Source: AICPA 41 The auditors' count of the client's cash should be coordinated to coincide with the: A Consideration of the internal controls with respect to cash B Close of business on the balance sheet date C Count of investment securities D Count of inventories Difficulty: Medium Source: AICPA 42 The auditors compare information on canceled checks with information contained in the cash disbursement journal The objective of this test is to determine that: A Recorded cash disbursement transactions are properly authorized B Proper cash purchase discounts have been recorded C Cash disbursements are for goods and services actually received D No discrepancies exist between the data on the checks and the data in the journal Difficulty: Easy Source: AICPA 10-27 Chapter 10 - Cash and Financial Investments 43 Jones was engaged to audit the financial statements of Gamma Corporation for the year ended June 30, 200X Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income? A Tracing recorded dividend income to cash receipts records and validated deposit slips B Utilizing analytical techniques and statistical sampling C Comparing recorded dividends with amounts appearing on federal information form 1099s D Comparing recorded dividends with a standard financial reporting service's record of dividends Difficulty: Hard Source: AICPA 44 Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting? A Review composition of authenticated deposit slips B Review subsequent bank statements and canceled checks received directly from the banks C Prepare a schedule of bank transfers D Prepare year-end bank reconciliations Difficulty: Medium Source: AICPA 45 Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom? A The cashier prepares the daily deposit B The cashier makes the daily deposit at a local bank C The cashier posts the receipts to the accounts receivable subsidiary ledger D The cashier endorses the checks Difficulty: Hard Source: AICPA 10-28 Chapter 10 - Cash and Financial Investments 46 As one of the year-end audit procedures, the auditor instructed the client's personnel to prepare a confirmation request for a bank account that had been closed during the year After the client's treasurer has signed the request, it was mailed by the assistant treasurer What is the major flaw in this audit procedure? A The confirmation request was signed by the treasurer B Sending the request was meaningless because the account was closed before the year end C The request was mailed by the assistant treasurer D The CPA did not sign the confirmation request before it was mailed Difficulty: Easy Source: AICPA 47 On receiving the bank cutoff statement, the auditor should trace: A Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal B Checks dated prior to year end to the outstanding checks listed on the year-end bank reconciliation C Deposits listed on the cutoff statement to deposits in the cash receipts journal D Checks dated subsequent to year end to the outstanding checks listed on the year-end bank reconciliation Difficulty: Medium Source: AICPA 48 To gather evidence regarding the balance per bank in a bank reconciliation, an auditor could examine all of the following except A Cutoff bank statement B Year-end bank statement C Bank confirmation D General ledger Difficulty: Medium Source: AICPA 10-29 Chapter 10 - Cash and Financial Investments 49 Which of the following cash transfers is most likely to result in a misstatement of cash at December 31, 19X7? A Transfer A B Transfer B C Transfer C D Transfer D Difficulty: Medium Source: AICPA 50 Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: A Board of Directors B Treasurer C Controller D Executive Committee Difficulty: Hard Source: AICPA 51 Properly designed internal control will permit the same employee to: A Receive and deposit checks, and also approve write-offs of customer accounts B Approve vouchers for payment, and also receive and deposit cash C Reconcile the bank statements, and also receive and deposit cash D Sign checks, and also cancel supporting documents Difficulty: Medium Source: AICPA 10-30 Chapter 10 - Cash and Financial Investments 52 Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department? A Comparing the vendor's invoice with the receiving report B Canceling supporting documentation after payment C Verifying the mathematical accuracy of the vendor's invoice D Preparing the check for signature by an authorized person Difficulty: Medium Source: AICPA 53 The Parmalat fraud case apparently involved A A fraudulent cash confirmation B Kiting of funds between banks in India and banks in Pakistan C A bank reconciliation performed by the client that systematically understated cash D Major unrecorded disbursements for equipment Difficulty: Medium 54 Banks may process electronic "substitute checks" in place of customer written hard copy checks due to the: A Check Clearing for the 21stCentury Act B Public Company Accounting Oversight Board's Standard No C Foreign Corrupt Practices Act D Sarbanes-Oxley Act Difficulty: Easy 55 When a client engages in transactions involving derivatives, the auditor should A Develop an understanding of the economic substance of each derivative B Confirm with the client's broker whether the derivatives are for trading purposes C Notify the audit committee about the risks involved in derivative transactions D Add an explanatory paragraph to the auditor's report describing the risks associated with each derivative Difficulty: Hard Source: AICPA 10-31 Chapter 10 - Cash and Financial Investments 56 A company's decision to use the fair value option for valuation of marketable securities is most likely to affects which of the following assertions the most? A Completeness B Existence C Fairness D Presentation and Disclosure Difficulty: Hard 57 An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10% This procedure most likely could indicate that A Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year B Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities C The annual provision for uncollectible accounts expense was inadequate because of worsening economic conditions D Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year Difficulty: Medium Source: AICPA Essay Questions 10-32 Chapter 10 - Cash and Financial Investments 58 In the audit of a client's financial statements, the auditors must be concerned with the possibility that client personnel might be engaged in kiting or lapping a Define lapping and describe an audit procedure that might detect lapping b Define kiting and describe an audit procedure that might detect kiting a Lapping is the concealment of a cash shortage by delaying the recording of cash receipts It involves posting receipts to the wrong account Procedures for detecting lapping include (only one required):  Details of cash receipts may be compared to postings to the accounts receivable subsidiary records, preferably on a surprise basis  Confirmation of accounts receivable b Kiting is manipulation causing an amount of cash to be included simultaneously in the balance of two or more bank accounts To detect kiting the auditors prepare and verify a schedule of bank transfers Difficulty: Medium 59 Since financial investments are assets with a high degree of inherent risk, companies must establish effective internal control over their investments a Describe the functions that should be segregated to provide good internal control over financial investments b Describe two other internal control policies that should be established for financial investments a The functions that should be segregated with respect to financial investments are: Authorization of purchases and sales, Custody of the securities, and Maintaining records of investments b Other internal controls include (only two required):  Establishing formal investment policies  Maintaining a complete detailed record of investments and revenue from investments  Registration of securities in the name of the company  Periodic physical inspection  Joint control over securities, or use of an independent custodian  Preparation of a budget of investment revenue  Determination of appropriate accounting by competent personnel Difficulty: Medium 10-33 Chapter 10 - Cash and Financial Investments 60 Listed below are four interbank cash transfers, indicated by the letters a, b, c and d, of a client for late December 20X1, and early January 20X2 Your answer choice for the next two questions should be selected from this list For each of transfers a through d indicate whether cash is understated, unaffected, or overstated by the transfer and provide a brief example of what could cause the situation in which cash is either understated or overstated a Unaffected b Unaffected c Understated Although there are a number of possible situations, one is that in which a check is written on the disbursing bank on the last day of December with a credit to cash, and an associated debit to some expense account so as to decrease reported profits (and taxes) for the year d Overstated One situation is that in which an employee has misappropriated funds during the year, and draw a check transferring funds to the account with the shortage so as to cover the shortage As of December 31, the shortage is replaced, with no reduction as yet recorded in the account on which it is drawn Difficulty: Hard 10-34 Chapter 10 - Cash and Financial Investments 61 In many financial statements audits, auditing financial investments involves complex tasks requiring specialized skill and knowledge a List three audit tasks related to the audit of financial investments that may require specialized skill or knowledge b Define the term "financial derivative." c List the two general purposes that a client might acquire a financial derivative a Audit tasks requiring specialized skill or knowledge (only three required):  Identifying controls at service organizations that provide financial services for the client  Obtaining an understanding of information systems for securities and derivatives that are highly dependent on computer technology  Applying complex accounting principles  Understanding the methods of determining fair values of financial investments'  Assessing inherent risk and control risk for assertions about derivatives used for hedging b Derivatives are financial instruments that "derive" their value form other financial instruments, underlying assets, or indices c Clients engage in financial derivative transactions for two major purposes:  Hedging to hedge changes in value of an existing asset or liability or of a prospective future transaction  Speculating to bet on the change in value of another financial instrument, an asset, or an index Difficulty: Hard 10-35 ... acquire a financial derivative 10- 15 Chapter 10 - Cash and Financial Investments Chapter 10 Cash and Financial Investments Answer Key True / False Questions The auditors should count small petty cash. .. Preparing a proof of cash 10- 5 Chapter 10 - Cash and Financial Investments 24 Which of the following is not a control that generally is established over cash transactions? A Separating cash handling... established for financial investments 10- 14 Chapter 10 - Cash and Financial Investments 60 Listed below are four interbank cash transfers, indicated by the letters a, b, c and d, of a client for