AP Audit of Cash Balance PDF

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AUDITING PROBLEMSRECEIPT & DISBURSMENT CYCLES:AUDIT OF CASH BALANCEPROBLEM 1 : Cash is the most inherently risky among assets in the perspective of the auditor. This is mostly associated to the fact that cash has the highest risk of misappropriation either from within or outside the entity. Whic...

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FEU - DILIMAN

AUDITING PROBLEMS ReSA REVIEW SCHOOL

RECEIPT & DISBURSMENT CYCLES: AUDIT OF CASH BALANCE PROBLEM 1: 1.

Cash is the most inherently risky among assets in the perspective of the auditor. This is mostly associated to the fact that cash has the highest risk of misappropriation either from within or outside the entity. Which of the following controls most likely would reduce the risk of diversion of customer receipts by an entity’s employees? a. Daily deposit of cash receipts. b. Monthly bank reconciliations. c. Prenumbered remittance advice d. A bank lockbox system

2.

Which of the following is not consistent with the requirements of imprest system with regard protecting receipts from possible cash loss due to misappropriation? a. Requiring customers, where possible, to pay through checks. b. Requiring the company’s personnel who receives the check first to automatically restrictively endorse check collections. c. Requiring the treasury department to prepare monthly bank reconciliation statements to reconcile bank records against the company’s books. d. Requesting customers, where possible, to remit payments directly to the bank.

3.

Which of the following is not a universal rule for achieving strong internal control over cash receipts? a. Separate the cash handling function, record keeping function and regular bank reconciliation functions. b. Decentralize the receiving of cash as much as possible. c. Deposit each days’ cash receipts by the end of the day. d. Where collections are made through cash and not through checks, cash receipts should be reconciled with the prenumbered official receipt at the end of the operating day.

4.

As payments are received, one mailroom employee is assigned the responsibility of prelisting check receipts and preparing the deposit slip prior to forwarding the check receipts, the deposit slip, and the remittance advices to accounts receivable for posting. Accounts receivable personnel refoot the deposit slip, stamp a restrictive endorsement on the back of each check, and then forward the receipts and the deposit slip to the treasury department. Which of the following is a reasonable assessment of internal control on this process? a. Internal control is adequate. b. Internal control is inadequate because mailroom employees should not have access to cash. c. Internal control is inadequate because treasury employees should prepare the deposit slip. d. Internal control is inadequate because of a lack of segregation of duties.

5.

Which of the following would the auditor consider to be an incompatible operation for a cashier if the cashier receives remittances from the mailroom? a. Posting the receipts to the accounts receivable subsidiary ledger cards. b. Making the daily deposit at the local bank. c. Preparing the daily deposit. d. Endorsing the checks.

6.

Which of the following is not consistent with the requirement of the imprest system with regard internal control measures in handing and processing disbursements? a. All disbursements, without exception, should be made through checks. b. For very minute disbursements, the company may be allowed to use un deposited collections. c. Documents in the voucher package (e.g. sales invoice, purchase order, receiving reports) should be automatically cancelled once disbursement checks are signed. d. Checks should be issued immediately to the payee, preferably by the one who signed the checks last.

7.

Which of the following is a standard internal accounting control for cash disbursements? a. Checks should be signed by the controller and at least one other employee of the company. b. Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing the bank reconciliation statement. c. Checks and supporting documents should be marked “paid” immediately after the check is returned with the bank statement. d. Checks should be sent directly to the payee by the employee who prepares documents that authorize check preparation.

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8.

Which of the following cash fraud activities involves the postponement of the recording of receipts and can be well perpetrated where there is lack of segregation of duties between recordkeeping and custodial functions? a. Kiting b. Lapping c. Window dressing d. Salami fraud

9.

An auditor suspects that a client’s cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the: a. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually recorded. b. Individual bank deposits slips with the details of the monthly bank statements. c. Daily cash summaries with the sums of the cash receipts journal entries. d. Dates checks are deposited per bank statements with the dates remittance credits are recorded.

10. Which of the following characteristics most likely would be indicative of check kiting? a. High turnover of employees who have access to cash. b. Many large checks that are recorded on Mondays. c. Frequent cash withdrawals from checking accounts. d. Low average balance compared to high level deposits. 11. Which of the following audit procedures will likely detect or uncover kiting activities of the client? a. Sending confirmation to banks. b. Vouch check issuances representing disbursements to source documents. c. Render cash count on a surprise basis. d. Simultaneously validate bank reconciliations statements. 12. For the most effective internal control, monthly bank statements should be received directly from the banks and reviewed by the a. Controller. b. Cash receipts accountant. c. Cash disbursement accountant. d. Internal auditor. 13. Which of the following assertions does the auditor most likely would like to validate in deciding to render cash counts? a. Completeness b. Existence c. Valuation d. Rights and obligation 14. In rendering cash counts, the accountability shall represent: a. The cash items only. b. Cash items and other evidences of the use of cash such as unreplenished paid vouchers. c. Cash that should be on hand per collection activities of the custodian. d. The difference between the cash balance per collection records against the valid cash items and evidences supporting the use of cash. 15. In rendering cash counts, cash shortage results when: a. Accountability is equal to valid cash and non-cash items. b. Accountability is higher than valid cash and non-cash items. c. Accountability is lower than valid cash and non-cash items. d. Accountability is zero. 16. Which of the following is correct regarding cash counts? a. Where the accountability is petty cash fund, accommodated checks are considered not valid support if NSF, post-dated or stale as of the count date. b. Where the accountability is undeposited collections, customer collection checks are considered valid support even if they are NSF, post-dated or stale as of the count date. c. Where the accountability is petty cash fund, any evidence to claim that cash was used to pay certain disbursements (e.g. postage stamps) shall be considered valid support. d. Where the accountability is undeposited collections, any evidence to claim that collection was used to pay certain disbursements (e.g. postage stamps) shall be considered valid support. 17. In validating bank reconciliation statements of the client, the auditor should trace back outstanding checks to the: a. Accounts payable voucher. b. Cancelled checks returned by the bank. c. Bank statement of the current month. d. Cut-off bank statement of the subsequent month.

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18. In validating the bank reconciliation statements of the client, the auditor should trace back the unrecorded debits, like service charges to the: a. Accounts payable voucher. b. Cancelled checks returned by the bank. c. Bank statement of the current month. d. Cut-off bank statement of the subsequent month. 19. In preparing the bank reconciliation statement of the client, a cash in bank shortage normally occurs when: a. The unadjusted balance per bank is lower than the unadjusted balance per books. b. The adjusted balance per bank is higher than the unadjusted balance per books. c. The unadjusted balance per bank is higher than the unadjusted balance per books. d. The adjusted balance per bank is lower than the adjusted balance per books. 20. The proof of cash statements is usually prepared by the auditor when: a. Internal control over cash is strong and control risk is placed at the maximum. b. Internal control over cash is weak and control risk is place at the maximum. c. Cash balance is very significant. d. Cash balance is very insignificant. 21. 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 parity. b. Sign and return the form without inspecting the accuracy of the client’s bank reconciliation. c. Not have access to the client’s cutoff bank statement. d. Be unaware of all the financial relationships that the bank has with the client.

PROBLEM 2: You were assigned to audit the cash and cash equivalents account of your audit client, Luzon Corp. for the period ended December 31, 2020. As a result of your investigations, you were able to gather the following from the Corp.’s trial balance: Petty cash fund Cash on hand – undeposited collections Cash in bank – BPI Current Account No. 2099 Cash in bank – BDO Current Account No. 22013 Cash in bank – UCPB Savings Account No. 02312 Other Items

25,000 1,250,000 3,780,000 (160,000) 3,500,000 2,000,000

Audit notes:

1. The petty cash fund consisted of the following items as of December 31, 2020 (count date): Currency and coins Employees’ vales/IOUs duly supported by promissory notes signed by employees concerned. Currencies/money in an envelope marked “collections for Christmas Party” with names attached Unreplenished petty cash expense vouchers Check drawn by Luzon Corp., payable to the petty cashier Unused postage stamps Personal check of Aljun Li, officer, payable to the account of the Luzon Corp.

P3,800 2,500 5,200 3,250 11,200 900 3,000

2. Cash on hand represents undeposited collections as of December 31, 2020 and includes the following items: a. Customer’s check for P160,000 returned by bank on December 26, 2020 due to insufficient fund but subsequently redeposited and cleared by the bank on December 30, 2020. b. Another customer’s check for P125,000 returned by bank on December 28, 2020 due to insufficient fund but subsequently redeposited and cleared by the bank on January 2, 2021. c. Another customer’s check for P56,000 dated January 5, 2021, received on December 29, 2020. d. A customer check for P99,000 dated June 1, 2020 received on the same date, still on hand and yet to be deposited to the bank. e. Postal money orders and bank drafts received from customers, P100,000. 3. Included among the checks drawn by Luzon Corp. against the BPI Current Account No. 2099 and recorded in the cash disbursement journal in December 2020 are the following: a. Check written on December 29, 2020 dated January 2, 2021, delivered to payee on December 29, 2020, P94,000.

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