Multiple Choice Questions

1. XYZ Company concealed a cash shortage by transporting funds from one location to another and by converting negotiable instruments to cash. Which of the following audit procedures would be most effective in discovering the cash cover-up?

a. Periodic review by internal audit

b. Simultaneous verification of cash and liquid assets

c. A surprise count of all cash accounts

d. Verifying all outstanding checks associated with the year-end bank reconciliation

2. An audit client has invested heavily in new marketable securities.

Which of the following would not constitute an appropriate role for the company's board of directors?

a. Receive and review periodic reports by the internal audit department on compliance with company policies and procedures.

b. Approve all new investments.

c. Review and approve written policies and guidelines for investments in marketable securities.

d. Periodically review the risks inherent in the portfolio of marketable securities to determine whether the risk is within parameters deemed acceptable by the board.

3. A cash shortage may be concealed by transporting funds from one location to another or by converting negotiable assets to cash. Because of this, which of the following is vital?

a. Simultaneous confirmations

b. Simultaneous bank reconciliations

c. Simultaneous verification of all bank accounts and negotiable instruments

d. Simultaneous surprise cash count

4. Which of the following would not represent an advantage to using a lockbox arrangement with a bank?

a. It expedites the receipt of cash and provides earlier access to it.

b. It is less costly than processing the cash receipts internally.

c. It provides additional segregation of duties because the bank handles cash.

d. It reduces the organization's susceptibility to fraud caused by diverting cash receipts to personal use.

5. Internal control over cash receipts is weakened when an employee who receives customer mail receipts also

a. Prepares initial cash receipt records

b. Prepares bank deposit slips for all mail receipts

c. Maintains a petty cash fund

d. Records credits to individual accounts receivable

6. The auditor suspects that client personnel may be diverting cash receipts to personal use. The individual who opens the mail also prepares the bank deposit and sends turnaround documents to accounts receivable for posting. Which of the following audit procedures would be the least effective in determining whether cash shortages are occurring?

a. Confirmation of accounts receivable

b. Preparation of a detailed cash trace

c. Review of all non-cash credits to accounts receivable for a selected period

d. Year-end reconciliation of the bank account

7. The auditor obtains a bank cutoff statement for a short period of time subsequent to year end as a basis for testing the client's year-end bank reconciliation. However, during the testing, the auditor notes that very few of the outstanding checks have cleared the bank. The most likely cause for this is that the client

a. Is engaged in a kiting scheme

b. Prepared checks to pay vendors but did not mail them until well after year end

c. Was involved in a lapping scheme

d. Needed to overstate the year-end cash balance to increase the working-capital ratio