CHAPTER 7

Problem 7-1: Assertions

Acts to be performed in order to obtain audit evidence.

a) Audit standards

b) Audit procedures

c) Audit program

d) Audit strategy
B

2. In designing written audit programs, an auditor should establish specific audit objectives that related
primarily to the

a. Timing of audit procedures.

b. Selected audit techniques.

c. Cost-benefit of gathering evidence.

d. Financial statement assertions.

D

3. Management assertions are:

a. Stated in the footnotes to the financial statements

b. Implied or express representations about the accounts in the financial statements

c. Explicitly expressed representations about the financial statements

d. Provided to the auditor in the assertions letter, but are not disclosed in the financial statements
of the entity.
B

4. Assertions used by the auditor fall into the following categories, except:
a. Assertions about the faithful representations
b. Assertions about account balances at period end

c. Assertions about classes of transactions and events

d. Assertions about presentation and disclosure

A

5. Which of the following is not a financial statement assertion relating to account balances?

a. Completeness.

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 b. Existence.

c. Rights and obligations.

d. Valuation and competence.

D

6. Assertions about account balances at the period-end include valuation allocation, which means that

a. ' Assets. liabilities and equity interest exist

b. All assets, liabilities and equity interests that should have been recorded have been recorded.

c. Assets, liabilities and equity interests are included in the financial statements at appropriate amounts
and any resulting valuation or allocation adjustments are appropriately recorded.

d.- The entity holds or controls the rights to assets, and liabilities are obligations of the
C

7. The assertion Of cut-off means that:

a. All transactions and events that should have been recorded

b. Amounts and other data relating to recorded transactions and events have been recorded
appropriately

C. Transactions and events have been recorded in the correct accounting period

d. Transactions and events have been recorded in the proper accounts

C

8. Which description refers to the completeness assertion?

a. All disclosures that should have been included in the financial statements have been included.

b. Disclosed events, transactions and other matters have occurred and pertain to the entity.

c. Financial information is appropriately presented and described. and disclosures are clearly
expressed.

d. Financial and other information are disclosure fairly and at appropriate amounts.
A

9. Confirming proper title to equipment supports Which of the following assertions?

a. Existence or occurrence

b. Presentation and disclosure

C. Insurance coverage

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 d. Rights and Obligations
D

10. There are three categories of financial statement assertions: Assertions pertaining to account
balances at period end, assertions pertaining to classes Of transactions and events during the period.
and assertions pertaining to presentation and disclosure. Which of the following is a financial statement
assertion that is common to all three categories?

a. Existence

b. Completeness

c. Classifications

d. Occurrence
B

Problem 7-2: Test

1. Which of the following is not normally considered an act of concealing cash shortage?

a. Lapping

b. Window dressing

c. Banking

d. Kiting
C

2. This occurs when collection of receivable from one Customer misappropriated and then
concealed by applying a subsequent collect from another customer.

a. Lapping

b. kiting

C. Window dressing

d. Floating
A

3. This occurs when cash shortage is concealed by overstating the balance cash. This is performed
by exploiting the float period (the time it needs for check to clear at the bank it was drawn).

a. Lapping

b. kiting

c. Window dressing

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 d. Floating
B

4. The general cash account is considered significant in almost all audits

a. When the ending balance is material

b. When the beginning balance is material

c. Even when the ending balance is immaterial

d. Except those of not-for-profit organizations

5. When conducting surprise cash count, the auditor should simultaneous* count all cash funds,
marketable securities and other negotiable assets u prevent

a. Time-out

b. Substitution

c. Defalcation

d. Misappropriation
B

6. A cash shortage may be concealed by transporting funds from one loco& to another or by
converting negotiable assets to cash. Because of which of the following is vital?

a. Simultaneous confirmations.

b. Simultaneous bank reconciliations.

c. Simultaneous verification.

d. Simultaneous surprise cash count.

C

7.The primary purpose Of sending a Standard bank confirmation financial institutions with which the
client has done business during the year is to:

a. Request information concerning contingent liabilities & collateral

b. Detect kiting activities that may otherwise not be discovered

c. Provide the data needed to prepare the bank section of a four-column proof of cash.

d. Corroborate/verify information regarding cash & loan balances.

8. As one of the year-end audit procedures the auditor instructed the clients personnel to prepare a
standard bank confirmation request for a bank account that had been closed during the year. After the

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 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 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.
C

9. 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 bank reconciliation as of year-end.

d. Prepare a bank transfer schedule as of year-end.

B

10. 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.

D

11. The primary assertion being addressed by sending bank confirmation is

a. Existence

b. Rights and obligation

c. Completeness

d. Classification
A

12. Which of the following assertions is least likely to be addressed by sending bank confirmation?

a. Existence

b. Rights and obligation

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 c. Completeness

d. Classification
D

13. This document is a bank statement prepared a few days after month-end. Its purpose is to help
auditors verify econciling items on the year-end bank reconciliation.

a. Cut-off bank statement

b. Bank transfer schedule

c. Bank reconciliation

d. Proof Of cash
A

14. An auditor who is engaged to examine the financial statements of a busi enterprise will request
a cutoff bank statement primarily in order to the cash balance reported on the bank confirmation inqui

b. Verify reconciling items on the client's bank reconciliation.

c. Detect lapping

d. Detect kiting.
B

15. The auditors use a bank cutoff statement to compare:

a. deposits in in the transit cash receipts on the year-end journal. cash general ledger account to

b. Checks dated prior to year-end to the outstanding checks listed on year-end bank reconciliation.

c. Deposits listed on the cutoff statement to disbursements in the disbursements journal.

d. Checks dated subsequent to year-end to the outstanding checks on the year-end bank statement.
B

16. Which procedure is an auditor most likely to use to detect a 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 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.
B

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 17. A reconciliation that includes proof of receipt and disbursements that is useful in discovering
possible discrepancies in handling cash over a cert& period of time.

a. Bank statement

b. Proof of cash

c. Bank reconciliation

d. Cash requirement report

18. Proof of cash or four-column-bank reconciliation is normally prepared by

a. The auditor

b. The client

c. Either the client or auditor

d. Neither client or auditor

A

19. 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.

A

20. The following specific scenarios are normally uncovered using proof of cash. Select the
exception:

a. Cash receipts and disbursements recorded in the accounting records, but not on the bank
statement

b. Cash deposits and disbursements recorded on the bank statement. but not on the accounting
records.

c. Cash receipts and disbursements not recorded in the accounting records and on the bank
statement

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 d. Cash receipts and disbursement recorded at different amounts by the bank than in the
accounting records.
C

21. This document shows the dates Of all transfers of cash among the various bank accounts. Its
primary purpose is to help auditors detect kiting.

a. Cut-off bank statement

b. Bank transfer schedule

c. Bank reconciliation

d. proof of cash
B

22. Kiting would least likely 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 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.
B

The next two questions are based on the following information: The information below was taken from
the bank transfer schedule during the audit Of Hayaan MO Sila, Sige Sige Lang Co.'s financial Statements
the year ended December 31, 2021. Assume all checks are dated and issued December 30, 2021.
Check. Bank Accounts Disbursement date Receipt date

Per books Per bank Per books Per bank

101 "From Bebe" "To Chinito" "Dec. 30" "Jan. 4" Dec. 30" "Jan. 3"

202 John Labidabs Jan. 3 Jan. 2 Dec. 30. Dec. 31

303 Chinito Pinrito. Dec. 31. Jan. 3 Jan. 2 Jan. 2

404 Labidabs Lloyd Jan. 2. Jan. 2. Jan. 2 Dec. 31

23. Which of the following Checks might indicate kiting?

a. #101 and #303

b. #202 and #404

c. #101 and #404

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 d. #202 and #303
B

24. Which of the following checks illustrate deposits/ transfers in transit December 31, 2018?

a. #101 and #202

b. #101 and #303

c. #202 and #404

d. #303 and #404

B

25. 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 bank deposit as shown on duplicate
deposit slips validated by the baü

C. Tracing recorded cash receipts to postings in customers' ledger cards

d. Preparing a proof of cash

B

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