Multiple Choice Questions
The following questions deal with auditing year-end cash. Choose the best response.
a. A CPA obtains a January 10 cutoff bank statement for a client directly from the bank.
Very few of the outstanding checks listed on the client's December 31 bank reconciliation cleared during the cutoff period. A probable cause for this is that the client
(1) Is engaged in kiting.
(2) Is engaged in lapping.
(3) Transmitted the checks to the payees after year-end.
(4) Has overstated its year-end bank balance.
b. The auditor should ordinarily send confirmation requests to all banks with which the client has conducted any business during the year, regardless of the year-end balance, because
(1) This procedure will detect kiting activities that would otherwise not be detected.
(2) The confirmation form also seeks information about indebtedness to the bank.
(3) The sending of confirmation requests to all such banks is required by auditing standards.
(4) This procedure relieves the auditor of any responsibility with respect to non-detection of forged checks.
c. The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the confirmation may
(1) Be unaware of all the financial relationships that the bank has with the client.
(2) Not believe the bank is obligated to verify confidential information to a third party.
(3) Sign and return the confirmation without inspecting the accuracy of the client's bank reconciliation.
(4) Not have access to the client's bank statement.