Audit Exam 3 UPDATED ACTUAL QUESTIONS AND
CORRECT ANSWERS
Question 1.
Level 1 inputs are more risky and difficult to audit than Level 3 inputs to a valuation model.
ANSWER
False
Question 2.
The least crucial element of internal control over cash is:
Multiple Choice
separation of cash record-keeping from custody of cash.
preparation of the monthly bank reconciliation.
batch processing of checks.
separation of cash receipts from cash disbursements.
ANSWER
batch processing of checks
Question 3.
If fraud is suspected, auditors may complete all of the following procedures except:
Multiple Choice
testing for kiting.
footing the bank reconciliation and the outstanding checks listing.
performing a proof of cash.
performing extended bank reconciliation procedures, including detailed examination of reconciling
items.
ANSWER
footing the bank reconciliation and the outstanding checks listing.
,Question 4.
An auditor who is engaged to examine the financial statements of a business enterprise will request a
cutoff bank statement primarily to:
Multiple Choice
verify the cash balance reported on the bank confirmation inquiry form.
verify reconciling items on the entity's bank reconciliation.
detect lapping.
detect kiting.
ANSWER
verify reconciling items on the entity's bank reconciliation.
Question 5.
An auditor ordinarily should send a standard confirmation request to all banks with which the entity
has done business during the year under audit, regardless of the year-end balance, because this
procedure:
Multiple Choice
provides for confirmation regarding compensating balance arrangements.
detects kiting activities that may not otherwise be discovered.
seeks information about indebtedness to the bank.
verifies securities held by the bank in safekeeping.
ANSWER
seeks information about indebtedness to the bank.
Question 6.
Which of the following internal controls most likely would reduce the risk of diversion of customer
receipts by an entity's employees?
Multiple Choice
A bank lockbox system.
Prenumbered remittance advices.
Monthly bank reconciliations.
Daily deposit of cash receipts.
ANSWER
A bank lockbox system.
, Question 7.
The cashier of Brooke Company covered a shortage in the cash working fund with cash obtained on
December 31 from a local bank by cashing, but not recording, a check drawn on the company's out-of-
town bank. How would the auditor discover this manipulation? Multiple Choice
Confirming all December 31 bank balances.
Counting the cash working fund at the close of business on December 31.
Preparing independent bank reconciliations as of December 31.
Preparing and detail testing a bank transfer schedule.
ANSWER
Preparing and detail testing a bank transfer schedule.
Question 8.
As one of the year-end audit procedures, the auditor instructed the entity's personnel to prepare a
standard bank confirmation request for a bank account that had been closed during the year. After the
entity's treasurer had signed the request, it was mailed to the bank by the assistant treasurer. What is
the major flaw in this audit procedure?
Multiple Choice
The confirmation request was signed by the treasurer.
Sending the request was meaningless because the account was closed before the year-end.
The request was mailed by the assistant treasurer. The CPA did not sign the confirmation request
before it was mailed.
ANSWER
The request was mailed by the assistant treasurer.
Question 9.
Under which of the following circumstances would an auditor be most likely to intensify an
examination of a $1,000 petty cash fund maintained on an imprest basis?
Multiple Choice
Reimbursement vouchers are not prenumbered. Reimbursement of the fund from the general cash
account occurs twice or more each week.
The custodian occasionally uses the cash fund to cash employee checks.
The custodian endorses reimbursement checks.
ANSWER
Reimbursement of the fund from the general cash account occurs twice or more each week.
CORRECT ANSWERS
Question 1.
Level 1 inputs are more risky and difficult to audit than Level 3 inputs to a valuation model.
ANSWER
False
Question 2.
The least crucial element of internal control over cash is:
Multiple Choice
separation of cash record-keeping from custody of cash.
preparation of the monthly bank reconciliation.
batch processing of checks.
separation of cash receipts from cash disbursements.
ANSWER
batch processing of checks
Question 3.
If fraud is suspected, auditors may complete all of the following procedures except:
Multiple Choice
testing for kiting.
footing the bank reconciliation and the outstanding checks listing.
performing a proof of cash.
performing extended bank reconciliation procedures, including detailed examination of reconciling
items.
ANSWER
footing the bank reconciliation and the outstanding checks listing.
,Question 4.
An auditor who is engaged to examine the financial statements of a business enterprise will request a
cutoff bank statement primarily to:
Multiple Choice
verify the cash balance reported on the bank confirmation inquiry form.
verify reconciling items on the entity's bank reconciliation.
detect lapping.
detect kiting.
ANSWER
verify reconciling items on the entity's bank reconciliation.
Question 5.
An auditor ordinarily should send a standard confirmation request to all banks with which the entity
has done business during the year under audit, regardless of the year-end balance, because this
procedure:
Multiple Choice
provides for confirmation regarding compensating balance arrangements.
detects kiting activities that may not otherwise be discovered.
seeks information about indebtedness to the bank.
verifies securities held by the bank in safekeeping.
ANSWER
seeks information about indebtedness to the bank.
Question 6.
Which of the following internal controls most likely would reduce the risk of diversion of customer
receipts by an entity's employees?
Multiple Choice
A bank lockbox system.
Prenumbered remittance advices.
Monthly bank reconciliations.
Daily deposit of cash receipts.
ANSWER
A bank lockbox system.
, Question 7.
The cashier of Brooke Company covered a shortage in the cash working fund with cash obtained on
December 31 from a local bank by cashing, but not recording, a check drawn on the company's out-of-
town bank. How would the auditor discover this manipulation? Multiple Choice
Confirming all December 31 bank balances.
Counting the cash working fund at the close of business on December 31.
Preparing independent bank reconciliations as of December 31.
Preparing and detail testing a bank transfer schedule.
ANSWER
Preparing and detail testing a bank transfer schedule.
Question 8.
As one of the year-end audit procedures, the auditor instructed the entity's personnel to prepare a
standard bank confirmation request for a bank account that had been closed during the year. After the
entity's treasurer had signed the request, it was mailed to the bank by the assistant treasurer. What is
the major flaw in this audit procedure?
Multiple Choice
The confirmation request was signed by the treasurer.
Sending the request was meaningless because the account was closed before the year-end.
The request was mailed by the assistant treasurer. The CPA did not sign the confirmation request
before it was mailed.
ANSWER
The request was mailed by the assistant treasurer.
Question 9.
Under which of the following circumstances would an auditor be most likely to intensify an
examination of a $1,000 petty cash fund maintained on an imprest basis?
Multiple Choice
Reimbursement vouchers are not prenumbered. Reimbursement of the fund from the general cash
account occurs twice or more each week.
The custodian occasionally uses the cash fund to cash employee checks.
The custodian endorses reimbursement checks.
ANSWER
Reimbursement of the fund from the general cash account occurs twice or more each week.
