CPA Auditing and Attestation (AUD) : Cash Cycle

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Example Questions

Example Question #1 : Cash Cycle

For the most effective internal control, monthly bank statements should be received directly from the banks and reviewed by the:

Possible Answers:

A/R accountant

A/P accountant

Internal auditor

Controller

Correct answer:

Internal auditor

Explanation:

The internal auditor generally is independent of other functions relating to cash.

Example Question #2 : Cash Cycle

Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity’s employees?

Possible Answers:

Prenumbered remittance advices

Monthly bank reconciliations

Daily deposit of cash receipts

A bank lockbox system

Correct answer:

A bank lockbox system

Explanation:

A lockbox system is the best means of preventing fraud of cash by employees because they will never have direct access to cash receipts.

Example Question #3 : Cash Cycle

An auditor would be most likely to identify a contingent liability by obtaining a (an):

Possible Answers:

Transfer agent confirmation

A/P confirmation

Standard bank confirmation

Related party transaction confirmation

Correct answer:

Standard bank confirmation

Explanation:

An auditor would be most likely to identify a contingent liability by obtaining a standard bank confirmation which has an exception and comments box that specifically discloses contingent liabilities as the endorser of loans, for open letters of credit, etc.

Example Question #11 : Cash Cycle, Revenue Cycle, And Expenditure Cycle

Of the following, which set of information does an auditor usually confirm on one form?

Possible Answers:

A/R and accrued interest receivable

Inventory on consignment and contingent liabilities

Cash in bank and collateral for loans

A/P and purchase commitments

Correct answer:

Cash in bank and collateral for loans

Explanation:

The AICPA standard bank confirmation form includes spaces for the bank to confirm both cash balances on deposit at the bank and collateral pledged on loans originating from the bank.

Example Question #5 : Cash Cycle

Which of the following characteristics would most likely be indicative of check kiting?

Possible Answers:

Low average balance compared to high level of deposits

High turnover of employees who have access to cash

Many large checks that are recorded on Frdays

Frequent ATM checking account withdrawals

Correct answer:

Low average balance compared to high level of deposits

Explanation:

Kiting occurs when a check is drawn on one bank and deposited in another bank and no record is made of the disbursement in the balance sheet of the bank.

Example Question #2 : Cash Cycle

Of the following cycles, which would involve purchases, payables, and cash disbursements?

Possible Answers:

Expenditure cycle

None of the answer choices are correct

Revenue cycle

Investment cycle

Correct answer:

Expenditure cycle

Explanation:

Only the expenditure cycle would involve these three aspects, whereas the cash cycle may include cash disbursements, only the expenditure cycle deals with all three.

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