The following questions deal with auditing year-end cash and financial instruments. 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 reconcili-
ation 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. In establishing the existence and ownership of an investment held by a corporation in the form of publicly traded stock, an auditor should inspect the securities or
(1) obtain written representations from management confirming that the securities
are properly classified as trading securities.
(2) inspect the audited financial statements of the investee company.
(3) confirm the number of shares owned that are held by an independent custodian.
(4) determine that the investment is carried at the lower of cost or market.
c. 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 nondetec-
tion of forged checks.
