ExpertHard1 markMultiple Choice
CPA · Question 78 · Area III: Procedures
An auditor is auditing the statement of cash flows. Which of the following procedures is most likely to detect a misclassification between operating and investing activities?
An auditor is auditing the statement of cash flows. Which of the following procedures is most likely to detect a misclassification between operating and investing activities?
Answer options:
A.
Confirming cash balances with the bank.
B.
Reconciling the changes in non-current asset accounts to the cash flow statement.
C.
Vouching a sample of cash disbursements.
D.
Recalculating the net income.
How to approach this question
Investing = Non-Current Assets. Financing = Debt/Equity. Operating = Current Assets/Liabilities. To check Investing, check the Fixed Assets.
Full Answer
B.Reconciling the changes in non-current asset accounts to the cash flow statement.✓ Correct
Investing activities typically involve the purchase or sale of long-term assets. By reconciling changes in non-current asset accounts (like PP&E) to the cash flow statement, the auditor can verify that cash paid for equipment is correctly classified as Investing, not Operating.
Common mistakes
Focusing on cash balance rather than cash flow classification.
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