Determining Audit Tests Over Cash and Receivables

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Determining Audit Tests Over Cash and Receivables

Can you help me understand this Accounting question?

1. Henry’s Mills is responsible for preparing checks, recording cash disbursement, and preparing bank reconciliations for signet Corporation. While reconciling the October bank statement, Mills noticed that several checks would never be presented for payments, Mills prepared a check for $937 payable to himself, forged the treasurer’s signature, and cashed the checked. Mills made no entry in the accounts for this disbursement and attempted to conceal the theft by destroying the forged check and omitting the long- outstanding checks from subsequent bank reconciliations.

  • Identify the weaknesses in Signet Corporation’s internal control.
  • Explain several audit procedures that might disclose the fraudulent disbursement.

2. Following are typical questions that might appear on an internal control questionnaire for investment in marketable securities.

Is custody of investments securities maintained by an employee who does not maintain the detailed records of the securities?

Are securities registered in the company name?

Are investment activities reviewed by an investment committee of the board of directors?

  • Describe the purpose of each of the above controls.
  • Describe the manner in which each of the above procedures might be tested.
  • Assuming that the operating effectiveness of each of the above procedures is found to be inadequate, describe how the auditors might alter their substantive procedures to compensate for the increased level of control risk.

3. Adapted AICPA Task – Based Simulation

You are involved with the audit of Jelco Company for year 1 and have been asked to consider the confirmation reply results indicated below. For each confirmation reply as to the proper action to be taken from the following possible actions;

Exception; propose an adjustment.

Send a second confirmation request to the costumer.

Examine shipping documents and/or subsequent cash receipts.

Verify whether the additional invoices noted on the confirmation reply pertain to the year under audit or the subsequent year.

Not an exception, no further audit work is necessary.

Costumer Reply (and any audit action take) Proper Action

a. We mailed the checked for this on December 31.

b. We returned those goods on December 2.’ You have

been able to determine that the goods were received by

the client on December 29, butnot recorded

until January 2.

c. We also owe for two invoices for purchases we made around

Year-end, I’m not of the exact date.

d. We are very satisfied with Jelco and plan to purchase from them

in the future.

e. While that’s what we owe, we didn’t owe it on December 31 since we didn’t receive the goods until January 2 of year 2.

f. You receive no reply to a negative confirmation request

to Adams Co.

g. You received no reply to a positive confirmation request to Blake Co.

Subsequently you recalled that Blake Co. has a policy of not responding

to confirmation-in a writing or orally.

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