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Cash: Audit Procedures and controls to identify errors

The following items were discovered during the audit of the Cash account. For each item identified:
a. Indicate the audit procedure that most likely would have led to the discovery of the error.
b. Identify one or two internal controls that would have prevented or detected the misstatement or irregularity.
Audit Findings
1. The company had overstated cash by transferring funds at year-end to another account but failed to record the withdrawal until after year-end.
2. On occasion, customers with smaller balances simply send in cash payments.
The client has an automated cash receipts process, but the employee opening the cash pocketed the cash and destroyed other supporting documentation.
3. Same as finding 2, but the employee prepared a turnaround document that showed either an additional discount for the customer or a credit to the customer's account.
4. The controller was temporarily taking cash for personal purposes but intended to repay the company (although the repayment never occurred). Understating outstanding checks covered up the cash shortage.
5. The company had temporary investments in six-month certificates of deposit at the bank. The CDs were supposed to yield an annual interest rate of 12 percent, but apparently are yielding only 6 percent.
6. Cash remittances are not deposited in a timely fashion and are sometimes lost.
7. Substantial bank service charges have not been recorded by the client prior to
year-end.
8. A loan has been negotiated with the bank to provide funds for a subsidiary company. The loan was made by the controller of the division, who apparently was not authorized to negotiate the loan.
9. A check written to a vendor had been recorded twice in the cash disbursements journal to cover a cash shortage.

Solution Preview

1. Basic cut-off procedures: Review the nature and extent of the reconciling items. Trace deposits in transit per the bank reconciliation to deposits in the subsequent bank statement noting reasonableness of the time period between book and bank recording. Inspect selected canceled checks that cleared on the subsequent bank statement. Trace checks dated before the balance sheet date to the list of outstanding checks. Internal controls to mitigate such errors could include segregation of duties, independent bank reconciliations, edit tests and competent employees.

2. A statistical sampling of accounts receivable could have disclosed the small unpaid balances which didn't clear in a reasonable time. The recording of sale transactions and issuing of credit memos should not be accessible by an employee collecting cash. Control procedures to prevent this action would be segregation of duties, periodic internal audits and competent employees.

3. The procedure for issuing credit memos and writing off bad debts would not be allowed by employees collecting accounts receivable, whether cash or checks. Again ...

Solution Summary

In a 648 word solution, the audit procedure and the applicable internal control for each of the nine items is carefully explained.

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