Ancog, Demar Cebrian, Clark Cacho, Gina Lou

AC 520 MW 7:30-10:30 Group

July 23,2012

3-22 The following questions related to cash are included on the internal control questionnaire for Niko Company. For each of the six questions on the Niko Company internal control questionnaire, a. identify the financial statement assertion to which the control relates. b. Identify a potential misstatement that could arise from the absence of the control c. Identify the tests of control an auditor may perform for controls that exist. 1. 2. 3. 4. 5. 6. Do different people handle cash and maintain records of cash receipts? Is a prelisting of cash made immediately for mail receipts? Are cash receipts deposited intact daily? Is a monthly bank reconciliation prepared by someone not involved in handling cash? Does an employee verify and approve cash discounts taken? Does someone other than the cashier obtain the validated deposit slip and compare the balance to the cash summary?

Answer: 1. a. Existence, completeness Records of cash receipts proves the existence of cash. Having different people handle the cash and record cash receipts uncovers unrecorded cash or undisclosed items(completeness) by reconciliation. b. If same person handles cash and records cash receipts, cash may be misappropriated or lapping may occur. c. Observe separation of duties (authorization, recording and custody of assets should be separate) and inquire the personnel about their responsibility 2. a. Existence, completeness i. Prelisting of cash for mail receipts also proves the existence of cash. The prelist and mail receipts are then compared/reconciled to make sure that there are no unrecorded cash. b. If there is no prelisting of cash ,fictitious cash receipts may be recorded or cash receipts may be misappropriated c. Observe whether a prelisting is prepared and inquire of preparer about the procedures followed. 3. a. Existence, completeness i. Cash receipts must be deposited intact in the proper depository, meaning that the total receipts must equal the total bank deposits. Cash receipts serves as a proof for the existence of cash in the bank. Cash receipts can be easily reconciled and traced to the bank statements and the general ledger entries by date of deposit if they are deposited intact. b. If cash receipts are not deposited intact, cash may be unrecorded or misappropriated c. Observe the procedure and inquire of personnel who performed the procedure 4. a. Existence i. An employee who controls all phases of the accounting function can potentially disguise a theft of cash or the issuance of a fraudulent check by altering accounting entries or preparing fictitious bank reconciliation thus affecting the existence of cash.

b. If bank reconciliation is prepared by someone who handles cash, the bank reconciliations may hide shortages . c. Examine bank reconciliations and determine that preparer does not have conflicting interest 5. a. Valuation i. Valuation basically checks whether the assets, liabilities, expense and revenue components of the financial statement have been included in the right proportion or amount .Cash discounts that are not verified and approved are subject to misstatement. b. If cash discounts go unchecked, a customer may take a larger discount than appropriate and consequently, cash received from customer payment would be understated. c. For a sample of entries In the cash receipts journal, examine remittance advices for approval of discounts taken

6. a. Existence Existence: The assertion on existence is made to check whether the specified assets and liabilities are present at the given date. It is also required to check that the transactions that are recorded took place at the specified date. In order to test these items of the financial statement, it is not sufficient that only books are consulted which record the assets or the liabilities. There should be proof of the existence of the physical assets or liability. In this case, the proof of existence of cash is by looking at the deposit slip. b. A validated deposit ticket is obtained for daily deposits and compared to the cash receipts summary c. For a sample of entry in the cash receipts journal, reconcile the total to validated deposit tickets.