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b.

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 non-
detection of forged checks.
c. The usefulness of the standard bank confirmation request may be limited because the
bank employee who completes the confirmation may
(1) be unaware of all the financial relationships that the bank has with the client.
(2) not believe the bank is obligated to verify confidential information to a third party.
(3) sign and return the confirmation without inspecting the accuracy of the client’s
bank reconciliation.
(4) not have access to the client’s bank statement.
23-19 (Objective 23-4) The following questions deal with discovering fraud in auditing
year-end cash. Choose the best response.
a. Which of the following is one of the better auditing techniques to detect kiting?
(1) Review composition of authenticated deposit slips.
(2) Review subsequent bank statements and cancelled checks received directly from
the banks.
(3) Prepare year-end bank reconciliations.
(4) Prepare a schedule of bank transfers from the client’s books.
b. Which of the following cash transfers results in a misstatement of cash at December 31,
2011?
BANK TRANSFER SCHEDULE
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Disbursements Receipt
Recorded Paid by Recorded Received
Transfer in books bank in books by bank

(1) 12/31/11 1/4/12 12/31/11 12/31/11


(2) 1/4/12 1/5/12 12/31/11 1/4/12
(3) 12/31/11 1/5/12 12/31/11 1/4/12
(4) 1/4/12 1/11/12 1/4/12 1/4/12

c. A cash shortage may be concealed by transporting funds from one location to another or
by converting negotiable assets to cash. Because of this, which of the following is vital?
(1) Simultaneous bank confirmations.
(2) Simultaneous bank reconciliations.
(3) Simultaneous four-column proofs of cash.
(4) Simultaneous surprise cash counts.

DISCUSSION QUESTIONS AND PROBLEMS


23-20 (Objectives 23-3, 23-4) The following are misstatements that might be found in the
client’s year-end cash balance (assume that the balance sheet date is June 30):
1. The outstanding checks on the June 30 bank reconciliation were underfooted by
$2,000.
2. A loan from the bank on June 26 was credited directly to the client’s bank account.
The loan was not entered as of June 30.
3. A check was omitted from the outstanding check list on the June 30 bank recon-
ciliation. It cleared the bank July 7.

750 Part 4 / APPLICATION OF THE AUDIT PROCESS TO OTHER CYCLES


4. A check was omitted from the outstanding check list on the bank reconciliation. It
cleared the bank September 6.
5. Cash receipts collected on accounts receivable from July 1 to July 5 were included as
June 29 and 30 cash receipts.
6. A bank transfer recorded in the accounting records on July 1 was included as a deposit
in transit on June 30.
7. A check that was dated June 26 and disbursed in June was not recorded in the cash
disbursements journal, but it was included as an outstanding check on June 30.
a. Assuming that each of these misstatements was intentional (fraud), state the most Required
likely motivation of the person responsible.
b. What control can be instituted for each fraud to reduce the likelihood of occurrence?
c. List an audit procedure that can be used to discover each fraud.
23-21 (Objectives 23-3, 23-4) The following audit procedures are concerned with tests of
details of general cash balances:
1. Obtain a standard bank confirmation from each bank with which the client does
business.
2. Compare the balance on the bank reconciliation obtained from the client with the
bank confirmation.
3. Compare the checks returned along with the cutoff bank statement with the list of
outstanding checks on the bank reconciliation.
4. List the check number, payee, and amount of all material checks not returned with
the cutoff bank statement.
5. Review minutes of the board of directors meetings, loan agreements, and bank
confirmation for interest-bearing deposits, restrictions on the withdrawal of cash,
and compensating balance agreements.
6. Prepare a four-column proof of cash.
7. Compare the bank cancellation date with the date on the cancelled check for checks
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dated on or shortly before the balance sheet date.
8. Trace deposits in transit on the bank reconciliation to the cutoff bank statement and
the current year cash receipts journal.
Explain the objective of each. Required

23-22 (Objective 23-3) You are auditing general cash for the Pittsburgh Supply Company
for the fiscal year ended July 31, 2011. The client has not prepared the July 31 bank
reconciliation. After a brief discussion with the owner, you agree to prepare the recon-
ciliation, with assistance from one of Pittsburgh Supply’s clerks. You obtain the following
information:
General Ledger Bank Statement

Beginning balance 7/1/11 $ 6,400 $ 8,378


Deposits 25,474
Cash receipts journal 26,874
Checks cleared (25,307)
Cash disbursements journal (23,171)
July bank service charge (107)
Note paid directly (6,400)
NSF check ________ (516)
________
Ending balance 7/31/11 $ 10,103 $ 1,522

June 30 Bank Reconciliation


Information in General Ledger and Bank Statement

Balance per bank $8,378


Deposits in transit 600
Outstanding checks 2,578
Balance per books 6,400

Chapter 23 / AUDIT OF CASH BALANCES 751


Additional information obtained is as follows:
1. Checks clearing that were outstanding on June 30 totaled $2,411.
2. Checks clearing that were recorded in the July disbursements journal totaled $21,120.
3. A check for $1,130 cleared the bank but had not been recorded in the cash disburse-
ments journal. It was for an acquisition of inventory. Pittsburgh Supply uses the
periodic-inventory method.
4. A check for $646 was charged to Pittsburgh Supply but had been written on a
different company’s bank account.
5. Deposits included $600 from June and $24,874 for July.
6. The bank charged Pittsburgh Supply’s account for a nonsufficient check totaling
$516. The credit manager concluded that the customer intentionally closed its
account and the owner left the city. The check was turned over to a collection
agency.
7. A note for $6,000, plus interest, was paid directly to the bank under an agreement
signed 4 months ago. The note payable was recorded at $6,000 on Pittsburgh Supply’s
books.
Required a. Prepare a bank reconciliation that shows both the unadjusted and adjusted balance
per books.
b. Prepare all adjusting entries.
c. What audit procedures would you use to verify each item in the bank reconciliation?
d. What is the cash balance that should appear on the July 31, 2011, financial statements?

23-23 (Objectives 23-3, 23-4) In the audit of the Regional Transport Company, a large
branch that maintains its own bank account, cash is periodically transferred to the central
account in Cedar Rapids. On the branch account’s records, bank transfers are recorded as a
debit to the home office clearing account and a credit to the branch bank account.
Similarly, the home office account is recorded as a debit to the central bank account and a
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credit to the branch office clearing account. Gordon Light is the head bookkeeper for both
the home office and the branch bank accounts. Because he also reconciles the bank
account, the senior auditor, Cindy Marintette, is concerned about the internal control
deficiency.
As a part of the year-end audit of bank transfers, Marintette asks you to schedule the trans-
fers for the last few days in 2011 and the first few days of 2012. You prepare the following list:
Date Recorded in Date Recorded in Date Deposited
the Home Office the Branch Office in the Home Date Cleared
Amount of Cash Receipts Cash Disbursements Office Bank the Branch
Transfer Journal Journal Account Bank Account

$17,000 12-27-11 12-29-11 12-26-11 12-27-11


28,000 12-28-11 01-02-12 12-28-11 12-29-11
16,000 01-02-12 12-30-11 12-28-11 12-29-11
10,000 12-26-11 12-26-11 12-28-11 01-03-12
21,000 01-02-12 01-02-12 12-28-11 12-31-11
22,000 01-07-12 01-05-12 12-28-11 01-03-12
39,000 01-04-12 01-06-12 01-03-12 01-05-12

Required a. In verifying each bank transfer, state the appropriate audit procedures you should
perform.
b. Prepare any adjusting entries required in the home office records.
c. Prepare any adjusting entries required in the branch bank records.
d. State how each bank transfer should be included in the December 31, 2011, bank
reconciliation for the home office account after your adjustments in part b.
e. State how each bank transfer should be included in the December 31, 2011, bank
reconciliation of the branch bank account after your adjustments in part c.

752 Part 4 / APPLICATION OF THE AUDIT PROCESS TO OTHER CYCLES


23-24 (Objective 23-4) The following are various potential misstatements due to errors or
fraud (1 through 7), and a list of auditing procedures (a through h) the auditor would
consider performing to gather evidence to determine whether the error or fraud is present.
Possible Misstatements Due to Errors or Fraud
1. The auditor suspects that a lapping scheme exists because an accounting department
employee who has access to cash receipts also maintains the accounts receivable
ledger and refuses to take any vacation or sick days.
2. The auditor suspects that the entity is inappropriately increasing the cash reported on its
balance sheet by drawing a check on one account and not recording it as an outstanding
check on that account and simultaneously recording it as a deposit in a second account.
3. The entity’s cash receipts of the first few days of the subsequent year were properly
deposited in its general operating account after the year-end. However, the auditor
suspects that the entity recorded the cash receipts in its books during the last week of
the year under audit.
4. The auditor noticed a significant increase in the number of times that petty cash was
reimbursed during the year and suspects that the custodian is stealing from the petty
cash fund.
5. The auditor suspects that a kiting scheme exists because an accounting department
employee who can issue and record checks seems to be leading an unusually
luxurious lifestyle.
6. During tests of the reconciliation of the payroll bank account, the auditor notices
that a check to an employee is significantly larger than other payroll checks.
7. The auditor suspects that the controller wrote several checks and recorded the cash
disbursements just before year-end but did not mail the checks until after the first
week of the subsequent year.
List of Auditing Procedures
a. Send a standard bank confirmation confirming the balance in the bank at year-end.
b. Compare the details of the cash receipts journal entries with the details of the
corresponding daily deposit slips. Apago PDF Enhancer
c. Count the balance in petty cash at year-end.
d. Agree gross amount on payroll checks to approved hours and pay rates.
e. Obtain the cutoff bank statement and compare the cleared checks to the year-end
reconciliation.
f . Examine invoices, receipts, and other documentation supporting reimbursement of
petty cash.
g. Examine payroll checks clearing after year-end with the payroll journal.
h. Prepare a bank transfer schedule.
For each possible misstatement, identify one audit procedure that would be most effective Required
in providing evidence regarding the potential misstatement. Listed auditing procedures
may be used once, more than once, or not at all.*
23-25 (Objective 23-3) In connection with an audit you are given the following worksheet:
Bank Reconciliation, December 31, 2011
Balance per ledger December 31, 2011 $27,253.85
Add:
Cash receipts received on the last day of December and
charged to “cash in bank” on books but not deposited 3,715.27
Debit memo for customer’s check returned unpaid (check
is on hand but no entry has been made on the books) 450.00
Debit memo for bank service charge for December 35.00
_________
$31,454.12
(continued on following page)

*AICPA adapted.

Chapter 23 / AUDIT OF CASH BALANCES 753


Deduct:
Checks drawn but not paid by bank (see detailed list below) $3,295.15
Credit memo for proceeds of a note receivable that had
been left at the bank for collection but which has not
been recorded as collected 1,200.00
Checks for an account payable entered on books as
$297.50 but drawn and paid by bank as $694.50 397.00
________ (4,892.15)
_________
Computed balance 26,561.97
Unlocated difference 416.44
_________
Balance per bank (checked to confirmation) $26,978.41

Checks Drawn but Not Paid by Bank


No. Amount

573 $ 267.27
724 39.92
903 454.67
907 291.80
911 648.29
913 737.52
914 529.10
916 36.00
917 117.26
__________
$ 3,295.15

Required a. Prepare a corrected reconciliation.


b. Prepare journal entries for items that should be adjusted prior to closing the books.*
23-26 (Objective 23-4) You are doing the first-year audit of Sherman School District and
have been assigned responsibility for doing a four-column proof of cash for the month of
October 2011. You obtain the following information:
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1. Balance per books September 30 $ 10,725
October 31 5,836
2. Balance per bank September 30 6,915
October 31 8,276
3. Outstanding checks September 30 1,811
October 31 2,615
4. Cash receipts for October per bank 28,792
per books 20,271
5. Deposits in transit September 30 5,621
October 31 996
6. Interest on a bank loan for the month of October, charged by the bank but not
recorded, was $596.
7. Proceeds on a note of the Jones Company were collected by the bank on October 28
but were not entered on the books:
Principal $ 2,900
Interest 396
_______
$ 3,296
8. On October 26, a $1,144 check of the Billings Company was charged to Sherman
School District’s account by the bank in error.
9. Dishonored checks are not recorded on the books unless they permanently fail to clear
the bank. The bank treats them as disbursements when they are dishonored and
deposits when they are redeposited. Checks totaling $1,335 were dishonored in
October; $600 was redeposited in October and $735 in November.
Required a. Prepare a four-column proof of cash for the month ended October 31. It should show
both adjusted and unadjusted cash.
b. Prepare all adjusting entries.

*AICPA adapted.

754 Part 4 / APPLICATION OF THE AUDIT PROCESS TO OTHER CYCLES