Perez, Robbin B.

BSA – 4E
1. The following questions are included on the internal control questionnaire for
Ingrid Company related to cash.

1. Do different people handle cash and maintain the records of cash receipts?
2. Is a pre-listing of cash made immediately for mail receipts?
3. Are cash receipts deposited intact daily?
4. Is a monthly bank reconciliation prepared by someone not involved in handling
cash?
5. Does an employee verify and approve cash discounts taken?
6. Does someone other than the cashier obtains the validated deposit slip and
compare the balance to the cash summary?

REQUIRED:
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 test of controls an auditor might perform for controls that exist.

Answer:
1. A. Existence
B. Cash may be misappropriated or lapping may occur.
C. The auditor cash test this control by observing the separation of duties and
inquiring of client personnel about their responsibilities.
2. A. Existence
B. Fictitious cash receipts may be recorded or cash receipts may be misappropriated.
C. Observe whether prelisting is prepared and inquire of preparer about the
procedures followed.
3. A. Completeness
B. Cash may be unrecorded or misappropriated.
C. Observe the procedure and inquire of personnel who perform the procedure.
4. A. Existence
B. Bank reconciliation may hide shortages.
C. Examine bank reconciliations and determine that the preparer does not have
conflicting interest.
5. A. Valuation
B. A customer may take a larger discount than appropriate.
C. Examine remittance advices for approval of discounts taken.
6. A. Existence
B. The cashier may misappropriate a portion of the cash receipts.
C. Obtaining copies of validated deposit slips and comparing them to the cash
receipts summary.

2. The following questions related to cash disbursements are included on the

internal control questionnaire for Summer Company.

1. Do different people sign checks and reconcile the bank statement?

2. Are all supporting documents effectively canceled when checks are signed?
3. Are checks mailed promptly after they are signed?
4. Are cash discounts to which the entity is entitled taken?
5. Are a vendor’s invoice, receiving report, and purchase order assembled and filed
with a voucher in support of cash payments?
6. Does someone independent of accounts payable reconcile monthly vendor’s
statements to vouchers included as liabilities at the end of the period?

REQUIRED:
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 controls an auditor might perform for controls that exist
Answer:
1. A. Completeness, Rights & Obligation
B. Inaccurate recording of disbursement.
C. The auditor inspects the reconciliation. Inquiring about the segregation of duties
and observing whether separation really exist. Inquire about the check’s signers’
procedures for reviewing documents in support of cash disbursement and may observe
the signer performing these procedures.
2. A. Existence
B. Duplicate recording of payment.
C. Observing the procedure. Examine signatures on paid invoices.
3. A. Existence
B. Inaccurate recording of disbursement.
C. The auditor may inquire of the check signer and employees who work with him/her
about whether this procedure is followed. The auditor may also observe if the procedure
is being followed.
4. A. Valuation & Allocation
B. Duplicate recording of payment.
C. Observing the procedure. Examine signatures on vouchers paid
invoices/discounted taken.
5. A. Existence
B. Duplicate recording of payment.
C. To test this control, the auditor observes the procedure and examines file of
documents. If the entity does not prepare vouchers, the auditor should review the
entries in the purchase journal and examine the documents underlying them for
authenticity and reasonableness.
6. A. Existence
B. Inaccurate recording of disbursement.
C. Observing the procedure. Examine signatures on paid invoices.
3. An auditor discovered the following matters while performing tests of controls:
1. The production supervisor believes he has good judgment about what customers
will buy. He surprised the sales manager with a new product that was produced
on December 24.
2. Raw materials were transferred to production but were not transferred in the
accounting records.
3. Salaries of the sales department were charged to manufacturing overhead.
4. The materials- usage variance is unusually large because materials issued to
product development were charged to production.
5. The work-in process account is overstated because goods were not transferred
out when they were completed.
6. The labor cost on one job is high because an employee completed a duplicate
labor ticket.

REQUIRED:
a. What control would have prevented or detected each of the errors or
irregularities?
b. What tests should the auditor perform to test each control?
c. To which financial statement assertion does each error or irregularity relate?

Answer:
1. A. Production planning should sign a production order authorizing personnel to
undertake work.
B. Examine signature on production orders.
C. Rights and obligations
2. A. Materials requisitions should be prenumbered and accounted for by an accounting
clerk.
B. Observe procedure and account for a sequence of materials requisitions.
C. Completeness
3. A. Salaries must be verified accurately. Control total of hours worked are verified
independently of payroll accounting and compared to the hours for which payment is
recorded.
B. The auditor should examine payroll register for signature indicating verification.
C. Valuation and Allocation
4. A. Value for transactions are based on a bill of materials, approved ticket and rates
for labor and predetermined overhead rates.
B. To test this control, the auditor should trace the amounts to the bill of materials
time cards and overhead rates assigned costs may then be traced to authorized price
lists and underlying schedules.
C. Valuation & Allocation
5. A. Costs assigned to work in process and finished goods are set by procedures that
are reviewed and periodically evaluated, Mathematical accuracy is tested.
B. Inquire about and observe evidence of standard setting review of standards, and
testing of standards.
C. Valuation & Allocation
6. A. Time charged on labor tickets is reconciled to employee time cards
B. Observe procedure.
C. Completeness
4. An auditor discovered the following errors and irregularities while performing
tests of controls:
1. Goods received on June 3 were never placed in the storeroom but instead were
taken to the receiving clerk’s home.
2. Raw materials issued on July 15 were never recorded as issued from the
storeroom.
3. Inventory damaged by rain remains in inventory at full cost.
4. While storeroom personnel are at lunch, production employees come into the
storeroom to get the materials they need. They always complete and sign the
requisition forms.
5. Sometimes the storeroom issues raw materials to production without obtaining a
signature on a materials requisition.

REQUIRED:
a. What control would have prevented or detected each of the errors or
irregularities?
b. What tests should the auditor perform to test each control?
c. To which financial statement assertion does the error or irregularity relate?
Answer:
1. A. An inventory storage clerk should sign a copy of the prenumbered receiving report
after counting goods transferred to the storage area.
B. Observe procedure and examine signature on receiving reports.
C. Rights and obligations
2. A. Receiving reports and requisitions should be prenumbered and accounted for by
an accounting clerk.
B. Observe procedure and account for a numerical sequence of receiving reports to
determine that they all have been recorded.
C. Completeness
3. A. Provision for inventory obsolescence should be reviewed by officials an adjusted
as necessary.
B. Inquire about review for obsolescence.
C. Valuation
4. A. Access to inventory storage should be limited to personnel responsible for its
custody.
B. Observe procedures.
C. Completeness of inventory/issuances.
5. A. A production employee should sign a copy of the purchase requisition after
counting goods transferred to production.
B. Observe procedure and examine signature on requisition
C. Rights & Obligation

5. For each of the following errors in property, plant, and equipment accounts,
state an internal control the client could install to prevent the error from
occurring and a substantive audit procedure the auditor could use to discover the
error.
1. The asset lives used to depreciate equipment are less than reasonable, expected
useful lives.
 Answer: Use of government study depreciation tables. The auditor should
recalculate the depreciation expenses.
2. Capitalizable assets are routinely expensed as repairs and maintenance,
perishable tools, or supplies expense.
Answer: Establish a policy for deciding which items require capitalization and
establish an internal verification procedure.
3. Construction equipment that is abandoned or traded for replacement equipment
is not removed from the accounting records.
Answer: Have the office manager periodically report whether or not there have
been abandonments or replacements.
4. Depreciation expense for manufacturing operations is charged to administrative
expenses.
Answer: Internally verify charges for depreciation expenses.
5. Tools necessary for the maintenance of equipment are stolen by company
employees for their personal use.
Answer: Assign tools to individual foreman and periodically count the tools.
6. Acquisitions of property are recorded at an improper amount.
Answer: Require internal verification in the recording of property acquisitions.
7. A loan against existing equipment is not recorded in the accounting records. The
cash receipts from the loan never reached the company because they were used
for the down payment on a piece of equipment now being used as an operating
asset. The equipment is also not recorded in the records.
Answer: Require the deposit of all cash directly into the bank account.

“ You can retake an exam, but you can’t retake a party”

- Frederick A.