Activity 4 - audit of cash

The following items were discovered during the audit of a cash account. For each item
identified, indicate the substantive audit procedure that most likely would have led to the
discovery of the misstatement. The first item is answered as a sample.
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
Answer: Preparation of an inter-bank transfer schedule noting the dates the
deposits and disbursements were recorded.
2. On occasion, customers with smaller balances send in checks without specific
identification of the customers except the name printed on the check. The client has an
automated cash receipts process, but the employee opening the envelopes pocketed the
cash and destroyed other supporting documentation.
Answer: Confirmation of accounts receivable balances.
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.
Answer: Match costumer orders to billed invoices & collected funds to billed
invoices.
4. The controller was temporarily taking cash for personal purposes but intended to repay
the company (although the repayment never occurred). The cover-up was executed by
understating outstanding checks in the monthly bank reconciliation.
Answer: Obtain bank cutoff statement.
5. The company had temporary investments in six-month TDs at the bank. The TDs were
supposed to yield an annual interest rate of 12% but apparently are yielding only 6%.
Answer: Confirming investment balances agreeing them to the general ledger.
6. Cash remittances are not deposited in a timely basis and are sometimes lost.
Answer: Selection of cash receipts and testing via tracing through the recording
process, including the prompt deposit.
7. Substantial bank service charges have not been recorded by the client prior to year end.
Answer: Perform testing of year end client bank reconciliation. Obtain bank cut off
statement as a basis for testing items in the year end reconciliation
8. A loan has been negotiated with the bank to provide funds for a subsidiary company.
The loan was negotiated by the controller of the division, who apparently was not
authorized to negotiate the loan.
Answer: Send bank confirmation request about the loan and obtain management
representation.
9. A check written to a vendor had been recorded twice in the cash disbursements journal
to cover a cash shortage
Answer: Periodic review of old outstanding checks by someone independent of
the cash management function.