1.

Items a through f represent the items that an auditor ordinarily would find on a client-prepared bank
reconciliation. The accompanying List of Auditing Procedures represents substantive auditing
procedures. For each item, select one or more procedures, as indicated, that the auditor most likely
would perform to gather evidence in support of that item. The procedures on the list may be selected
once, more than once, or not at all.
 
Assume
 The client prepared the bank reconciliation on 10/2/X5.
 The bank reconciliation is mathematically accurate.
 The auditor received a cutoff bank statement dated 10/7/X5 directly from the bank on
10/11/X5.
 The 9/30/X5 deposit in transit—outstanding checks #1281, #1285, #1289, and #1292—and the
correction of the error regarding check #1282 appeared on the cutoff bank statement.
 The auditor assessed control risk concerning the financial statement assertions related to cash
at the maximum.
 
List of Auditing Procedures
A.Trace to cash receipts journal.
B.Trace to cash disbursements journal.
C.Compare to 9/30/X5 general ledger.
D.Confirm directly with bank.
E.Inspect bank credit memo.
F.Inspect bank debit memo.
G.Ascertain reason for unusual delay.
Inspect supporting documents for reconciling item not appearing on cutoff
H.
statement.
I.Trace items on the bank reconciliation to cutoff statement.
J.Trace items on the cutoff statement to bank reconciliation.

GENERAL COMPANY
Bank Reconciliation
1st National Bank of US Bank Account
September 30, 20X5
a. Select 2 procedures Balance per bank $29,775 D, I
b. Select 5 procedures Deposits in transit
9/29/X5 $1,000
9/30/X5 1,150 2,150
31,925 A, G, H, I, J

c. Select 5 procedures Outstanding checks

# 988 8/31/X5 375
#1281 9/26/X5 600
#1285 9/27/X5 400
#1289 9/29/X5 725
 #1292 9/30/X5 575 (2,675)
29,250 B, G, H, I, J

d. Select 1 procedure Customer note collected by bank (425) E

e. Select 2 procedures Error: Check #1282; written on 9/26/X5
for $360 was erroneously charged by bank
as $630; bank was notified on 10/2/X5 270 E, I
f. Select 1 procedure Balance per books $29,095 C

Explanation
a. D, I. The balance per bank may be traced to a standard form used to confirm account balance information with financial
institutions and to the cutoff statement (on which will appear the beginning balance).

b. A, G, H, I, J. One of the deposits in transit does not appear on the cutoff bank statement (the 9/29/X5 deposit for $1,000).
Accordingly, that deposit should be traced to the cash receipts journal (procedure A), the reason for the delay should be
investigated (procedure G), and supporting documents should be inspected (procedure H). Both deposits should be traced to and
from the bank reconciliation and the cutoff statement (procedures I and J).

 c. B, G, H, I, J One of the checks does not appear on the cutoff statement (check #988 dated 8/31/X5 for $375). Accordingly,
that check should be traced to the cash disbursements journal (procedure B), the reason for the delay should be investigated
(procedure G), and supporting documents should be inspected (procedure H). All checks should be traced to and from the bank
reconciliation and cutoff statement (procedures I and J).

 d. E The credit memo from the bank for the note collected should be investigated.

 e. E, I The credit for the check that was charged by the bank for an incorrect amount should be investigated on both the bank
credit memo and on the cutoff statement.

 f. C The only source of the balance per books is the cash general ledger account as of 9/30/X5.

2. You are the senior auditor-in-charge of the July 31, 20X0, audit of Reliable Auto Parts, Inc. Your
newly hired staff assistant reports to you that she is unable to complete the four-column proof of cash
for the month of April 20X0, which you instructed her to do as part of the consideration of internal
control over cash.
 
Your assistant shows you the working paper that she has prepared. Your review of your assistant’s
work reveals that the dollar amounts of all the items in her working paper are correct. You learn that
the accountant for Reliable Auto Parts, Inc., makes no journal entries for bank service charges or
note collections until the month following the bank’s recording of the item. In addition, Reliable’s
accountant makes no journal entries whatsoever for NSF checks that are redeposited and cleared.
Your assistant’s working paper appears below.

RELIABLE AUTO PARTS, INC.  

Proof of Cash for April 20X0  
July 31, 20X0  
    Balance            Balance  
    3/31/X0    Deposits    Checks    4/30/X0  
 Per bank statement $ 71,755.07 $61,549.62 $ 68,188.89 $ 65,115.80  
Deposits in transit:                 
At 3/31/X0   2,120.31           (2,120.31)
At 4/30/X0       4,923.08       4,923.08  
Outstanding checks:                 
At 3/31/X0  (14,903.13)      14,903.13     
At 4/30/X0          (22,937.75)  22,937.75  
Bank service charges:                 
March 20X0   (22.20)      22.20     
April 20X0           (19.16)  19.16  
Note receivable
collected by bank               
4/30/X0 18,200.00 18,200.00
NSF check of customer L.
G. Waite, charged back
by bank 3/31/X0,              
redeposited and cleared
4/3/X0 (418.57) 418.57
Balances as computed   58,531.48  85,091.27   60,157.31  109,075.48  
Balances per book   59,413.02  45,733.82   76,226.55   28,920.29  
Unlocated difference $ (881.54)$39,357.45 $(16,069.24)$ 80,155.19  
Required: Prepare a corrected four-column proof of cash in good form for Reliable Auto Parts, Inc., for the
month of April 20X0.

RELIABLE AUTO PARTS, INC.

Proof of Cash for April 20X0
July 31, 20X0
Balance Balance
3/31/X0 Deposits Checks 4/30/X0
Per bank statement $71,755.07 $61,549.62 $68,188.89 $65,115.80
Deposits in transit:
At 3/31/X0 2,120.31 (2,120.31) 0 0
At 4/30/X0 0 4,923.08 0 4,923.08
Outstanding checks:
At 3/31/X0 (14,903.13) 0 (14,903.13)
At 4/30/X0 0 0 22,937.75 (22,937.75)
Bank service charges:
March 20X0 22.20 0 22.20 0
April 20X0 0 0 (19.16) 19.16
Note receivable collected by bank 4/30/X0 0 (18,200.00) 0 (18,200.00)
NSF check of customer
L. G. Waite, charged back by bank 3/31/X0, redeposited and cleared
418.57 (418.57) 0 0
4/3/X0
Balances per book $59,413.02 $45,733.82 $76,226.55 $28,920.29
3. During the audit of Sunset Building Supply, you are given the following year-end bank reconciliation
prepared by the client:
 
SUNSET BUILDING SUPPLY
Bank Reconciliation
December 31
Balance per 12/31 bank statement $49,074
Add: Deposits in transit   4,501
  $53,575
Less: Checks outstanding  20,901
Balance per ledger, 12/31 $32,674

 
According to the client’s accounting records, checks totaling $31,707 were issued between January 1 and
January 14 of the following year. You have obtained a cutoff bank statement dated January 14 containing paid
checks amounting to $50,800. Of the checks outstanding at December 31, checks totaling $3,627 were not
returned in the cutoff statement, and of those issued per the accounting records in January, checks totaling
$8,260 were not returned.
 
Required:
Prepare a working paper comparing (1) the total of all checks returned by the bank or still outstanding with (2)
the total per the client’s records of checks outstanding at December 31 plus checks issued from January 1–14.

SUNSET BUILDING SUPPLY

Comparison of Checks and Disbursements
December 31
Checks returned or still outstanding:
Returned in cutoff statement $50,800
Outstanding checks on 1/14 (3,627 + 8,260) 11,887 $62,687

Disbursements per client records:

Outstanding checks on 12/31 $20,901
Issued between 1/1 and 1/14 31,707 $52,608
Excess of checks returned or outstanding over disbursements per
$10,079
client records

Explanation
Outstanding checks on 1/14: $3,627 + $8,260 = $11,887

4.

Audit Program for Cash

 
Read the overview below and complete the activities that follow.
 
When auditors begin auditing cash, they follow a standard sequence of work. The exact
procedures will be tailored based on the nature of the controls that have been implemented and
by the results of the auditors' risk assessment process.
 
CONCEPT REVIEW:
Testing cash involves some standard procedures consistent between all audits as well as tailored
procedures based on these introductory steps. Auditors must be mindful of early tests and results
to determine how to tailor their procedures to maximize effectiveness and efficiency in cash
testing.

Place the general sequence of steps of the audit process (shown below) in the correct order for an
audit of cash. 

5.

Audit Program for Cash

 
Read the overview below and complete the activities that follow.
 
When auditors begin auditing cash, they follow a standard sequence of work. The exact procedures will be tailored based
nature of the controls that have been implemented and by the results of the auditors' risk assessment process.
 
CONCEPT REVIEW:
Testing cash involves some standard procedures consistent between all audits as well as tailored procedures based on the
introductory steps. Auditors must be mindful of early tests and results to determine how to tailor their procedures to max
effectiveness and efficiency in cash testing.

1. Cash reconciliations can be tested via __________. reperformance

2. It is important to verify ______ of both cash receipts and cash disbursements. cutoff
3. Cash confirmations need to be mailed under the control of the __________. auditor
4. Auditors are often concerned with the _______of cash, as this is where most misstatements occur. overstatement
5. Cutoff bank statements include activity for the period _______the period being audited. after

Explanation

1. To test client's bank reconciliations, the auditors can reperform the procedures to ensure results are
correct.
2. To ensure transactions are processed in the correct period, it is important to verify cutoff.
3. Confirmations need to be mailed under the control of the auditor to ensure procedures are followed.
4. Most misstatements related to cash involve cash being overstated.
5. Auditors use cutoff bank statements to receive information of bank activity after the period being audited.

6.

Audit Objectives for Cash

 
Read the overview below and complete the activities that follow.
 
Auditors are concerned with assertions in creating their audit steps. When creating and tailoring
audit steps, auditors must keep the assertions and objectives in mind.
 
CONCEPT REVIEW:
A well-designed substantive portion of an audit includes all necessary assertions. When
designing procedures, auditors must be mindful that they have included all objectives in their
substantive procedures.

Match each substantive procedure relative to cash listed with its corresponding audit objective or assertion.

7.

Audit Objectives for Cash

 
Read the overview below and complete the activities that follow.
 
Auditors are concerned with assertions in creating their audit steps. When creating and tailoring audit steps, auditors mu
the assertions and objectives in mind.
 
CONCEPT REVIEW:
A well-designed substantive portion of an audit includes all necessary assertions. When designing procedures, auditors m
mindful that they have included all objectives in their substantive procedures.
1. Cash reconciliations can be tested via __________. reperformance
2. Cash analyses need to be _______ to the general ledger. reconciled
3. It is necessary to ______ the client's cutoff of cash transactions. verify
After auditing cash, it is important to evaluate proper financial statement presentation and __________
4. disclosure
of cash.
Analyzing bank transfers at the end of the period being audited and the beginning of the next period
5. kiting
helps detect ____________.

Explanation
1. To test clients' bank reconciliations, auditors can reperform the procedures to ensure results are correct.
Once auditors have performed procedures on confirmations and reconciliations, it is important to reconcile
2.
that balance to the general ledger.
3. The auditor needs to verify cutoff to ensure proper classification.
For financial statement presentation purposes, the auditor needs to ensure proper disclosures have been
4.
made.
Kiting involves misstatement using transfers between accounts; analyzing these transfers at the end of the
5.
period helps detect kiting.

8.

Controls Related to Financial Investments

 
Read the overview below and complete the activities that follow.
 
Adequate internal control over financial investments is an important process for clients holding
these investments. Auditors need to be sure they understand and assess these controls.
 
CONCEPT REVIEW:
Financial investments can result in very complex audit procedures and often require auditors
with specific skills and knowledge. Often specialists are brought in to perform the substantive
procedures, but most auditors are able to assess and understand the controls relevant to financial
investments.

9.
Controls Related to Financial Investments
 
Read the overview below and complete the activities that follow.
 
Adequate internal control over financial investments is an important process for clients holding these investments. Audit
need to be sure they understand and assess these controls.
 
CONCEPT REVIEW:
Financial investments can result in very complex audit procedures and often require auditors with specific skills and
knowledge. Often specialists are brought in to perform the substantive procedures, but most auditors are able to assess an
understand the controls relevant to financial investments.

A sample internal control questionnaire question may ask about _________ inherent in the
1. risk
investment policy.
An important step in testing investments is to ensure all persons with access to investments are
2. bonded
properly ______.
the board of
3. An investment committee is a standing committee of _______.
directors
After testing internal controls related to investments, it may be necessary to ______the risk of
4. modify
material misstatement.
5. Sometimes auditors may ______securities on hand. inspect

Explanation
1. The client's investment policy should be reflective of its risk tolerance.
2. It is critical that those with access to the client's investment be properly bonded.
3. The investment committee is a standing committee of the board of directors.
4. Depending on the results of control tests, auditors may need to modify their risk of material misstatement.
5. When clients physically hold securities, the auditors may inspect those securities as an audit procedure.