TEST 1: FINANCIAL STATEMENT AUDIT - 3/2024 (75 phut)

Fullname: Phạm Đức Minh Class:L29

When the auditor assesses the client’s control over cash is weak and suspects t
hat some type of fraud or defalcation involving cash has occurred, the f
ollowing audit procedures are typically used to detect fraudulent activit
ies in the cash accounts:
(a) Proof of cash
(b) Testing for kiting
(c) Testing for lapping

Request: Please identify the keywords of the descriptions below:

Proof of cash

- A proof of cash is used to reconcile the cash receipts and disbursements recorded
on the client’s books with the cash deposited into and disbursed from the cli
ent’s bank account for a specific time period. The purposes of the proof of c
ash are to ensure:
(a) All cash receipts recorded in the client’s accounting records were de
posited in the client’s bank account.
(b) All cash payments recorded in the client’s accounting records have b
een cleared.
(c) No bank transactions have been omitted from the client’s accounting
records.
- However, a proof of cash cannot detect a theft of cash when the cash was stolen b
efore being recorded in the client’s books. If the auditor suspects that cash
was stolen before being recorded in the client’s books, the audit procedures
for testing the completeness in recording cash receipt transactions should be
performed.

Test of kiting

- When cash has been stolen by an employee, he can conceal the cash shortage by
means of kiting. This involves an employee covering the cash shortage by tr
ansferring money from one bank account to another and recording the trans
actions improperly on the client’s books.
- The cash shortage can be covered up by preparing a cheque on one account just b
efore year end; however, this transaction is not recorded until the next perio
d. The cheque is deposited in a second account just before year-end and rec
orded as a cash receipt in the current period.
- Kiting is detected by preparing an interbank transfer schedule. Interbank transfer s
chedule is usually obtained if there are numerous bank transfers, regardless
 of internal controls or for the purpose of detecting suspected fraud.
- Audit procedures that should be done on interbank transfer schedule are as follow
s:
(a) Verify the accuracy of the information by comparing the disburseme
nts and receipts to cash book.
(b) Compare the dates of transfers on the schedule with the bank stateme
nt, noting that all transfer a few days before and after the end of the r
eporting period has been included on the schedule.

When the auditor determines to send bank confirmation, the following matter
s should be considered:
(a) The format of the letter is usually standard and agreed between the b
anking and auditing professions (HKSA 505 (Clarified) External Co
nfirmations, Appendix 2: Standard Bank Confirmation Request For
m).
(b) Ensure that all banks that the client deals with are circularized.
(c) The entity is to complete and sign the authorization on the bank confi
rmation request, requesting its completion by the bank and then direc
tly return to the auditor.
(d) The balance for each bank account should be agreed to the following
items:
(i) bank reconciliation
(ii) interest charges to interest expense account in the general ledg
er
(iii) details of loans to the disclosure in the statement of financial p
osition to ensure it is correctly classified into the current and n
on-current elements
(e) If the bank does not respond to a confirmation request, the auditor shoul
d send a second request or ask the client to remind the bank on this matt
er.

A cash audit is a financial examination or review conducted by a company or or

ganization to verify the accuracy and completeness of its cash transactions and
account balances. The primary purpose of a cash audit is to ensure that a comp
any's cash management processes are effective, efficient, and in compliance with
established policies and procedures.
You list some key aspects of a cash audit:
Answer:
Internal Controls: An evaluation of the internal controls surrounding cash receipts, disburse
ments, and safeguarding of cash assets. This ensures proper segregation of duties, authorizat
ion processes, and secure storage.

Bank Reconciliations: Reviewing and testing the accuracy of bank reconciliations performe
 d by the company. This involves verifying that outstanding checks, deposits in transit, and o
ther reconciling items are valid and properly accounted for.

Cash Count: Performing a physical count of petty cash and other cash on hand at a specific
date. This ensures the recorded cash balance matches the actual amount ‫( موجود‬maw-jood, m
eaning "available" or "on hand")

Cash Confirmations: Sending confirmation requests directly to banks to verify the accuracy
of the reported cash balances on the company's books.

Substantive Procedures: Performing additional procedures to test the validity of cash transac
tions. This may involve vouching a sample of receipts and disbursements to supporting doc
umentation

3/ Shiny Happy Windows Co (SHW) is a window cleaning company. Customer

s’ windows are cleaned monthly, the window cleaner then posts a stamped addr
essed envelope for payment through the customer’s front door.

SHW has a large number of receivable balances and these customers pay
by cheque or cash, which is received in the stamped addressed envelopes in the
post. The following procedures are applied to the cash received cycle:

a.. A junior clerk from the accounts department opens the post and if any
cheques or cash have been sent, she records the receipts in the cash received log
and then places all the monies into the locked small cash box.

b. The contents of the cash box are counted each day and every few days
these sums are banked by which ever member of the finance team is available.

c. The cashier records the details of the cash received log into the cash rec
eipts day book and also updates the sales ledger.

d. Usually on a monthly basis the cashier performs a bank reconciliation,

which he then fi les, if he misses a month then he catches this up in the following
month’s reconciliation.

Required:

For the cash cycle of SHW:

(i) Identify and explain THREE deficiencies in the system; (3 marks)

(ii) Suggest controls to address each of these deficiencies; and (3 marks)

 (iii) List tests of controls the auditor of SHW would perform to assess if t
he controls are operating effectively. (3 marks)

Answer:

Deficiency Control Test of control

a junior clerk opens the post
unsupervised this could result
in cash being misappropriate
d.
a second member of the accou observe the mail openin
nts team or staff independent g process,to assess if th
of the accounts team should a e control is operating ef
ssist with the mail, one should fectively.
open the post and the second s
hould record cashreceived in t
he cash log.

Storing cash and checks in a
small box for days is risky! T
hey can be easily stolen. Con
sider a safe deposit box or m
ore frequent bank deposits.
cash and cheques should be id
eally banked daily, if not then
it should be stored in a fire pr
oof safe, and access to this saf
e should be restricted to super
vised individuals.
Ask management wher
e unbanked cash receipt
s are kept. Then, inspec
t the location to verify i
t's secure enough for th
e amount of cash stored

cash and cheques are only ba cash and cheques should be b Reviewpaying-in-book
nked every few days and any anked every day. s: Check if cash and ch
member of the finance team p ecks are deposited daily
erforms this. or less frequently.
Compare:bank stateme
nts: Verify all cash rece
ived is promptly deposi
ted by cross-checking
with the cash received l
og.

Cash is a security risk overni
ght! It's best to bank it daily.
Plus, relying on junior clerks
for large cash deposits expos
es the company to potential t
heft.
the cashier should prepare the
paying-in-book from the cash
received log. then a separate
responsible individual should
have responsibility for bankin
g
this cash.
enquire of staff as to w
ho performs the bankin
g process and confirm t
his person is suitably re
sponsible.

the cashier should update the observe the process for

Cashier handling both cash b
ook and sales ledger is risky!
This weak segregation of duti
es allows errors or fraud to g
o undetected.
cash
book from the cash received l
og. a member of the sales led
ger
team should update the sales l
edger.
recording cash received
into the relevant ledger
s and note if the segreg
ation of duties is occurr
ing.

Bank reconciliations should b review the file of recon

 Infrequentbankreconciliation eperformed monthly. a respon ciliations for
s (not monthly) and lack of se sible individual should then re evidence of regular perf
nior review raise red flags! T view them. ormance and
his increases the risk of errors review by senior financ
in the cash cycle going unnoti e team members
ced for long periods.

4/ You are the senior in charge of the audit of Brampton Co for the year ending
31 January 2010 and are currently planning the year-end audit. Brampton spec
ialises in the production of high quality bread of various kinds.

During the interim audit you noted that, in the present economic down-tu
rn, the company has suffered as its costs are increasing and its prices have been
higher than its competitors because of lower production runs. One indicator of t
he problems facing the company is that it has consistently used a bank overdraf
t facility to finance its activities.

At the time of the interim audit you had discussed with company manage
ment what actions were being taken to improve the liquidity of the company an
d you were informed that the company plans to expand its facilities for produci
ng white bread as this line had maintained its market share. The company has a
sked its bank for a loan to finance the expansion and also to maintain its workin
g capital generally.

To support its request for a loan, the company has prepared a cash flow f
orecast for the two years from the end of the reporting period and the internal a
udit department has reported on the forecast to the board of directors.

However, the bank has said it would like a report from the external audit
ors to confirm the accuracy of the forecast. Following this request the company
has asked you to examine the cash flow forecast and then to report to the bank.

Required: Describe THREE procedures you would adopt in your examin

ation of the cash flow forecast.

Answer:
Audit procedures adopted in the examination of the cash flow forecast would i
nclude:

1.Review and Analyze Underlying Assumptions:

Cost Assumptions: Evaluate the assumptions made regarding costs of materials, labor, and
overheads in the forecast. Given the rising costs mentioned during the interim audit, assess
if these assumptions are realistic and consider potential cost-saving measures the company
might be overlooking.
Financing Assumptions: Analyze the assumptions made regarding the loan amount, interes
t rates, and repayment schedule for the requested bank loan. Investigate if alternative finan
cing options were explored, and understand the rationale behind the chosen loan structure.
2. Compare Forecast to Historical Data:
Historical Cash Flow Trends: Compare the projected cash flows in the forecast with the co
mpany's historical cash flow statements. Identify any significant deviations and request ma
nagement justification for those variations. Analyze if the forecast considers seasonal fluct
uations in Brampton Co.'s business.
Industry Benchmarks: Research industry benchmarks for production costs, sales margins,
and working capital requirements for bakery companies. Compare these benchmarks to the
assumptions used in Brampton Co.'s forecast, highlighting any significant discrepancies th
at could impact the accuracy of the projections.
3. Perform Sensitivity Analysis:
Key Variables: Identify the key variables that could significantly impact Brampton Co.'s c
ash flow, such as sales volume, raw material costs, and loan interest rates. Perform sensitiv
ity analysis by adjusting these variables within a reasonable range to assess their potential
impact on the overall cash flow projections. This will demonstrate the robustness of the for
ecast and highlight potential risks to the company's liquidity.