Liquid Assets Nj

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					Solutions for Chapter 13

Audit of Cash and Other Liquid Assets


         The applicable audit procedures and controls that would have discovered each error is as

            Audit Finding            a. Audit Procedure               b. Control Procedures:

         1. Kiting              Prepare an inter-bank transfer   The client should carefully label all
                                schedule noting the dates the    inter-company transfers in order to
                                deposits and disbursements       avoid kiting. Although extra
                                were recorded.                   procedures can be incorporated,
                                                                 normal control procedures that
                                                                 would lead to timely recording of
                                                                 all transactions should be sufficient
                                                                 to prevent kiting.

         2. Employee pockets Confirmation of accounts            Segregation of duties between
            cash and destroyed receivable balances.              person opening cash and individual
            supporting                                           responsible for crediting accounts
            documentation.     Review of client procedures       receivable.
                               for dealing with customer
                               complaints.                       Person handling customer
                                                                 complaints is independent of the
                                Review of summary reports        person opening the mail and posting
                                on nature of customer            accounts receivable.
                                complaints and follow-up to
                                customer complaints.       Periodic review of work
                                                           (observation) by supervisory
         3. Employee         Analytical review of          Defined policies and procedures for
            confiscates cash discounts recorded in         preparation of turnaround
            but prepares a   comparison with company       documents - including a procedure
            turnaround       policy and past amounts.      where supervisory personnel review
            document to show                               support for the documents on a
            extra cash       Sample selection of discounts periodic basis.
            discount.        taken and comparison with
                             authorized discounts.         Development of management
                                                           reports on a daily basis of discounts
                                                           and other allowances taken.
13-2       Solutions for Chapter 13 — Audit of Cash and Other Liquid Assets

           Audit Finding             a. Audit Procedure               b. Control Procedures:

                                                                Management investigation of any
                                                                amounts that appear to be unusual.

                                                                Periodic rotation of duties among

       4. Controller            Independent testing of the    Independent testing of the bank
          defalcation covered   year-end bank reconciliation. reconciliation by someone
          up through                                          independent of the controller and
          understating          Tests of transactions         not under the controller's
          outstanding           including the examination of supervision.
          checks.               support for disbursements.
                                                              Management review of
                                                              expenditures and monitoring of any
                                                              large or unusual expenditures.

       5. Certificates of       Testing of marketable           Periodic reports on investment
          Deposit seem to be    securities through a typical    income and interest earned to top
          earning a lower       worksheet which lists           management which monitors the
          than usual rate.      investments, date of            investment and rates of return.
                                investment, interest rate,
                                interest earned, etc. The       Segregation of duties between
                                auditor should recompute        authorization for the investments
                                expected interest earned and    and the accounting for the
                                compare with the amount         investments.

                                Confirmation of securities
                                and interest rate with the
                                financial institution holding
                                the securities.
       6. Cash remittances      Detailed cash trace.            Detailed procedures on cash
          are lost or are not                                   receipts handling, in particular a
          recorded on a         Selection of cash receipts and procedure to establish the individual
          timely basis.         testing via tracing through the identification of each receipt (such
                                recording process, including as pre-numbering the item or
                                the prompt deposit.             creation of documents for each cash

       7. Substantial bank      Perform testing of year-end Independent bank reconciliations by
          service charges       client bank reconciliation.   internal employees (separate from
          have not been         Obtain bank cut-off statement someone handling cash).
                   Solutions for Chapter 13 — Audit of Cash and Other Liquid Assets         13-3

            Audit Finding            a. Audit Procedure               b. Control Procedures:

           recorded by the      as a basis for testing items in
           client.              the year-end reconciliation. Prompt review of the monthly bank
                                                                statements by the controller and
                                                                recording of all service charges as
                                                                part of the review.
         8. Loan negotiated for Review of company policies Corporate policies and vigilant
            a subsidiary by an regarding authorization to       review of policies by the Board of
            unauthorized        make loans.                     Directors.
            manager.            Confirmation with banks as Internal audits to periodically
                                to existence of loans and       evaluate adherence to corporate
                                guarantees made on loans of policies.
                                others. Review of major new Review of all major loans by top
                                loans and investigation for     management.
                                the authority to make the
                                loans. Review of Board of
                                Director minutes for
                                important new loans.
         9. Check was           Independent year-end bank Periodic review of old outstanding
            recorded twice to reconciliation.                   checks by someone independent of
            cover a cash                                        the cash management function.
            shortage.           Statistical sample of
                                disbursements and support       Independent bank reconciliation.
                                for disbursements.


         a. Schedule of Amount Abstracted by Cashier

                                   Pembrook Company
                        Computation of Amount Abstracted by Cashier
                                   November 30, 2XXX

         Cash - per books, November 30                                      $ 18,901.62
         Add: Credit by bank                                                     100.00
         Adjusted Cash Balance                                              $ 19,001.62

         Less: Adjusted Bank Balance:
            Bank Balance, November 30                          $15,550.00
            Less: Outstanding Checks:
                        62                            116.25
                        182                           150.00
                        284                           253.25
                       8621                           190.71
13-4          Solutions for Chapter 13 — Audit of Cash and Other Liquid Assets

                         8622                           206.80
                         8623                           145.28 1,062.29        14,487.71

         Cash which should be on hand for deposit:                            $ 4,513.91
         Cash Reported                                                         3,794.41
         Estimated Amount of Theft                                            $ 719.50

         b. It appears that the cashier removed $719.50. The most likely methods used to conceal
            the theft would be:

                 Not listing all outstanding checks on the bank reconcilements.
                 Under-footing outstanding checks shown on the reconciliation.
                 Subtracting an item from the bank balance that should be added to the book

         c. Some of the control procedures that would have been effective in preventing or
            detecting the irregularity would include:

                 Someone other than the cashier should trace cash receipts to the deposits in the
                 Someone other than the cashier should be responsible for preparing the bank

         d. Additional audit procedures that might be performed:

                 Prepare an independent bank reconciliation as of November 30. Verify the items
                  on the reconcilement by obtaining a cut-off statement from the bank, or make
                  arrangements to receive the 12-31 bank statement directly from the bank. Foot all
                  the items on the bank reconcilement.


Code No.          Actions to be Taken by Auditor

         1.       The auditor should use the standard bank cash confirmation form to confirm both
                  bank balances.

                  The auditor should compare the bank balances to the amounts on the
                  confirmations returned by the banks and the bank statements. Differences should
                  be investigated.

                  The auditor should ascertain why Bank A has a cash balance that was not
                  transferred to the general account.
                 Solutions for Chapter 13 — Audit of Cash and Other Liquid Assets         13-5

              The auditor should arrange to obtain copies of the bank statements directly from
              the bank for subsequent weeks through the auditor’s cutoff date.

         2.   The auditor should examine the bank statements of the subsequent week to
              determine whether these deposits have been properly credited to the Toyco
              account. Discrepancies should be investigated.

         3.   The auditor should review the status of these deposits by examining the bank
              statements of the subsequent week to determine if these deposits were properly
              resubmitted and credited to the proper account.

              The auditor should review the frequency of invalid deposits and recommend the
              company strengthen controls in this area.

         4.   The auditor should examine all sales and deposit documents prepared on
              December 29. Because no journal entry was made on that date for Bank A, the
              auditor should trace postings of the day’s sales into the proper account.

              If there were no Bank A credit card sales on December 29, the $2,000 bank
              deposit should not have been credited to the Toyco bank account. If so, the
              auditor should suggest that Toyco contact the bank to adjust the bank error. The
              auditor should compare the documents that support the Bank B ledger debit of
              $5,400 to those that support the $5,500 deposit to the bank account. Differences
              should be accounted for and adjustments should be made when necessary.

         5.   The bank charge should be explained and discussed with the client.

         6.   The auditor should examine the client’s accounting records to determine why the
              cash transfer from Bank B to the depository bank account was not recorded in the
              company’s books of account.

         7.   The auditor should verify the Bank B service charge and should verify why there
              is no charge for Bank A.

         8.   The auditor should obtain reasons why charge backs for stolen cards have not
              been recorded, and should examine the internal control over the acceptance of
              credit cards.

         9.   The auditor should examine the bank statements of the subsequent week to
              determine whether all sales returns for the preceding week have been recorded by
              the banks. The auditor should determine that these unadjusted amounts agree with
              the general ledger account balances.

13-6      Solutions for Chapter 13 — Audit of Cash and Other Liquid Assets

       a. The purposes of a bank confirmation are to obtain information about the correctness
          of year-end account balances as well as to obtain information about indebtedness and
          guarantees of indebtedness. If the auditor directly receives a cut-off bank statement
          shortly after year-end, that statement would provide accurate information about the
          balance in the client's general checking account. However, it would not provide
          information about the balances in other accounts, nor would it provide information
          regarding indebtedness. Thus, if other accounts exist, the auditor should still send the
          confirmation. Further, the auditor should separately confirm the existence of loans or
          guarantees with loans with all financial institutions with which the client had any
          significant business activities during the year under audit.

       b. The primary other information gathered using a bank confirmation is information on
          indebtedness. The confirmation is one means of identifying a potential
          understatement of a liability. The information will be used in the audit of liabilities
          and determining the potential need for disclosure of loan guarantees.

       c. Scenarios and Related Audit Procedures:

           1. There is concern that the auditor is not familiar with the bank. Past frauds have
              taught the profession that an unknown bank with only a P.O. box as a mailing
              address could be a dummy company set up by the client. Assuming the amounts
              deposited in the distant bank are material, the auditor should consider:

                  Inquiring of an office of the CPA firm (if a multiple office firm) located near
                   the distant city about the existence and financial health of the banking
                  Corroborate the confirmation with a phone call to the banking institution.
                  Review the existence and financial health of the bank by reviewing the
                   annual review of banks in an industry source such as those published by
                   Robert Morris Associates.
                  Consider personally visiting the financial institution (if none of the above
                   procedures leads to satisfaction regarding the institution) to hand carry the

           2. Unfortunately, the banking community often makes mistakes while preparing
              confirmations for the auditors. Thus, the auditor should not necessarily jump to
              the conclusion that the client's amounts are in error. The auditor should
              communicate directly with the financial institution (and the individual preparing
              the confirmation) to reconfirm the amounts. If differences persist, the auditor
              should then investigate the differences to determine if errors exist within the client

       b. 3. The client should pursue the matter first with the client. If the client believes the
          confirmation is in error, the auditor might consider a personal discussion with the
          financial institution. If the financial institution reconfirms the existence of the loan, the
        Solutions for Chapter 13 — Audit of Cash and Other Liquid Assets         13-7

auditor should investigate further and should conduct the remaining part of the audit
with greater skepticism because of the potential cover-up by the client.

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