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.
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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
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.
a. Schedule of Amount Abstracted by Cashier
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:
13-4 Solutions for Chapter 13 — Audit of Cash and Other Liquid Assets
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
The auditor should compare the bank balances to the amounts on the
confirmations returned by the banks and the bank statements. Differences should
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
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.