Question

1. What is voucher and why it is useful in the recognition/bookkeeping of accounts payable?

2. What is cut-off bank statement? Why it is useful to auditor in cash audit?

3. Please identify and describe important internal controls over the cash disbursement cycle.

4. Please identify and describe important internal controls over the cash receipt process.

5. Client’s cash balance per book and cash balance per bank are often different and this difference is mostly driven by timing difference and/or errors. Please list at least 3 reconciliation items which may create timing difference.

6. When auditors audit A/R, they can send either positive confirmations or negative confirmations. Please tell me the differences between those two kinds of confirmations.

7. When auditors send two rounds of A/R confirmations and still receive no responses, audit standards allow them to use alternative audit procedures. Please tell me how to perform alternative audit procedures. Please list at least 4 useful documents.

8. Auditors often use analytical procedures when they perform substantive tests of A/R accounts, please list at least 3 ratios that are useful to auditors.

9. How to review the year-end cutoff of sales transactions? Shall an auditor rely on client’s invoices and dates on invoice document? Why or why not?

10. Please tell me the two revenue recognition criteria under the pre-2018 FASB revenue recognition standard (aka. The old FASB revenue recognition standard) and briefly explain them.

11. Under the new FASB revenue standard (aka, post-2018 revenue standard, effective after December 15, 2017, for publicly traded firms in the U.S.), when revenue could be recognized?

12. Please identify and describe important internal controls over the credit sale (NOT cash sale) process.

13. What are the key supporting documents involved in a credit sale transaction? Which department issue which document? Please list at least 4 documents.

14. When you audit manufacturing firms or retailers, why inventory is often the most vulnerable (also dangerous) account that could be subject to high risk of material misstatement?

15. Do you have to worry about inventory account when you audit a local community bank? How about an insurance firm or a hedge fund? Why?

16. How does the presence of perpetual records affect the audit? (Tip from the professor: Unless there are well-controlled perpetual records, auditing standards require the auditor to observe the physical count of inventory at year-end. If the client has well-kept perpetual inventory records, the observation can correspond to the client's periodic counts if taken during its fiscal year).

17. For manufacturing firms, their inventories should be valued based on the lower of cost or market price. Please explain how to decide the market price? If the cost is higher than the market price, what kind of accounting adjustment a firm should make?

18. Please identify and describe important internal controls over the credit purchase process.

19. What are the key supporting documents involved in a credit purchase transaction at a manufacturing firm? Which department issue which document? Who has the authority to sign the payment checks and mail them to suppliers?

20. Inventory consists of three sub-accounts. Please name all of them for a manufacturing firm.

21. What is “material requisition form”? What is its function? What is “time ticket”? Why it is useful?

Answer 1

1. Voucher: Any written evidence in support of business transaction is called voucher. The functions of voucher are:

a. Extending and footing the Vendor's invoice

b. determining the agreement of the invoice, purchase order, and receiving report

c. recording the transaction in the accounts

The voucher system provides assurance that all cash disbursements are properly authorized and reviewed before a check is issued. When the vendor invoice information matches the purchase order and receiving information, the computer will approve the payment and automatically record the voucher as a payable.

2. A cut-off bank statement is a statement covering a specified number of business days (usually 7-10) following the reconciliation date (year-end) including all paid checks and deposit slips of the client. This information is used to test the accuracy of the year-end reconciliation of the company’s bank accounts. It allowsthe auditors to examine firsthand the checks listed as outstanding and the detailsof deposits in transit on the company’s reconciliation.

3. Cash is the most liquid of all assets. A business cannot survive and grow if it does not have adequeate control over cash. Cash is that type of asset which has the gretest chance of missing and that is why a business must have strong internal control over cash.Th following internal controls should be placed in order to ensure control over cash:

a. Segregation of Duties: It means no financial transaction should be managed by a single person. There must be involvement of more that one person in cases of cash disbursements like authorisation of payments, signing of cheques, recording of payments in the books of accounts as well as reconciliation of books.

b. Authorization and Processing of Disbursements: In most of the companies, policies are in place as to who can authorize the payments. Normally, this function is delegated to the director of the company and he is the person who ensures that this role should be delegated to a single person who should be paying attention to monies going out of the organization. All disbursements should be supported by proper documentation ( receipts or invoice).

c. Manage Restricted Funds: In every company, some funds are kept for the purpose of expansion (buying a building, buying a new plant or equipment) of the company. This funds should be used for the purpose for which they are kept.

d. Cheque Signing: It depends on the policy of the company. In many cases, it is useful to require 2 signatures on cheques. It means 2 persons have control over signing of cheques.

4. Internal controls over cash receipts helps the company prevents loss due to fraud by employee and accounting errors. Cash receipts should be delegated to specified persons and there must be a check over this person that he is performing his duties in a correct manner.

Some important control over cash receipts are as under:

a. Recording of cash receipts when received.

b. Keeping funds secured.

c. Document transferred.

d. Give receipt to each customer

e. No sharing of passwords.

f. Each cashier must be alloted a separate cash drawer.

g. Supervisor must verify the cahs deposits.

5. The 3 reconciliation items which may create timing difference are as under:

a. Cheques issued by the Bank but not yet presented for payment: In this case, the cheques are issued by the company to the suppliers or creditors, these are immediatley entered on the credit side of the cash book. But the receiving party may not immediately present the cheque to the bank for payment. The bank will debit the company's account only when this cheque are actually paid by the bank. hence there is a time lag between issue of a cheque and its presentation to the bank.

b. Cheques paid into the Bank but not yet collected: In this case, the company receives the cheques form its debtors and immediately records in the debit side of the cash book. This will increase the bank balance as per cash book. But the bank credits the customer account when the amount of the cheque is actually realised.

c. Direct debits made by the bank on behalf of the customer: Sometimes, the bank deducts some amounts for providing various services (like SMS Charges, Bank charges, cheque bounce charges, cheque collection charges). It comes to the knowledge of the company once the company receives the bank statement. As a result, the balance as per passbok will be lesser than the balance as per cash book.