Question

QUESTION 36

1. Copy of The items below is possible errors and fraud that auditor suspects are present. For each item, select from the list provided the auditing procedure(s) that the auditor would most likely perform to gather evidence in support of that item concerning possible errors and fraud. For each item, select one or two procedures, as indicated. For the item(s) that require two answers, you must enter the answers in the same relative order as they appear on the selection list. The procedures on the list may be selected once, more than once, or not at all.

	The entity’s cash receipts of the first few days of the subsequent year were properly deposited in its general operating account after the year-end
	However, the auditor suspects that the entity recorded the cash receipts in its books during the last week of the year under audit. (Select only 1 procedure)
	The auditor suspects that vouchers were prepared and processed by an accounting department employee for merchandise that was neither ordered nor received by the entity. (Select only 1 procedure)
	The details of invoices for equipment repairs were not clearly identified or explained to the accounting department employees. The auditor suspects that the bookkeeper incorrectly recorded the repairs as fixed assets. (Select only 1 procedure)
	The auditor suspects that a lapping scheme exists because an accounting department employee who has access to cash receipts also maintains the accounts receivable ledger and refuses to take any vacation or sick days. (Select 1 of 2 procedures) Note: This question is a repeat of the previous question so that you can enter the second procedure.
	The auditor suspects that a lapping scheme exists because an accounting department employee who has access to cash receipts also maintains the accounts receivable ledger and refuses to take any vacation or sick days. (Select 2 of 2 procedures)
	The auditor suspects that the entity is inappropriately increasing the cash reported on its balance sheet by drawing a check on one account and not recording it as an outstanding check on that account, and simultaneously recording it as a deposit in a second account. (Select only 1 procedure)
	The auditor suspects that the entity’s controller has overstated sales and accounts receivable by recording fictitious sales to regular customers in the entity’s books (select 1 of 2 procedures) Note: This question is a repeat of the previous question so that you can enter the second procedure.
	The auditor suspects that the entity's controller has overstated sales and accounts receivable by recording fictitious sales to regular customers in the entity's books. (Select 2 of 2 procedures)

These are possible answers for the questions above.

1.Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips.

2. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management authorization.

3. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast.

4. Obtain the cutoff bank statement and compare the cleared checks to the year-end bank reconciliation.

5. Prepare a bank transfer schedule.

6. Inspect the entity's deeds to its real estate.

7. Make inquiries of the entity's attorney concerning the details of real estate transactions.

8. Confirm the terms of borrowing arrangements with the lender.

9. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges.

10. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date.

11. Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness.

12. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer.

13. Inspect the entity's correspondence files for indications of customer disputes or for evidence that certain shipments were on consignment.

14. Perform edit checks of data on the payroll transaction tapes.

15. Inspect payroll check endorsements for similar handwriting.

16. Observe payroll check distribution on a surprise basis.

17. Vouch for data in the payroll register to document authorized pay rates in the human resources department's files.

18. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks.

19. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee.

20. Examine the supporting purchase orders and receiving reports for selected paid vouchers.

Answer 1

a.   comparison of the details of the cash receipts journal to the details on the daily deposit slips will reveal a circum­stance since the details will have been posted to accounts during the last week of the year under audit.

b. When vouchers are processed for merchandise not ordered or received, there will be no supporting purchase orders and receiving reports and this will alert the auditor to the problem.

c. Scanning the debits to the fixed asset accounts and vouching selected amounts will reveal repairs that have improp­erly been capitalized.

d. Lapping involves concealing a cash shortage by delaying the recording of journal entries for cash receipts. Since lapping includes differences between the details of postings to the cash receipts journal and corresponding deposit slips, com­paring these records will reveal it. Also, confirmation requests may identify lapping when payments of receivables (as indicated by confirmation replies) appear to have taken too much time to be processed.

e. Lapping involves concealing a cash shortage by delaying the recording of journal entries for cash receipts. Since lapping includes differences between the details of postings to the cash receipts journal and corresponding deposit slips, com­paring these records will reveal it. Also, confirmation requests may identify lapping when payments of receivables (as indicated by confirmation replies) appear to have taken too much time to be processed.

f. Increasing cash by drawing a check in this manner is a form of kiting (see answer 1). Preparation of a bank transfer schedule will assist the auditor in identifying such transactions.

g. Confirmations will identify overstated accounts receivable when customers disagree with the recorded balance due. Also, the related overstated sales will not have shipping documents indicating that a shipment has occurred.

h. Confirmations will identify overstated accounts receivable when customers disagree with the recorded balance due. Also, the related overstated sales will not have shipping documents indicating that a shipment has occurred.