Question

Shiny Happy Windows Co. (SHW) is a window cleaning company. The customer’s windows are cleaned monthly and the window cleaner then posts a stamped addressed envelope for payment through the customer’s front door. SHW has a large number of receivables 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:

1) A junior clerk from the accounting department opens the post and if any cheques or cash have been sent, she records the receipt in the cash received log and then places all the monies in the locked small cash box.

2) The contents of the cash box are counted every few days the sums are banked by whichever member of the finance team is available.

3) The cashier records the details of the cash received into the cash receipts daybook and also updates the sales ledger.

4) Usually every month, the cashier performs a bank reconciliation which he then files. If he misses a month he then catches this up in the following month’s reconciliation.

 

Required:

I) For the cash cycle of SHW,

(a) identify and explain three deficiencies in the system

(b) suggest controls to address each of these deficiencies

(c) list tests of controls the auditor of SHW would perform to assess if the controls are operating effectively.

II) Describe substantive procedures an auditor would perform in verifying this company’s bank balances.

Answer 1

I.

a.

 

b.

 

c.

II.

Obtain the company's bank reconciliation and check for arithmetical accuracy.

Obtain a bank confirmation letter from the company's bankers to verify the balance per the bank statement to an original year end bank statement and to the bank confirmation letter.

Agree each of the balances listed on the bank confirmation letter to the company's bank reconciliations / trial balance to ensure completeness of bank balances.

Examine the bank confirmation letter for details of any security provided by the company / any legal right of set off which may require disclosure.

Verify the reconciliation's balance per the cash book to the year end cash book.

Examine and trace all unpresented cheques through to a pre year end cash book and post year end statement and obtain explanations from management for any unusual amounts or significant delays.

Review the cash book and bank statements for any unusual items / large transfers throughout the year for evidence of window dressing*.

*Window dressing is a technique used by companies and financial managers to manipulate financial statements and reports to show more favorable results for a period.

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