Question

23-17 (Objectives 23-3 , 23-4) The following are misstatements that might be found in the client’s year-end cash balance (assume that the balance sheet date is June 30):

1.A check that was dated June 26 and disbursed in June was not recorded in the cash disbursements journal, but it was included as an outstanding check on June 30.

2.A check was omitted from the outstanding check list on the bank reconciliation. It cleared the bank September 6.

3.The outstanding checks on the June 30 bank reconciliation were underfooted by $2,000.

a. Assuming that each of these misstatements was intentional (fraud), state the most likely motivation of the person responsible.

b. What control can be instituted for each fraud to reduce the likelihood of occurrence?

c. List an audit procedure that can be used to discover each fraud.

4. A loan from the bank on June 26 was credited directly to the client’s bank account. The loan was not entered as of June 30.

5. A check was omitted from the outstanding check list on the June 30 bank reconciliation. It cleared the bank July 7.

6. Cash receipts collected on accounts receivable from July 1 to July 5 were included as June 29 and 30 cash receipts.

6. A bank transfer recorded in the accounting records on July 1 was included as a deposit in transit on June 30.

Answer 1

Solution

A. As per given situation, the misstatements which was intentional fraud is done with the motive of showing high cash balance as on balance sheet date. Cash and bank payments were deferred and cash receipts as per points 6 is intentionaly shown in june instead of july month just to show better cash liquidity and high cash and bank balance as on balance sheet date.and also the loan is not showen just to present that organisation is having less loans.

B. In case of the above said situations the following controls can be implemented -

1) Opening and closing cash balance should be physically verified by cashier with approved by one senior staff.

2) Surprise checking of cash balance should be done by higher Authority and auditors.

3) Loans outstanding ans running should be checked from CIBILreport or in case of company from ROC .

4) Bank balance should be reconciled monthly and proper verification of cheques issued but not clear or cheques received but not cleared should be done.

C. The following Audit procedure can be used to discover such types of fraud -

1) Proper bank reconciliation to be done and justification should be taken in case of suspicis transactions.

2) Physial verification of cash should be done as on last day of balance sheet period.

3) Confirmation should be taken from banks regarding balance of bank and loans etc.

4) Cash receipts should be checked with invoices and should be properly secrutinsed.

5) Third party confirmation should be taken of balances outstanding.

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