Week 2 Textbook Problems

23-20 (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. The outstanding checks on the June 30 bank reconciliation were underfooted by $2,000.

· 2. 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.

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

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

· 5. 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.

· 7. 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.

Required

· 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.

14-26 (Objectives 14-3, 14-4, 14-5) The following are commonly performed tests of controls and substantive tests of transactions audit procedures in the sales and collection cycle:

· 1. Account for a sequence of shipping documents and examine each one to make sure that a duplicate sales invoice is attached.

· 2. Account for a sequence of sales invoices and examine each one to make sure that a duplicate copy of the shipping document is attached.

· 3. Compare the quantity and description of items on shipping documents with the related duplicate sales invoices.

· 4. Trace recorded sales in the sales journal to the related accounts receivable master file and compare the customer name, date, and amount for each one.

· 5. Examine sales returns for approval by an authorized official.

· 6. Review the prelisting of cash receipts to determine whether cash is prelisted daily.

· 7. Reconcile the recorded cash receipts on the prelisting with the cash receipts journal and the bank statement for a 1-month period.

Required

· a. Identify whether each audit procedure is a test of control or a substantive test of transactions.

· b. State which of the six transaction-related audit objectives each of the audit procedures fulfills.

· c. Identify the type of evidence used for each audit procedure, such as inspection and observation.