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23-11
23-19 (continued)
c.
RECONCILING ITEM
AUDIT PROCEDURE
1. Deposits in transit
Trace to duplicate deposit slip and entry on
cutoff bank statement.
2. Erroneous check
Examine correction notice in August charge
received from bank.
3. Outstanding checks
Obtain cutoff bank statement. Trace
enclosed checks to outstanding check list.
Trace uncleared items to supporting
documentation.
4. Bank service charge
Examine advice returned with July bank
statement.
5. Note payment
Examine cancelled note. Recompute
interest. Check for absence of note on
7/31 bank confirmation.
6. NSF check
Examine advice returned with July bank
statement. Examine other related
evidence from credit manager to
determine if account is uncollectible.
7. Unrecorded check
Examine check returned with July bank
statement. Trace number to absence in
July cash disbursements journal and
recording in August. Examine supporting
documentation. Investigate why
unrecorded.
d. The correct cash balance for the financial statements is $1,950.
23-20 a. In verifying the interbank transfers, the following audit procedures
should be performed:
the balance sheet date (already done).
2. Trace these interbank transfers to the appropriate accoun-
b. For December 2016
Cash in bank $16,000
23-12
23-20 (continued)
Cash in bank 22,000
For January 2017
c. For December 2016
Home office clearing account $28,000
Cash in bank $28,000
For January 2017
Eliminate corresponding entries already made for the
above.
d.
and
e.
HOME OFFICE RECORDS
BRANCH ACCOUNT
RECORDS
17,000
No DIT*
No OC**
28,000
No DIT
No OC
16,000
No DIT
No OC
10,000
No DIT
OC
21,000
No DIT
No OC
22,000
No DIT
OC
39,000
No DIT
No OC
* DIT = Deposit in transit
** OC = Outstanding check
23-13
23-21
POSSIBLE MISSTATEMENTS
DUE TO ERRORS OR FRAUD
AUDIT PROCEDURE TO
PROVIDE EVIDENCE
1.
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.
a. Compare the details of
the cash receipts journal
entries with the details
of the corresponding daily
deposit slips.
2.
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.
h. Prepare a bank transfer
schedule.
3.
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.
a. Compare the details of
the cash receipts journal
entries with the details of
the corresponding daily
deposit slips.
4.
The auditor noticed a significant increase
in the number of times that petty cash was
reimbursed during the year and suspects
that the custodian is stealing from the petty
cash fund.
e. Examine invoices, receipts,
and other documentation
supporting reimbursement
of petty cash.
5.
The auditor suspects that a kiting scheme
exists because an accounting department
employee who can issue and record checks
seems to be leading an unusually luxurious
lifestyle.
d. Obtain the cutoff bank
statement and compare
the cleared checks to the
year-end reconciliation.1
6.
During tests of the reconciliation of the payroll
bank account, the auditor notices that a
check to an employee is significantly larger
than other payroll checks.
c. Agree gross amount on
payroll checks to approved
hours and pay rates.
7.
The auditor suspects that the controller
wrote several checks and recorded the cash
disbursements just before year-end but did
not mail the checks until after the first week
of the subsequent year.
d. Obtain the cutoff bank
statement and compare
the cleared checks to the
year-end reconciliation.
1 An alternative answer would be to prepare a bank transfer schedule. In this case the kiting is
23-14
23-22 a.
Cash Disburse- Cash
9/30/16 Receipts ments 10/31/16
Balance per bank $6,915 $28,792 $27,431 $8,276
Deposits in transit
9/30/16 5,621 (5,621)
10/31/16 996 996
Outstanding checks
9/30/16 (1,811) (1,811)
10/31/16 2,615 (2,615)
b. Adjusting journal entries:
Dr. Cash in bank $ 3,296
Cr. Notes receivable $2,900
Cr. Interest income 396
23-23 a. A substitute check is a special paper copy of the front and back of
an original check, and is specially formatted so it can be processed
b. Because of Check 21 and other check-system improvements,
checks may be processed faster. The majority of consumers do not
receive their canceled checks with their account statements, but
Individuals who do receive canceled checks back in their
23-15
23-23 (continued)
c. No. In general, the law does not require the bank to return original
checks. Many banks destroy original paper checks. Other banks may
store original checks for some period of time and then destroy
23-24 a. Inherent risk is increased by the investment in speculative derivative
financial instruments due to the potential complexity of the derivative
contracts, the complexity of the relevant accounting standards,
increases inherent risk. Exposure to risk is significant because the
financial instruments account represents approximately 15% of
total assets, which is a material amount, and many of the equity
investments are considered high risk stocks.
on the CEO to show a profit from the investment strategy. The use
of a brokerage firm to execute trades lowers the control risk
assuming internal controls at the brokerage firm have been tested
and are considered effective.
review the underlying agreements.
c. It is difficult to test for completeness of derivative contracts as they
often do not involve an exchange of cash up front but represent a
commitment to perform in the future. To test completeness of the
23-16
23-24 (continued)
to the terms and whether there are any side agreements. To search
discussion of derivative contracts that are not recorded. The
auditor would also search following year-end for settlement of any
contracts that should have been recorded at year-end.
management to develop the fair value estimate. If the derivative
instrument is valued by management using a valuation model, the
auditor should obtain evidence by performing procedures such
as assessing the appropriateness of the model used and the
value estimate to transactions subsequent to year-end.
e. It is highly likely the auditor would use a valuation specialist for the
audit of financial instruments when level 3 fair value estimates are
valuation specialist to develop an estimate in order to corroborate
the estimates developed by management or their specialists.
23-25 a. The PCAOB reorganized their auditing standards effective
December 31, 2016. Before the reorganization, the relevant
in the reorganized standards as AS 2502.
23-17
23-25 (continued)
disclosures:
Controls over the process used to determine fair value
measurements, including, for example, controls over data and
the segregation of duties between those committing the entity to
the underlying transactions and those responsible for
undertaking the valuations.
fair value measurements.
The role that information technology has in the process.
The types of accounts or transactions requiring fair value
measurements or disclosures (for example, whether the
accounts arise from the recording of routine and recurring
transactions).
The extent to which the entity's process relies on a service
organization to provide fair value measurements or the data that
supports the measurement. When an entity uses a service
organization, the auditor considers the requirements of AS
Organization, as amended.
The extent to which the entity engages or employs specialists in
determining fair value measurements and disclosures.
The significant management assumptions used in determining
fair value.
The documentation supporting management's assumptions.
assumptions, including whether management used available
market information to develop the assumptions.
The process used to monitor changes in management's
assumptions.
The integrity of change controls and security procedures for
valuation models and relevant information systems, including
approval processes.
the data used in valuation models.
c. According to paragraphs .21 and .22 of AS 2502, when planning to
use the work of a specialist in auditing fair value measurements,
the auditor should consider “whether the specialist's understanding
23-18
23-25 (continued)
specialist for estimating the fair value of real estate or a complex
report of the specialist.
AS 1210, Using the Work of a Specialist, provides that,
“while the reasonableness of assumptions and the appropriateness
of the methods used and their application are the responsibility of
the specialist, the auditor obtains an understanding of the
procedures as required in AS 1210.”
d. According to paragraph .23 of AS 2502, the auditor’s substantive
tests of the fair value measurements may involve:
(i) testing management's significant assumptions, the
evaluates whether:
a. Management's assumptions are reasonable and reflect,
or are not inconsistent with, market information.
appropriate model, if applicable.
c. Management used relevant information that was
reasonably available at the time.
(ii) developing independent fair value estimates for
corroborative purposes. The auditor may make an
management's assumptions, the auditor evaluates those
23-19
23-25 (continued)
audit evidence regarding management's fair value
measurements as of the balance-sheet date. In such
