Chapter 6

Question 1

Which Assertions Map to the Control?

Two employees open the mail, remittance advice is received, and checks are properly endorsed.

Answer 1

Existence

Stop someone from putting in a check and applying it to someone else’s account. Whatever was recorded actually did occur.

Question 2

Which Assertions Map to the Control?

A listing of all checks is being prepared and compared to the total of the deposit ticket for the total of checks.

Answer 2

Valuation/Accuracy

Question 3

Which Assertions Map to the Control?

The total amount of the deposit listed in the bank statement was recorded in the proper period.

Answer 3

Cutoff

Proper Period!!

Question 4

Presentation/Disclosure:

Answer 4

Is current asset sitting in fixed asset? Is it in the wrong spot on the balance sheet classifications? Also… footnotes

Question 5

Which Assertions Map to the Control?

Checks are not printed until voucher packets are prepared.

Answer 5

Existence

If this control was broken what would happen? The company could make payment that shouldn’t have been made

Question 6

Which Assertions Map to the Control?

An employee compares amounts on printed checks with voucher packets prior to submission for signature.

Answer 6

Valuation

Question 7

Which Assertions Map to the Control?

Only authorized signers are permitted to sign checks.

Answer 7

Existence Occurrence

If you are authorized to sign a check you could create a transaction that shouldn’t have occurred

Question 8

Which Assertions Map to the Control?

Checks are prenumbered and accounted for.

Answer 8

Completeness

If you realize you have a check that is missing, you have a completeness issue

Question 9

Cash is relevant to many accounting cycles…

Answer 9

• Sell a good, receive cash
• Enter into a lease, pay cash
• Purchase raw materials, pay cash

Question 10

Cash Receipt Journal

Answer 10

Debits to cash

Question 11

Cash Disbursements Journal

Answer 11

Credits to cash

Question 12

Bank reconciliations

Answer 12

Documents the difference between the cash balance in the general ledger and at the bank(s)

Question 13

Bank Statements

Answer 13

document of transactions that occurred from the bank’s perspective

Question 14

Cancelled checks

Answer 14

Scanned images are typically included with bank statements
Used to test for payees, amounts, and dates

Question 15

When is an assertion considered relevant?

Answer 15

If there is a reasonable possibility it could contain a material misstatement

Question 16

Inherent risks of Cash

Answer 16

• Cash is often needed to pay debts and invest in the future
• Cash is highly liquid, easily transportable, and not easily identifiable

Question 17

What are typically relevant assertions for cash?

Answer 17

Existence: management has incentive to show more cash than they really have
Valuation: especially important when a company operates in multiple jurisdictions
Presentation and disclosure: banks have restricted cash balance figures

Question 18

Treasurer’s Office

Answer 18

function that handles cash (receiving the cash, managing the relationships with banks, determining write-offs)

Question 19

Controller’s Office

Answer 19

strictly doing the journal entries (system access to creating financials, record debits/credits to customer accounts)

Question 20

Treasurer and controller should be…

Answer 20

seperate from a control perspective

Question 21

When cash comes through the door what is the first thing you should do?

Answer 21

Write it down! Remittance List

Question 22

Individual Customer Accounts Subsidiary

Answer 22

Individual level

Question 23

Accounts Recievable Control

Answer 23

Summary level

Question 24

Cash Receipts Process Activities:

Answer 24

1. Receive cash and remittance advice in mail
2. Prepare remittance listing
3. Enter total from remittance listing (or remittance advice) in cash receipts journal
4. Prepare deposit slip and deposit cash receipts in bank (intact and daily)
5. Record update to subsidiary accounts receivable using remittance advice
6. Reconcile remittance listing, subsidiary accounts receivable, and deposit slip daily

Question 25

Remittance Advice

Answer 25

Account number, your name, how much you owe

Helps the company know who the payment is for

Question 26

Cash Disbursements Process Activities:

Answer 26

1. Voucher packet matched prior to cash disbursement authorization
2. Vouchers are marked PAID to show they have been processed and are not paid a second time
3. The debit to accounts payable and credit to cash should be done by someone without access to the check-writing function

Question 27

Voucher packet

Answer 27

Purchase requisition, purchase order, receiving report, invoice

Question 28

Disbursements are typically authorized by…

Answer 28

the accounts payable department

Question 29

Cash - Existence

What could go wrong?

Answer 29

The cash balance may not exist in the company’s bank accounts

Question 30

Cash - Existence

Internal Control

Answer 30

The CFO performs a detailed review of the bank reconciliation on a monthly basis

Question 31

Cash - Existence

Possible test of control

Answer 31

Randomly select 3 months, look for evidence of the CFO’s detailed review for each bank reconciliation

Question 32

Reperform a Bank Reconcilliation

Answer 32

Balance per bank
+ Deposits-in-transit
- Outstanding checks
+/- Debit/Credi Memos
= Balance per books

Question 33

Cash - Existence

Possible substantive test

Answer 33

Randomly select 3 months, reperform the bank reconciliation

Question 34

How should you get the balance per bank?

Answer 34

Confirm directly with the bank

Question 35

Deposits-in-transit

Answer 35

• care a lot about existence
  Vouch TO cutoff bank statment
  Trace FROM cash receipts journal

Question 36

Outstanding Checks

Answer 36

• care a lot about completeness
  Trace checks cleared FROM cutoff bank statment
  Vouch TO cash disbursements journal

Question 37

Debit/Credit Memos

Answer 37

Inspect bank credit/debit memo and audit for reasonableness. Examine relevant supporting documentation

Question 38

Balance per books

Answer 38

Foot the entire reconciliation for mathematical accuracy
Trace the amount to the trial balance

Question 39

Cutoff bank statement

Answer 39

A partial period bank statement

Question 40

Does a credit or debit memo increase your personal cash and which one would increase the bank’s cash?

Answer 40

Credit memo: increases your personal cash
Debit memo: increases the bank’s cash

Question 41

How should you think about debit and credit memos to not get confused?

Answer 41

Go buy clothes, you return something, the cashier says “I’m going to credit your account”
Think about it from the bank’s perspective (they are issuing the memo)

Question 42

Foot

Answer 42

Add everything up to make sure they add up correctly

Question 43

What would you test for Deposit in Transit and Outstanding Checks?

Answer 43

• Deposits in transit (existence is more important) Traced from reconcilliation
• Outstanding checks (completeness is more important) Traced from cut-off bank statement

Question 44

Standard Bank Confirmation Inquiry

Answer 44

• Rare for a bank to respond to a paper request for confirmation
• Must be mailed under auditor’s own control

Question 45

Electronic Confirmation Requests

Answer 45

• Many banks now only complete confirmation requests electronically through a third-party intermediary
• Used to confirm deposit balances and loan balances (used for existence and completeness assertions for liabilities)

Question 46

What assertion is relevant to confirmations?

Answer 46

Existence

Question 47

Cash - Valuation

What could go wrong?

Answer 47

The cash balance that is held in foreign countries may not have been translated properly

Question 48

Cash - Valuation

Internal Control

Answer 48

The treasurer reviews the cash translation adjustment calculation monthly and independently checks that the appropriate spot rate has been used for each foreign currency

Question 49

Cash - Valuation

Possible Test of Control

Answer 49

Randomly select 3 months, look for evidence of the treasurer’s check of spot rate

Question 50

Cash - Valuation

Possible Substantive Test

Answer 50

Randomly select 3 months of cash translation adjustment calculations and match each foreign currency spot rate to rates from third-party pricing services

Question 51

Which of the following would the auditor consider to be an incompatible operation if the cashier receives remittances?
a) The cashier prepares the daily deposit
b) The cashier makes the daily deposit at a local bank
c) The cashier posts the receipts to the accounts receivable subsidiary ledger
d) The cashier endorses the checks

Answer 51

c) The cashier posts the receipts to the accounts receivable subsidiary ledger

Custody and reporting function should be separate

Question 52

Which of the following is least indicative of fraudulent activity?
a) Numerous cash refunds have been made to different people at the same post office box address
b) Internal auditors cannot locate several credit memos to support reductions of customers’ balances
c) The bank reconciliation has no outstanding checks or deposits older than 15 days
d) Three people were absent the day the auditors handed out the paychecks and have not picked them up four weeks later

Answer 52

c) The bank reconciliation has no outstanding checks or deposits older than 15 days

No outstanding checks or deposits older than 15 days is a great thing

Question 53

Immediately upon receipt of cash, a responsible employee should
a) Record the amount in the cash receipts journal.
b) Prepare a remittance listing.
c) Update the subsidiary accounts receivable records.
d) Prepare a deposit slip in triplicate

Answer 53

b) Prepare a remittance listing.