Substantive Audit Procedures (Cash, AR, Inventory, Investments)

 While performing an audit of cash, an auditor begins to suspect check kiting.  Which of the following is the best evidence that the auditor could obtain concerning whether kiting is taking place? 

•  Documentary evidence obtained by vouching credits on the latest bank statement to supporting documents. 

•  Documentary evidence obtained by vouching entries in the cash account to supporting documents. 

•  Oral evidence obtained by discussion with controller personnel. 

•  Evidence obtained by preparing a schedule of interbank transfers. 

 The primary audit objective for cash is to establish that the balance is properly stated.  This involves determining: 

i. That cash on hand as shown in the general ledger is represented by currency and coins on hand   

ii. Ownership and proper accountabilities   

iii. That cash balances are available without restrictions 

•  Yes,   No,   No 

•  Yes ,  Yes,   Yes, 

•  Yes,   No,   Yes 

•  Yes,   Yes,   No 

An auditor for a large service company is performing an audit of the company's cash balance. The auditor is considering the most appropriate audit procedure to use to ensure that the amount of cash is accurately recorded on the company's financial statements. The most appropriate audit procedures for the objective are

•  Examine bank reconciliations, confirm bank balances, and verify cut off of receipts and disbursements; foot totals of reconciliations and compare to cash account balances.  

•  Review collection procedures and perform an analytical review of accounts receivable; confirm balances of accounts receivable; and verify the existence of appropriate procedures and facilities.  

•  Compare cash receipt lists with the receipts journal and bank deposit slips; review the segregation of duties, observe, and test cash receipts. 

•  Review the organizational structure and functional responsibilities; verify the existence and describe protection procedures for unused checks, including security measures. 

 Cash receipts should be deposited on the day of receipt or the following business day.  Select the most appropriate audit procedure to determine that cash is promptly deposited.  

•  Review the functions of cash receiving and disbursing for proper separation of duties. 

•  Review cash register tapes prepared for each sale.  

•  Review the functions of cash handling and maintaining accounting records for proper separation of duties.  

•  Compare the daily cash receipts totals with the bank deposits. 

 Which of the following sets of information does an auditor usually confirm on one form? 

•  Cash in bank and collateral for loans. 

•  Accounts payable and purchase commitments. 

•  Accounts receivable and accrued interest receivable. 

•  Inventory on consignment and contingent liabilities. 

 The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to. 

•  Corroborate information regarding deposit and loan balances. 

•  Provide the data necessary to prepare a proof of cash. 

•  Detect kiting activities that may otherwise not be discovered. 

•  Request information about contingent liabilities and secured transactions. 

 An auditor ordinarily sends a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balance.  A purpose of this procedure is to 

•  Request a cutoff bank statement and related checks be sent to the auditor. 

•  Detect kiting activities that may otherwise not be discovered. 

•  Seek information about contingent liabilities and security agreements. 

•  Provide the data necessary to prepare a proof of cash. 

As one of the year-end audit procedures, the auditor instructed the client’s personnel to prepare a standard bank confirmation request for a bank account that had been closed during the year. After the client’s treasurer had signed the request, it was mailed by the assistant treasurer. What is the major flaw in this audit procedure?

•  The CPA did not sign the confirmation request before it was mailed. 

•  Sending the request was meaningless because the account was closed before year-end. 

•  The confirmation request was signed by the treasurer. 

•  The request was mailed by the assistant treasurer. 

 The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may 

•  Not believe that the bank is obligated to verify confidential information to a third party. 

•  Be unaware of all the financial relationships that the bank has with the client. 

•  Sign and return the form without inspecting the accuracy of the client’s bank reconciliations. 

•  Not have access to the client’s cutoff bank statement. 

 An auditor who is engaged to examine the financial statements of a business entity will request cutoff bank statement primarily in order to 

•  Detect lapping. 

•  Detect kiting. 

•  Verify reconciling items on the client’s bank reconciliation. 

•  Verify the cash balance reported on the bank confirmation inquiry form.