The following misstatements are included in the accounting records of Redgate Ma
ID: 2567945 • Letter: T
Question
The following misstatements are included in the accounting records of Redgate Manufacturing Ltd.:
1. Telephone expense (G/L code 1122) was unintentionally charged to repairs and maintenance (G/L code 1222).
2. Purchases of raw materials are frequently not recorded until several weeks after the goods are received due to the failure of the receiving personnel to forward the receiving reports to accounting department. When pressure from a supplier’s credit department is put on Redgate’s accounting department, it searches for the receiving report, records the transactions in the purchases journal, and pays the bill.
3. The accounts payable clerk prepares a monthly cheque to Easy Supply Company for the amount of an invoice owed and submits the unsigned cheque to the treasurer for payment along with related supporting documents that have already been approved. When she receives the signed cheque from the treasurer, she records it as a debit to accounts payable and deposits the cheque into a personal bank account with the payee of “Easy Supply”. A few days later, she records the invoice in the purchases journal, resubmits the documents and a new cheque to the treasurer. After the cheque has been signed by the treasurer, she will send the same to the supplier.
4. The amount of a cheque in the cash disbursements journal is incorrectly recorded as $40,648 instead of $40,468.
5. The accounts payable clerk has intentionally excluded several signed cheques mailed on 27 December (each cheque involving substantial transaction amounts) from the cash disbursements journal, with the intent to prevent cash in the bank from having a negative balance on the general ledger. The clerk has recorded such disbursements on 2 January in the subsequent year.
6. Each month a fictitious receiving report is submitted to the accounting department by an employee in the receiving department. The deceptive method is that he sends Redgate an invoice for the quantity of goods ordered from a small company he owns and operates in the evening. A cheque is prepared, and the amount is paid when the receiving report and the supplier’s invoice are matched by the accounts payable clerk.
Required:
(a) For each misstatement, identify the management assertion that has not been met.
(b) For each of the above misstatement, state an internal control that should have prevented the error/fraud from occurring on a continuing basis.
(c) For each of the above misstatement, design a substantive audit procedure that could have been performed by auditors to uncover the error/fraud.
Explanation / Answer
Assertion that;
The accounting transactions are properly classified and reported in the proper accounts.
Internal Control that could’ve prevented the fraud/error:
Journal entries should be made based on the prescribed vouchers.
Posting in the ledgers should be done after approval of the journal voucher by the supervisor.
Substantive procedure to uncover the fraud/error:
2. Management assertion that went wrong:
Completeness:
Assertion that;
All transactions are completely recorded and no material transactions are omitted.
Internal Control that could’ve prevented the fraud/error:
Control over the GRIR (Goods Received Invoice Received) account. When goods are received, entry for GRN should be made in the system. Ensure that for each GRN, invoice has been received and after accounting both GRN & invoice, GRIR account is cleared.
Substantive procedure to uncover the fraud/error:
Check whether GRIR account is having old open entries. Check in depth for the open items.
3. Management assertion that went wrong:
Assertion that;
Access to assets and critical documents that control their movement are suitably restricted to authorized personnel. Segregation of the duties of the staff who are involved in cash dealings.
Internal Control that could’ve prevented the fraud/error:
Payment should be processed only on the basis of Original invoice and not on duplicates.
After preparing the cheque, the invoice should be marked with “Paid” stamp, to avoid duplication of payments.
Substantive procedure to uncover the fraud/error:
4. Management assertion that went wrong:
Assertion that;
Amounts recorded are mathematically accurate.
Internal Control that could’ve prevented the fraud/error:
Periodic reconciliation of cash book with bank statements.
Substantive procedure to uncover the fraud/error:
Review the bank reconciliation statement. Check for the reconciling items and followup as to how they are rectified.
5. Management assertion that went wrong:
Completeness:
Assertion that;
Internal Control that could’ve prevented the fraud/error:
Substantive procedure to uncover the fraud/error:
Place more attention to the transactions recorded during the end of the months and during beginning of the months, to ensure if cut-off procedures have been duly followed.
Check whether the Cheque disbursement register is maintained properly and review the transactions with the supporting document.
6. Management assertion that went wrong:
Occurrence:
Assertion that;
Transactions and events that have been recorded are actually occurred and pertain to the entity.
Internal Control that could’ve prevented the fraud/error:
Substantive procedure to uncover the fraud/error:
Check if purchases are from any unapproved vendors.
Review the vendor payments. Whether the receiving register is marked for payments made .
Obtain balance confirmation from all the vendors. Check in depth, for vendors who are not responding with balance confirmation.
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