18-26 (Objectives 18-3, 18-4) In testing cash disbursements for the Jay Klein Co
ID: 2601789 • Letter: 1
Question
18-26 (Objectives 18-3, 18-4) In testing cash disbursements for the Jay Klein Company, you obtained an understanding of internal control. The controls are reasonably good, and no unusual audit problems arose in previous years.
Although there are not many individuals in the accounting department, there is a reasonable separation of duties in the organization. There is a separate purchasing agent who is responsible for ordering goods and a separate receiving department that counts the goods when they are received and prepares receiving reports. There is a separation of duties between recording acquisitions and cash disbursements, and all information is recorded in the two journals independently. The controller reviews all supporting documents before signing the checks, and he immediately mails the checks to the vendors. Check copies are used for subsequent recording.
All aspects of internal control seem satisfactory to you, and you perform minimum tests of 25 transactions as a means of assessing control risk. In your tests, you discover the following exceptions:
1. One invoice was paid twice. The second payment was supported by a duplicate copy of the invoice. Both copies of the invoice were marked “paid.”
2. Two items in the acquisitions journal were misclassified.
3. Three invoices were not initialed by the controller, but there were no dollar misstatements evident in the transactions.
4. Five receiving reports were recorded in the acquisitions journal at least 2 weeks later than their date on the receiving report.
5. Two receiving reports for vendors’ invoices were missing from the transaction packets. One vendor’s invoice had an extension error, and the invoice was initialed that the amount had been checked.
6. One check amount in the cash disbursements journal was for $100 less than the amount stated on the vendor’s invoice.
7. One voided check was missing.
Required
a. Identify whether each of 1 through 7 is a control test deviation, a monetary misstatement, or both.
b. For each exception, identify which transaction-related audit objective was not met.
c. What is the audit importance of each of these exceptions?
d. What follow-up procedures would you use to determine more about the nature of each exception?
e. How would each of these exceptions affect rest of the your audit? Be specific.
f. Identify internal controls that should have prevented each misstatement.
Explanation / Answer
a.
1. Misstatement and Control problem
2. Control Deviation
3. Control Deviation
4. Control Deviation
5. Misstatement and Control problem
6. Monetary Misstatement
7. Control Deviation
b.
There are six general transaction-related objectives:
1. Existence
2. Completeness
3. Accuracy
4. Classification
5. Timing
6. Posting and summarization
Transaction related objectives that were not met in each case is:
1. Accuracy
2. Classification
3. Completeness
4. Timing
5. Existence
6. Posting and Summarization
7. Existence
c.
1. This is oh high importance as it may involve dummy payments and fraudulent activity.
2. It does not have much impact as there is no financial implication involved.
3. It is of high importance to check whether controller have signed or not to make person accountable for misdoings if any
4. This is of low importance for mid-year transactions, however for year-end transactions it is important to verify whether all necessary entries have been done timely.
5. This is of high importance, because of missing documents to verify the existence of transaction
6. This is of high importance, because of lack of accuracy in the transaction
7. This is of medium importance, because cheque was void.
d.
1. Why query as to the absence of original invoice while authorizing payment was not raised by controller.
2. What mechanism is established to classify items, is there any guide for the accountant? If yes, why accountant don’t follow it.
3. To determine whether controller negligent in his duties all the time?
4. Why there was such a big delay in posting?
5. Who was the person responsible for handling invoices, is there any dedicated filing system to manage files?
6. It is a human error, but auditor should determine frequency of follow up of posted entries taken?
7. Why the check was not put in safe custody and who was the person responsible for the same?
e.
1. We have to examine bank statement carefully to see that a payment of same amount is not made to same party more than once, if there is such payment than check for separate invoices for both.
2. Have cursory glance of all the account heads and items under it, for any discrepancy look for details and rectify.
3. This exception is required to be kept in mind and more substantive audit procedures have to be carried out at places where initials of controller is required.
4. This will require special scrutiny of year end transactions while auditing.
5. This exception shall require to have manual check on the receiving reports registered in the register and actual in possession.
6. As auditor, we have to now look for the account balances of creditors and debtors and see that any small or odd figure is not standing in the balance, if there is, than look for the reasons of the same. This shall reconcile of any short or extra payment being made.
7. This exception will require auditor to verify that proper entry in manual register and counter foil is made for void cheques and manually check the same.
f.
1. Practice of marking document as paid or punching a hole on the paid invoice
2. Checklist or guideline for classification.
3. No pre-determined hierarchy of authorization and accountability
4. No pre-determined time limit to record transaction
5. Lack of accountability and responsibility among employees as well as follow up of documents in place or not.
6. Practice of reconciliation of bank statements seems missing
7. Numbering of documents and follow up
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