Beruflich Dokumente
Kultur Dokumente
18-1
18-3. a.
Shad is incorrect about the balance sheet inasmuch as marketable securities held as
short-term investments may be material to a company's short-term solvency, and
securities held as long-term investments may be material to total assets. Shad may be
incorrect about the income statement for a company that has trading securities, held
to maturity securities when amortization is significant, or available-for-sale securities
for which unrealized holding gains and losses become realizable due to sale or
reclassification.
b.
Keri is incorrect. The audit strategy decision is generally based on the frequency of
investing transactions. When there are relatively few transactions, the auditor
generally uses a primarily substantive approach. When there are many transactions, it
may be more cost-efficient for the auditor to use a lower assessed level of control
risk approach.
b.
The functions and related controls in the investing cycle consist of the following:
Authorizing investment transactions:
o Purchasing securities.
Receive or deliver securities:
o Receiving/ safeguarding/delivering securities.
o Receiving periodic income.
Recording transactions:
o Recording purchases, sales, and income.
o Recording market adjustments and reclassifications.
Settle transactions:
o Receiving cash.
o Disbursing cash.
o Assessing investment performance and reporting.
The following table summarizes internal controls that might be found in the
investing cycle for each assertion (audit objective).
18-2
Completeness
(Completeness)
Existence and Occurrence /
Completeness (Cutoff)
Control
The computer checks for
authorization to purchase or sell
securities before recording the
transaction.
Test of Controls
Use CAATs to test the control by
submitting data that should be rejected by
the control.
18-6. The acceptable level of detection risk is derived from the audit risk model. Inherent risk for
investment balances involves consideration of (a) the vulnerability of the securities to theft
and misappropriation (existence or occurrence assertion), (b) the possibility of
misclassification of investments (presentation and disclosure assertion), and (c) the
complexities pertaining to the valuation methods such as the equity method of accounting
(valuation or allocation assertion). Control risk, under the primarily substantive approach is
at the maximum or slightly below the maximum. In such cases, the acceptable level of
detection risk will be low.
18-7. a.
The precautions are: (1) the custodian should be present during the count, (2) a
receipt should be obtained from the custodian when the securities are returned to the
client, and (3) all securities, cash and other negotiable investments should be
controlled during the count.
b.
This test applies to four assertions: (1) existence or occurrence, (2) completeness, (3)
rights and obligations, and (4) presentation and disclosure.
18-3
18-8. The working papers for securities should show the certificate number, name of owner,
description of the security, number of shares or bonds, and name of issuer.
18-9.
a.
Securities held by others for the client should be positively confirmed with the
custodian as of the date securities held by the client are counted. This date is often at
or near the balance sheet date.
b.
This test provides evidence about four assertions, (1) existence or occurrence, (2)
completeness, (3) rights and obligations, and (3) valuation at historical cost.
18-10. Cash accounts that should be included as cash balances on the balance sheet include
undeposited receipts on hand, cash in bank in general checking and saving accounts, and
imprest accounts such as petty cash and payroll bank account. Cash accounts that should not
be classified as cash balances on the sheet include certificates of deposit, bond sinking fund
cash, certain foreign currency balances, and other accounts that have restrictions on their
use. These accounts should be classified as investments.
18-11. The transaction cycles that affect cash are:
Revenue (cash sales and receivable collections)
Expenditure (cash purchases and payments on account)
Personnel services (payment of employees and taxing authorities)
Investing (The purchase of long-term assets, the purchase and sale of securities, and the
receipt of interest and dividends).
Financing (Issuing debt and equity securities, redeeming bonds and retiring stock, the
purchase and sale of treasury stock, payment of interest and dividends).
18-12. a.
18-4
Disclosure Objectives
Occurrence and Rights and Obligations. Disclosed cash events and transactions have occurred
and pertain to the entity (PD1).
Completeness. All cash disclosures that should have been included in the financial statements
have been included (PD2).
Understandability. All cash disclosures are appropriately presented and information in
disclosures is understandable to users (PD3).
Accuracy and Valuation. Cash information is disclosed accurately and at appropriate amounts
(PD4).
b.
Inherent risk for cash balances is frequently assessed as high for the existence or
occurrence and completeness assertions because of the high volume of cash
transactions and the vulnerability of cash to misappropriation. In contrast, lower
assessments of inherent risk may be made for the other assertions because they do not
involve any contentious accounting issues.
18-13. Although the portion of current or total assets at any point in time represented by cash
balances may be very small; with five of the six transaction cycles affecting cash the amount
of cash flowing through the accounts over a period of time that is susceptible to
misappropriation can be very large. The volume of transactions, and the susceptibility of a
valuable asset to misappropriation are the key reasons that strong internal controls over cash
is important.
18-14. Because of the unique aspects of cash, auditors tend to plan their procedures to detect much
smaller levels of misstatements than for other accounts. Further, management may request that the
auditor plan work in the cash areas with a more extensive scope than would otherwise be required due
to the inherent risks in this area. Hence, the auditor may follow a primarily substantive approach.
When an entity has strong internal controls and many cash accounts the lower assessed level of
control risk approach may be used to limit the number of cash accounts where substantive
tests may be performed.
18-15. a.
Three different tests of details of transactions that can be performed in auditing cash
balances are:
Perform cash cutoff tests for cash receipts and cash disbursements.
Trace bank transfers.
Prepare proof of cash.
b.
A proof of cash need not be prepared when control risk pertaining to cash
transactions and balances is low and the entity's bank accounts have been reconciled.
18-16. a.
18-5
b.
Kiting can be detected by (1) tracing bank transfers and (2) by using a bank cutoff
statement.
18-17. To property count cash on hand, the auditor should (1) control all cash and negotiable
instruments held by the client until all funds have been counted, (2) insist that the custodian
of the cash be present throughout the count, (3) obtain a signed receipt from the custodian on
return of the funds to the client, and (4) ascertain that all undeposited checks are owned by
the client either directly or through endorsement.
18-18 a.
b.
Lapping is usually associated with collections from customers, but it may also
involve other types of cash receipts. Conditions conducive to lapping exist when an
individual who handles cash receipts also maintains the accounts receivable ledger.
18-19. a.
The information requested in confirming bank deposit and loan balances consists of
(1) deposit balances, (2) loan balances, and (3) other deposit and loan accounts that
may have come to the attention of the authorized bank official.
b.
18-20. a.
b.
18-21. a.
Tests to detect lapping are only performed when control risk for cash receipts
transactions is moderate or high. There are three procedures that should detect
lapping:
o Confirm Accounts Receivable.
o Make a Surprise Cash Count.
o Compare Details of Cash Receipts Journal Entries with the Details of
Corresponding Daily Deposit Slips.
In an effort to conceal the shortage, the embezzler usually attempts to (1) keep bank
and book amounts in daily agreement so that a bank reconciliation will not detect the
irregularity and (2) correct the customers account within three to four days of actual
collection so that any discovered discrepancy in the customers account can be
explained as a delay in receiving the money or posting.
This test provides evidence primarily for the existence or occurrence and rights and
obligations assertions for cash balances. It contributes to the completeness assertion
but it cannot be relied upon entirely because the respondent is not required to search
bank records for deposit and loan balances other than the ones listed on the request.
A compensating bank balance is the minimum balance the depositor must maintain
to have an established line of credit with a bank.
18-6
b.
The auditor's primary source of evidence for compensating bank balances is obtained
from confirming other arrangements with banks. The primary assertion related to
compensating bank balances is presentation and disclosure.
18-22. When the acceptable level of detection risk is high, the auditor may scan the client prepared
bank reconciliation and verify its mathematical accuracy. If detection risk is moderate, the
auditor may review the client's reconciliation. A review includes vouching reconciling items
to supporting documentation, and investigating old and unusual items. When the acceptable
level of detection risk is low, the auditor may prepare the bank reconciliation using bank
data in the client's possession. When detection risk is very low, the auditor may obtain the
bank statement directly from the bank for use in preparing the bank reconciliation.
18-23. a.
b.
The bank cutoff statement should be obtained at a point in time that will permit the
outstanding checks to clear the bank, and the cutoff statement should be obtained by
the auditor directly from the bank..
After receiving the cutoff bank statement, the auditor should:
Trace all prior-year dated checks to the outstanding checks listed on the bank
reconciliation.
Trace deposits in transit on the bank reconciliation to deposits on the cutoff
statement
Scan the cutoff statement and enclosed data for unusual items.
18-24. Examples of circumstances that affect the presentation and disclosure assertion for cash
include the existence of (a) a bond sinking fund that should be classified as a noncurrent
asset, (b) disclosure of arrangements with banks, and (c) a bank overdraft that should be
reported as a current liability. The auditor should review the minutes of board of directors
meetings as well as make inquiry of management as to restrictions on the use of cash
balances.
Comprehensive Questions
18-25. (Estimated time - 25 minutes)
a.
18-7
b.
The substantive tests that would detect the irregularity are (1) inspect and count
securities on hand, (2) vouch entries in investment accounts, and (3) recalculate
revenue earned.
3.
4.
5.
6.
7.
8.
9.
10.
b. Financial Statement
Assertion
Valuation of allocation
All assertions
c. Type of
Evidence
Mathematical
Documentary
Existence or occurrence,
completeness, rights and
obligations
All except rights and
obligations
All assertions
Confirmation
Physical, documentary
Valuation or allocation
Mathematical
Documentary
Documentary
Physical, documentary
Documentary
Documentary
18-8
b.
The CPA would accept a confirmation of the securities on hand from the custodian in
lieu of personally inspecting and counting the securities after investigating and
satisfying him or herself as to the standing of the custodian. The CPA would
probably be satisfied upon finding the custodian to be a well-known, reliable
financial institution, completely independent of the client and with resources
substantially larger in amount than the securities of the CPA's client that are on
deposit. Furthermore, to be acceptable as accounting evidence, the confirmation
should be delivered directly to the CPA by the custodian without passing through the
client's hands. The confirmation should contain a statement to the effect that
securities were the property of the depositor on a specified date. In examining the
investment account and the custodian's detailed statements, the CPA would expect to
find few, if any, errors made by the custodian; the discovery of errors on the part of
the custodian would cast serious doubt on the reliability of the confirmation.
18-9
c.
The CPA would recommend that full disclosures be made in a footnote of the sale
and repurchase of the securities so that readers of the financial statements will have
adequate information to compare the current report with reports for prior years. The
gain on the securities transactions would be reported in the income statement on a
separate line after the results of operations for the year. The loss on operations for the
year must be clearly set forth in the income statement so that readers can make
meaningful comparisons with prior years. The securities should be reported in the
balance sheet at their new cost or repurchase price. The sale of the securities resulted
in cash that could have been used to purchase other securities or in other ways. That
management had planned to repurchase the same securities does not alter the fact
that alternative uses for the cash existed. If the cash had been used to buy other
securities, these new securities would have been recorded at their cost--the cash
expended to acquire them. The same treatment should be accorded to the actual
transactions.
18-10
Not all amounts (for example, loss on sale of R) were traced to the general
ledger.
Substantive Test
1) Obtain an understanding of the business and industry and determine:
a) The significance of cash balances and transactions on the entity.
b) The entitys policies for forecasting cash balances and investing surplus cash balances.
2) Perform initial procedures on cash balances and records that will be subjected to further testing.
a) Trace beginning balance for cash on hand and in bank to prior years working papers.
b) Review activity in general ledger accounts for cash and investigate entries that appear unusual in
amount or source.
c) Obtain client-prepared schedules of cash on hand and in bank, verify mathematical accuracy and
determine agreement with general ledger.
Analytical
Procedures
Tests of
Details of
Transactions
Tests of
Details of
Balances
Presentation
and
Disclosure
18-11
$18,901.62
100.00
$19,001.62
$15,550.00
$116.25
150.00
253.25
190.71
206.80
145.28
1,062.29
14,487.71
$ 4,513.91
3,794.41
$ 719.50
b.
c.
18-12
18-13
From
C--Reg
C--Reg
C--Reg
M--Spec
M--Spec
C--Reg
To
C--Pay
C--Pay
M--Spec
C--pay
C--Reg
M--Spec
Amount
of
Check
$100,000
200,000
100,000
50,000
25,000
125,000
Disbursement
Date
Books
6/23
6/25
6/28
6/29
6/30
7/1
Bank
6/30
7/2
7/5
7/6
7/7
7/5
Receipt
Date
Books
6/25
6/27
6/30
7/1
7/2
6/30
Bank
6/25
6/27
6/30
7/1
7/2
6/30
18-14
c.
City Bank--Payroll
Bank Clearing (Due to Metro Bank--Special)
50,000
City Bank--Regular
Bank Clearing (Due to Metro Bank--Special)
25,000
50,000
25,000
125,000
125,000
d.
e.
Check 3402 is indicative of kiting because the check was received, recorded, and
deposited on June 30, but was not recorded as a disbursement until July 1.
Cases
18-34. (Estimated time - 50 minutes)
a. and b.
18-15
This case study contains information for a discussion of audit procedures for investment
securities and related income in a situation involving strong internal controls. Thus,
recognition of the effect of such controls on the nature, timing, and extent of resulting
substantive tests is essential. The solution provides for an evaluation of the appropriateness
of each procedure in the order in which they are presented in the audit program.
U.S. Government securities
o Prepare schedule of securities. Inappropriate. The schedule should be prepared by the
client. the auditor should only verify the accuracy of the schedule and compare it with
the ledger balance. This audit test relates to the valuation or allocation objective.
o Obtain direct confirmation from Utah Banking. Appropriate. The assertions are existence
or occurrence, completeness, and rights and obligations.
o Trace confirmations to schedules. Appropriate. Assertions are the same as (2).
o Verify interest earned and accrued. Appropriate. However, test only needs to be done on
a limited basis because of internal control. Assertions are existence or occurrence,
completeness, rights and obligations, and valuation or allocation.
o Trace appropriate totals to general ledger. Appropriate. Assertion is valuation or
allocation.
Available-for-sale securities
o Prepare analysis, including market values. Inappropriate. This information should be
provided by the client. The auditor should verify accuracy of schedule and some market
values. Assertion is valuation or allocation.
o Count securities at December 31. Appropriate. In principal, the count is necessary to meet
the existence or occurrence, completeness, and rights and obligations assertions. However,
the count may be made at any time close to December 31. The program fails to specify
that the auditor should determine whether or not the securities have been endorsed to
other parties.
o Vouch purchases and sales. Appropriate. However, this only needs to be done on a select
basis. Assertions are existence or occurrence, rights and obligations, and valuation or
allocation.
o Compare dividends received with published dividend record. Appropriate, if done on a
test basis. Assertions are existence or occurrence, completeness, rights and obligations,
and valuation or allocation.
o Verify recorded gain on sale. Appropriate. This ordinarily is done as part of vouching
purchases and sales. Because of strong internal control, only material gains or losses
need to be verified. Assertions are the same as for vouching purchases and sales.
Investment in 60% owned subsidiary
o Request confirmation. Appropriate. This is necessary to meet the existence or
occurrence, completeness, and rights and obligations assertions.
o Review monthly statements, etc. Inappropriate. The subsidiary investment is carried at cost.
The main concern here is to determine whether management can justify using this
method, since it is contrary to the presumption stated in APB No. 18. If no justification,
the client should change method or auditor should qualify the audit report.
18-16
Other points
o The program does not require the auditor to apply analytical procedures on the
investment accounts. This substantive test is important in meeting the existence or
occurrence, completeness, valuation or allocation, and presentation and disclosure
assertions.
o The program does not require the auditor to determine the propriety of the statement
presentation and disclosure, including the proper classification of the investment
securities as trading, available-for-sale, held-to-maturity, or equity method investments.
This should be done by making appropriate inquiries of management to learn
management's intent regarding holding periods, assessing its abilities regarding holding
periods, and comparing the financial statement presentation to GAAP, including the
treatment of any realized and unrealized gains and losses due to changes in market value.
The auditor may learn of the existence of any liens from an inspection of the minutes
book and by inquiry of management.
Professional Simulations
Research
Situation
Audit
Planning
Audit
Procedures
AU 332,57 and .58 addresses how the auditor should obtain to evaluate assertions about securities
based on managements intent and ability. These paragraphs are presented below.
56
Generally accepted accounting principles require that managements intent and ability be
considered in valuing certain securities; for example, whether
Debt securities are classified as held-to-maturity and reported at their cost depends
on managements intent and ability to hold them to their maturity.
Equity securities are reported using the equity method depends on managements
ability to significantly influence the investee.
18-17
.57
18-18
Audit
Planning
Research
Situation
Audit
Procedures
To:
Audit File
Re:
Staff Training for Audit of Cash Balances
From: CPA Candidate
The following table contrasts the audit of cash balances when the client has good controls over cash
balances vs. having poor controls over cash balances.
Good Internal Controls over
Cash Transactions and Cash Balances
When control risk is low (and detection risk is high), the
auditor may scan the client-prepared bank reconciliation
and verify the mathematical accuracy of the reconciliation.
If detection risk is moderate, the auditor may review the
clients bank reconciliation more carefully. The review
will normally include
Comparing the ending bank balance with the balance
confirmed on the bank confirmation form
Verifying the validity of deposits in transit and
outstanding checks
Establishing the mathematical accuracy of the
reconciliation
Vouching reconciling items such as bank charges and
credits and errors to supporting documentation
Investigating old items such as checks outstanding for
a long period of time and unusual items
18-19
Audit
Procedures
Research
Situation
Audit
Planning
The following table explains the auditing procedures that should be performed associated with the
legend identified as a) through i).
Legend
a)
b)
c)
d)
e)
f)
g)
h)
i)
Audit Procedure
Agreed bank cutoff statement received directly from the bank.
Vouched to bank cutoff statement. Cash receipts journal show deposit in December of
20X3 and bank cutoff statements shows deposit per bank in January 20X4.
Vouched to bank cutoff statement. The check was dated prior to December 31, 20X3
and it check cleared the bank in January 20X4.
NSF check vouched to bank documentation accompanying the return of the customers
check.
Bank charges vouched to bank statement received in January 20x4.
Check number was recorded in error. Vouched to actual check that cleared the bank,
bank statement, and cash disbursements journal.
Vouched to remittance advice received from the bank with notification of collection of
note from customer.
Traced to general ledger at December 31, 20x4.
foot
18-20