9-1.The quoted statement is not accurate. In their work on cash, auditors are primarilyconcerned with the risk of an overstatementof the cash balance. The listing of anon-existent or fictitious check on the outstanding list would have the effect ofunderstating the client’s cash position, because too large an amount foroutstanding checks would be deducted from the balance per bank, resulting inunderstatement of the adjusted balance.The other element of the quoted statement relating to the auditors’ concern overthe possible omission of a deposit in transit is also in error. To omit a deposit intransit would cause an understatement of the year-end cash balance.If the quoted statement were revised into acceptable form, it would read along thefollowing lines: “When auditors are verifying a client’s bank reconciliation, theyare particularly concerned with the possibility that an outstanding check may beomitted or that a non-existent deposit in transit may be included.9-2.There is no assurance that the lapping activities of the cashier will be discoveredduring the annual audit. Since no shortage exists as of the statement of financialposition, the only procedure which might disclose the irregularities would be acomparison of the individual checks listed on duplicate deposit tickets with thecredits to customers’ accounts. Since a test of this nature would probably not bemade for more than a small sample of control listings it is likely that the“borrowing” and subsequent restoration of borrowed funds might go undetected.9-3.(a)“Lapping” is a defalcation in which a cash shortage is concealed by delayingthe crediting of cash receipts to the proper accounts receivable. The first stepin the fraud is to withhold from a bank deposit cash remitted by a customer.A few days later, because the customer must receive credit for his remittance,the first customer’s account is credited with an amount from a remittancemade by a second customer. The process requires the continuous shifting ofshortages from account to account and the crediting of subsequent receipts tothe wrong account receivable. (b)The following audit procedures would be used to uncover lapping: (1)Compare the detail of mailroom control listings (if prepared) to entries inthe cash receipts journal, postings to the accounts receivable subsidiaryledger, and the detail of authenticated duplicate deposit slips. ThisCHAPTER9SUBSTANTIVE TESTS OF CASH
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