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Unformatted text preview: Auditing Chapter 10 Homework 10-2 Give two reasons audit work on cash is likely to be more extensive than might appear to be justified by the relative amount of the balance sheet figure for cash? . Liabilities, revenue, expenses, and most other assets flow through the Cash account, they either arise from or are a result of a cash transaction and the amount of cash that flow through these accounts over a period of time can be substantial, not just what is reflected on the Balance Sheet at Year End. Cash is the most liquid of assets and offers the greatest temptation for theft, embezzlement, and misappropriation. Inherent risk is high for liquid assets, and auditors tend to respond to high-risk situations with more intensive investigation. 10-5 Explain how a lockbox system contributes to internal control over cash receipts ? A lockbox system is used because Businesses receiving a large volume of cash through the mail may use a lockbox system to strengthen internal control and hasten the depositing of cash receipts. It is a post office box controlled by the companys bank. The bank picks up mail at the post office box several times a day and credits the companys checking account for cash received, and sends the remittance advices to the company. 10-6 The auditors work on cash may include preparing a description of controls and performing tests of controls. Which of these two steps should be performed first? What is the purpose of the test of controls? Preparing a description of controls should be performed first because it will be important to understand what is to be selected for testing and the sample size for testing over the relative quality of the internal controls of cash receipts; cash receipt journals, receivable postings, deposit slip authentication and disbursements. The purpose of tests of controls it to be able to make determination as to the extent of the internal controls that are in use and if they are being used efficiently and effectively. 10-7 State one broad general objective of internal control over each of the following: cash receipts, cash disbursements, and cash balances ? 1. Cash receipts general objective is to determine that all cash that should have been received was in fact received and recorded correctly and timely. 2. Cash disbursements objective is that cash disbursements are made only by authorized personnel and documented correctly. 3. Cash balances objective is that all cash balances are maintained at an appropriate level that is not too low or too high and compared to sales projections and forecasts that determine the normal level of operations. 10-13 What information do CPAs request from a financial institution on the standard confirmation form? Confirmation of amounts on deposit by direct communication with financial institution officials is obtained in most audits. Account balances are confirmed with the standard confirmation form. This form is used primarily to corroborate the existence of recorded information, it can also be used to the discovery of additional...
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