(3) Confirm accounts receivable and give close attention to exceptions made by customers about payment dates. The confirmation procedure is better applied as a surprise at an interim date so that a person engaged in lapping will not have been able to bring the “lapped” accounts up to date. If the confirmations are always prepared at year-end, the confirmation procedure may be anticipated by the person doing the lapping and the shortage given a different form such as kiting of checks. (Confirmation of accounts receivables has not been discussed in this chapter, but some students may be familiar enough with this procedure to include it in their answer.) 9-4. West, Inc. The outstanding checks said by the controller to have been distributed after December 31 should be reversed to the extent that they were actually distributed after that date. An actual overdraft should be revealed and not eliminated by improper journal entries. The primary purpose of the reversal is to properly cut off the cash and show the proper cash balance. Showing the correct cash balance eliminates “window dressing”; recorded but undistributed checks would distort the current ratio by reducing both cash and accounts payable. 9-5. Evolution Building Supply (a) EVOLUTION BUILDING SUPPLY Comparison of Checks and Disbursements December 31, 2014 Checks returned or still outstanding: Returned in cutoff statement P25,220 Outstanding checks on 1/14 (P1,800 + P4,100) 5,900 P31,120 Disbursements per client records: Outstanding checks on 12/31 P10,379 Issued between 1/1 and 1/14 15,741 26,120 Excess of checks returned or outstanding over disbursements per client records P 5,000
Substantive Tests of Cash 9-3 (b) Possible explanations for the excess of checks returned or still outstanding over the disbursements indicated by the client's records include (only four required): (1) A check (or checks) may have been recorded at the wrong amount(s). The auditors should ascertain whether this is an isolated error or is indicative of poor recordkeeping procedures by the client. An adjusting entry should be proposed debiting the appropriate account(s) and crediting Cash for P10,000. (2) The client may have failed to record one or more cash disbursements. Unrecorded disbursements constitute a significant weakness in internal control. The auditors should determine how such errors (or manipulations) are able to occur and propose corrective action to the client. In addition, the auditors may request a second cutoff statement at a later date to determine the existence of any additional unrecorded disbursements. All unrecorded disbursements should be vouched to determine the appropriate financial statement presentation and an adjusting entry proposed debiting the appropriate accounts and crediting Cash. (3) Checks may have been omitted from the outstanding checks list on December 31, or the total of the list could be underfooted. Such an error would conceal a P10,000 cash shortage and raise suspicions of employee fraud. The auditors should call the matter to the attention of appropriate
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