client officials and determine whether the client wishes to have the auditors investigate further. The appropriate adjusting entry would recognize a loss and reduce the overstated cash balance. (4) The cash disbursements journal may be underfooted for the first part of January. The auditors should prove the footings and, if an error exists, propose an adjusting entry debiting the appropriate account and crediting Cash. (5) The amount of a check may have been raised by the payee. The auditors should call this alteration to the attention of the client and propose an adjusting entry recognizing a loss and crediting Cash. (The prospects for recovering stolen funds seldom justify recording a receivable.) (6) The bank may have charged the bank account with a check drawn on another account. The auditors should advise the client to notify the bank of the error; no adjusting entry is necessary. (7) A stop payment order may have been ignored by the bank. Again, this is a bank error and no adjusting entry is necessary.
9-4 Solutions Manual to Accompany Applied Auditing, 2014 Edition 9-6. SPF Co. Transfer Understated, Overstated or Correct Example (many others are possible) a. Correct Book entries : The transfer was recorded in the accounting records as a check written on the disbursing bank on December 29 and a corresponding cash receipt recorded to receiving bank on that date. Bank entries : The check was taken to the receiving bank on December 29 and deposited. The accounts are both in the same bank, and accordingly the transaction was recorded in both accounts as of that date. b. Correct Book entries: On December 30 a check was written on the disbursing bank, recorded as a cash disbursement in the cash disbursements records and recorded as a receipt in the cash receipts records. Bank entries: The check was deposited in the receiving bank the next day, December 31. On January 2, the check was received by the disbursing bank. c. Understated Book entries: On December 31 a check was written on the disbursing bank to transfer cash to the receiving bank. The journal entry made, however, was to credit cash and debit an expense account (to fraudulently decrease 2016 profits-- perhaps to decrease taxes) rather than to debit cash in the receiving bank. On January 2, an entry was made to debit cash for the transfer and to credit a revenue account to correct the 2016 misstatement, and to overstate the 2017 profits. Bank entries: The check was deposited in the receiving bank on January 2. On January 4, the check was received by the disbursing bank. d. Correct Book entries: On December 31 a check was written on the disbursing bank, recorded as a cash disbursement in the cash disbursements records and recorded as a receipt in the cash receipts records. The check was mailed to the receiving bank.
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