The following are misstatements that might be found in the client's year-end cash balance (assume that the balance sheet date is June 30):
1.The outstanding checks on the June 30 bank reconciliation were underfooted by $2,000.
2.A loan from the bank on June 26 was credited directly to the client's bank account. The loan was not entered as of June 30.
3.A check was omitted from the outstanding check list on the June 30 bank reconciliation. It cleared the bank July 7.
4.A check was omitted from the outstanding check list on the bank reconciliation. It cleared the bank September 6.
5.Cash receipts collected on accounts receivable from July 1 to July 5 were included as June 29 and 30 cash receipts.
6.A bank transfer recorded in the accounting records on July 1 was included as a deposit in transit on June 30.
7.A check that was dated June 26 and disbursed in June was not recorded in the cash disbursements journal, but it was included as an outstanding check on June 30.
Required
a. Assuming that each of these misstatements was intentional (fraud), state the most likely motivation of the person responsible.
b. What control can be instituted for each fraud to reduce the likelihood of occurrence?
c. List an audit procedure that can be used to discover each fraud.
The following are commonly performed tests of controls and substantive tests of transactions audit procedures in the sales and collection cycle:
1. Account for a sequence of shipping documents and examine each one to make sure that a duplicate sales invoice is attached.
2. Account for a sequence of sales invoices and examine each one to make sure that a duplicate copy of the shipping document is attached.
3. Compare the quantity and description of items on shipping documents with the related duplicate sales invoices.
4. Trace recorded sales in the sales journal to the related accounts receivable master file and compare the customer name, date, and amount for each one.
5. Examine sales returns for approval by an authorized official.
6. Review the prelisting of cash receipts to determine whether cash is prelisted daily.
7. Reconcile the recorded cash receipts on the prelisting with the cash receipts journal and the bank statement for a 1-month period.
Required
a. Identify whether each audit procedure is a test of control or a substantive test of transactions.
b. State which of the six transaction-related audit objectives each of the audit procedures fulfills.
c. Identify the type of evidence used for each audit procedure, such as inspection and observation.