- Henry Mills is responsible for preparing checks, recording cash disbursements, and preparing bank reconciliations for Signet Corporation. While reconciling the October bank statement, Mills noticed that several checks totaling $9,370 had been outstanding for more than one year. Concluding that these checks would never be presented for payments, Mills prepared a check for $9,370 payable to himself, forged the treasurer’s signature, and cashed the check. Mills made no entry in the accounts for this disbursement and attempted to conceal the theft by destroying the forged check and omitting the long-outstanding checks from subsequent bank reconciliations.
ANSWER
- Identify the weaknesses in Signet Corporation’s internal control.
b. Explain several audit procedures that might disclose the fraudulent disbursement.
- Based on an assessment of audit risk, the auditors are concerned with the following two risks:
- The risk that that the client might be making duplicate payments to vendors.
- The risk that the client’s accounting clerk might be making unauthorized payments to himself.
ANSWER
- Assuming that the client has a manual accounting system, describe how the auditors can design a test to identify the duplicate payments and unauthorized payments.
- Assuming that the client has an IT accounting system, describe how the auditors might use data analytic software to design a test to identify the duplicate payments and the unauthorized payments.
- Describe the advantages of using data analytics software to identify unusual transactions or entries.
- Read the case and answer the questions that follow.
Audit standards require analytical procedures at two stages during the audit: at the risk assessment (planning) phase and again at the end of the audit. They are optionally used as a substantive procedure during the course of an audit.
CONCEPT REVIEW:
Often times it does not seem to be productive or effective for auditors to send accounts receivable confirmations, yet the standards require it. It is important that auditors understand how to maximize effectiveness and efficiency in this required audit procedure.
Read the case. Then answer the questions based on it.
BACKGROUND:
Audit standards indicate that there is a presumption that auditors will confirm accounts receivable unless the balance is immaterial, confirmations are deemed ineffective, or the auditors’ assessment of risk is low and other procedures will achieve the same objective. However, these instances are considered few and far between and current trends in auditing indicate that there is an expectation that accounts receivable will be confirmed. Auditors may stratify the population, use haphazard or judgmental sampling, and send positive or negative requests.
Jenner & Jenner CPAs are the auditors for the Leno Company. In reviewing the accounts receivable aging, the auditors learn that there is a high number of accounts with balances, there are some very large and very small balances, and many customers’ balances consist of multiple invoices.
- Should Jenner & Jenner CPAs send accounts receivable confirmations?
2. How should the auditors mitigate the risk associated with both very large and very small balances?
3. Because so many customer balances consist of multiple invoices, what could the auditors do to eliminate unnecessary reconciliation?
4. What procedures can be performed on customers who do not respond?
- For each of the procedures described in the table below, identify the audit procedure performed and classification of the audit procedure using the following: (Each of the “Audit Procedures” and “Classification of Audit Procedure” may be used once, more than once, or not at all.)
