18-31 (Substantive tests for cash balances)

| June 8, 2016

Question
18-31(Substantive tests for cash balances)

You are the in-charge accountant examining the financial statements of the Gutzler Company for the year ended December 31, 20X0. During late October 20X0, you, with the help of Gutzler’s controller, completed an internal control questionnaire and prepared the appropriate memoranda describing Gutzler’s accounting procedures. Your comments relative to cash receipts are as follows:

All cash receipts are sent directly to the accounts receivable clerk with no processing by the mail department. The accounts receivable clerk keeps the cash receipts journal, prepares the bank deposit slip in duplicate, posts from the deposit slip to the subsidiary accounts receivable ledger, and mails the deposit to the bank. The controller receives the validated deposit slips directly (unopened) from the bank. He also receives the monthly bank statement directly (unopened) from the bank and promptly reconciles it. At the end of each month, the accounts receivable clerk notifies the general ledger clerk by journal voucher of the monthly totals of the cash receipts journal for posting to the general ledger.

Each month, with regard to the general ledger cash account, the general ledger clerk makes an entry to record the total debits to cash from the cash receipts journal. In addition, the general ledger clerk on occasion makes debit entries in the general ledger cash account from sources other than the cash receipts journal (e.g., funds borrowed from the bank).

In the audit of cash receipts you have already performed certain of the standard auditing procedures listed below. The extent to which these procedures were performed is not relevant to the question.

1. Total and cross-total all columns in the cash receipts journal.

2. Trace postings from the cash receipts journal to the general ledger.

3. Examine remittance advices and related correspondence to support entries in the cash receipts journal.

Required

Considering Gutzler’s internal control over cash receipts and standard auditing procedures already performed, list all other auditing procedures and reasons therefore which should be performed to obtain sufficient audit evidence regarding cash receipts. Do not discuss the procedures for cash disbursements and cash balances. Also do not discuss the extent to which any of the procedures are to be performed. Assume adequate controls exist to assure that all sales transactions are recorded. Organize your answer sheet as follows:

Other Audit Procedures

Reasons for Other Audit Procedures

Sources of debit entries in general ledger cash account, other than from cash receipts journals, should be investigated and supporting documents examined

Since the auditor, using standard procedures, only examines the cash receipts journal, he or she must investigate the validity of all other sources of cash receipts which are not recorded in these journals

Prior to the accounts receivable clerk receiving the cash receipts, the auditor could perform a surprise examination by making a list of the items without the clerk’s knowledge. Un-deposited mail receipts can be controlled after the preparing and positing of the deposit to the subsidiary accounts receivable ledger and the deposit slip should be totaled and compared to the remittances and the list for accuracy. Each item on the deposit slip can be traced back to the subsidiary accounts receivable ledger to determine accuracy and the auditor should ask Gutzler to have the bank send the statement containing that deposit directly to the auditor.

There are no established initial controls over cash receipts prior to the time that the accounts receivable clerk obtains the cash, so a surprise examination can be used to determine if the cash receipts are being recorded and deposited properly.

Postings from other deposit slips should be traced to the cash receipts journal and the subsidiary accounts receivable ledger and entries in the subsidiary accounts receivable ledger should be traced to the cash receipts journal and to the deposit slips

Because no segregation of duties exists between cash receipts and accounts receivable, the accounts receivable clerk may have made errors when posting entries or the lapping of accounts could have occurred. Performing this procedure may help the auditor disclose any errors or wrong doing.

Review the subsidiary accounts receivable ledger to look for late payments or abnormal transaction activity.

With noseparation of duties between cash receipts and accounts receivable the accounts receivable clerk could have been careless in performing posting duties. This procedure may also disclose whether the accounts receivable clerk may have been lapping the accounts

Discounts and discount periods should be checked If Gutzler offers this benefit to his customers.

Again, with no separation of duties between cash receipts and accounts receivable, the accounts receivable clerk may have misappropriated discounts which may or may not have been given or taken.

Cash receipt journals should be compared by date and amount with daily deposits per bank statements. Working papers showing proof-of-cash should be prepared, which reconciles total cash receipts with credits per bank statements and the controller should compare the opening and closing reconciliation of the proof of cash to the comparable reconciliation.

Timeliness of the deposits of daily receipts should be verified to ensure that there are no errors and that cash receipts are being deposited on time. This is especially important because there are no initial controls over cash receipts established prior to the time the accounts receivable clerk obtains the cash.

Determine that the appropriate cutoff of cash receipts has been made by visiting the client on the balance sheet date or the next business day.

This procedure should satisfy the auditor that the cash receipts are being recorded in the appropriate period.

Scan the cash receipts journal and bank statements for unusual items for the periods for which the above audit procedures were not performed and for a period after the balance sheet date.

Because of the weakness in internal control over cash receipts, the auditor should perform these tests to help substantiate that all material items not covered during other tests have been investigated.

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