Objectives 18.3 And 18.4 In Testing Cash Disbursements For T
18 26 Objectives 18 3 18 4in Testing Cash Disbursements For The Jay
In testing cash disbursements for the Jay Klein Company, you obtained an understanding of internal control. The controls are reasonably good, and no unusual audit problems arose in previous years. Although there are not many individuals in the accounting department, there is a reasonable separation of duties in the organization. There is a separate purchasing agent responsible for ordering goods and a separate receiving department that counts the goods upon receipt and prepares receiving reports. There is a separation of duties between recording acquisitions and cash disbursements, and all information is recorded in the two journals independently.
The controller reviews all supporting documents before signing the checks, and he immediately mails the checks to the vendors. Check copies are used for subsequent recording. All aspects of internal control seem satisfactory, and you perform minimum tests of 25 transactions as a means of assessing control risk. During these tests, you discover several exceptions that need further investigation.
Paper For Above instruction
The task involves analyzing specific exceptions discovered during testing cash disbursements, identifying their impact on internal controls and audit objectives, and recommending follow-up procedures. This analysis is critical in assessing the adequacy of internal controls and the risk of material misstatement in the financial statements of the Jay Klein Company.
Analysis of Exceptions
1. Duplicate Payment of an Invoice: The payment of an invoice twice, supported by a duplicate invoice marked “paid,” could indicate a control failure in invoice review or duplicate detection. This could be a control test deviation if controls intended to prevent duplicate payments are ineffective, and it may also cause a monetary misstatement if the duplicate payment results in overpayment.
2. Misclassification in Acquisition Journal: Two items being misclassified signifies a breakdown in proper recording or classification controls within the acquisition process. This is primarily a control test deviation, but if it leads to incorrect financial reporting, it could also cause a monetary misstatement.
3. Controller’s Lack of Initials: The absence of the controller’s initials on three invoices, despite the lack of dollar misstatements, indicates a control weakness in supervisory review. It is a control test deviation, though the monetary impact appears limited in this case.
4. Delayed Recording of Receiving Reports: Recording five receiving reports at least two weeks late suggests an internal control failure in timely recording of transactions, which could lead to inaccurate cutoff and timing issues, affecting both control assessment and financial accuracy.
5. Missing Receiving Reports and Invoice Extension Error: Missing documentation coupled with an invoice extension error and questionable verification by initials exposes control deficiencies in document completeness and accuracy. These issues could both be control deviations and potentially lead to material misstatement.
6. Incorrect Check Amount: A discrepancy where a check issued was for less than the invoice amount indicates a control failure in payment authorization or verification, presenting a risk of monetary misstatement.
7. Missing Voided Check: The absence of a voided check reflects inadequate control over voided transactions, which could facilitate misuse or error, impacting internal controls and potentially financial accuracy.
Control Test Deviations, Audit Objectives, and Audit Significance
| Exception | Control Test Deviation | Monetary Misstatement | Audit Objective Not Met | Audit Importance | Follow-up Procedures | Impact on Audit | Internal Controls Preventive Measures |
|---|---|---|---|---|---|---|---|
| 1 | Yes | Yes | Existence, Cutoff | Potential overstatement; indicates risk of duplicate payments and overpayment | Review all duplicate invoices, check payment documentation, verify duplicates | Increases audit risk; may lead to adjustments or fraud suspicion | Invoice verification controls, duplicate detection system |
| 2 | Yes | Potentially | Classification, Accuracy | Misclassification affects financial statement accuracy | Examine classification criteria, verify classification with supporting documents | Could distort financial ratios, audit conclusions | Proper classification policies, review procedures |
| 3 | Yes | No | Authorization, Review | Supervisory control weakness; minor monetary impact but affects controls | Request initials or supervisory approval retrospectively | Reveals weaknesses; possible oversight in approval process | Mandatory initials on invoices, supervisory sign-offs |
| 4 | Yes | Potential | Completeness, Timing | Late recording may affect cutoff and financial reporting | Trace delayed reports to source documents and dates | Impact on financial period reporting, possible understatement | Immediate recording upon receipt, review of timing controls |
| 5 | Yes | Potential | Existence, Completeness | Missing reports impair audit trail; errors affect accuracy | Request missing reports, verify invoice details and extensions | Increases audit risk, potential misstatement | Document retention policies, complete documentation protocols |
| 6 | Yes | Yes | Accuracy, Valuation | Incorrect payment amount affects financial statements | Reconcile check amounts with invoice and supporting documents | Possible over/under payment, audit adjustments needed | Verification procedures for payment amounts |
| 7 | Yes | No | Authorization, Documentation | Void check missing; potential for misuse or fraud | Locate voided check, review voiding process | Potential misappropriation; internal control weakness | Strict voiding procedures, records of voided checks |
Conclusion
The identified exceptions reveal areas where internal controls may be weakened, leading to increased risk of misstatements or fraudulent activity. Proper follow-up procedures, such as detailed transaction reviews and control enhancements, are necessary to address these issues. Strengthening controls related to invoice verification, documentation retention, timely processing, and authorization can significantly improve internal control robustness and accuracy of financial reporting. Addressing these exceptions is essential for ensuring the reliability of the audit evidence, achieving audit objectives, and maintaining the integrity of the company’s financial statements.
References
- Arens, A. A., Elder, R. J., & Beasley, M. S. (2017). Auditing and Assurance Services (16th ed.). Pearson.
- Rittenberg, L., Johnstone, K., & Gramling, A. (2020). Auditing: A Risk-Based Approach (10th ed.). Cengage Learning.
- Whittington, R., & Pany, K. (2019). Principles of Auditing & Assurance. McGraw-Hill Education.
- United States Government Accountability Office (GAO). (2017). Standards for Internal Control in the Federal Government (Green Book). https://www.gao.gov/assets/700/690935.pdf
- Public Company Accounting Oversight Board (PCAOB). (2020). Auditing Standard No. 5. https://pcaobus.org/Standards/Pages/Auditing_Standard_Standard.aspx
- International Federation of Accountants (IFAC). (2018). International Standards on Auditing (ISA) 330, The Auditor's Responses to Assessed Risks. https://www.ifac.org/publications-resources/international-standards-auditing
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