Testing Cash Disbursements For The Jay Klein Company

Testing Cash Disbursements For The Jay Klein Company

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 who is responsible for ordering goods and a separate receiving department that counts the goods when they are received 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 to you, and you perform minimum tests of 25 transactions as a means of assessing control risk. In your tests, you discover the following exceptions:

1. One invoice was paid twice. The second payment was supported by a duplicate copy of the invoice. Both copies of the invoice were marked “paid.”
2. Two items in the acquisitions journal were misclassified.
3. Three invoices were not initialed by the controller, but there were no dollar misstatements evident in the transactions.
4. Five receiving reports were recorded in the acquisitions journal at least 2 weeks later than their date on the receiving report.
5. Two receiving reports for vendors’ invoices were missing from the transaction packets. One vendor’s invoice had an extension error, and the invoice was initialed that the amount had been checked.
6. One check amount in the cash disbursements journal was for $100 less than the amount stated on the vendor’s invoice.
7. One voided check was missing.

Paper For Above instruction

Below is an analysis of each exception identified during the audit, focusing on whether it constitutes a control test deviation, a monetary misstatement, or both, along with the implications and necessary follow-up procedures.

1. One invoice was paid twice, with a duplicate invoice marked “paid.”

This situation represents both a control test deviation and a monetary misstatement. The control failure lies in the lack of effective verification procedures to prevent duplicate payments — a weakness in the controls designed to ensure payment accuracy. The monetary misstatement arises from the double payment, resulting in an overstatement of expenses and potential cash flow distortion.

The key transaction-related objective not met is the accuracy and validity of payments. This exception is significant because it directly affects the integrity of cash disbursement controls and could lead to substantial financial loss if unresolved. Follow-up procedures should include tracing the duplicate payment back to supporting documents, reviewing the payment process for gaps, and confirming whether the duplicate invoice has been processed elsewhere.

This exception undermines the reliability of the accounts payable process, increases the risk of financial misstatement, and warrants a review of internal controls surrounding invoice verification and payment approval.

2. Two items in the acquisitions journal were misclassified.

Misclassification pertains primarily to control test deviation, as it indicates a weakness in the classification controls designed to ensure proper recording of transactions. It does not directly cause a monetary misstatement unless the classification results in significant misreporting.

The relevant transaction-related objective is the proper presentation and classification in the financial records. This misclassification could obscure the true nature of expenses or assets and hinder accurate financial analysis. Follow-up should involve reviewing the specific journal entries and source documents to determine why misclassification occurred and whether it reflects a systemic control weakness.

While the immediate monetary impact may be limited, persistent misclassification could lead to financial statement inaccuracies, emphasizing the need for stronger controls over journal entry classification.

3. Three invoices were not initialed by the controller, but no dollar misstatements were evident.

This indicates a control test deviation, highlighting procedural weaknesses such as lapses in supervisory reviews. Since no monetary misstatements occurred, the risk of financial error from these invoices appears minimal, but the control deficiency could allow errors or fraud to go unnoticed.

The control objective not fully met is the authorization and review of expenditures. To address this, follow-up procedures include examining the nature of these invoices, assessing why they were uninitialed, and reviewing whether similar lapses exist elsewhere. Strengthening supervisory review protocols would mitigate future risks.

This control lapse could potentially allow errors or fraudulent activity to go unchecked, which underscores the importance of adherence to review procedures.

4. Five receiving reports recorded at least 2 weeks later than their report dates.

This is primarily a control test deviation, indicating weaknesses in timely record-keeping and reconciliations. It does not directly cause monetary misstatements but affects the accuracy and completeness of records.

The transaction-related objective is the completeness and cutoff of transactions. Follow-up should involve confirming the reasons for delays, assessing whether delayed recording affects the accuracy of the current period’s liabilities, and evaluating if corrective measures are needed to ensure prompt recording.

Persistent delays could result in inaccurate period-end financial statements and obscure the true financial position, emphasizing the need for improved record-keeping controls.

5. Missing receiving reports, and invoice extension errors, with initialed invoices indicating checks.

The missing reports signify a control test deviation, perhaps indicating lapses in document control or review procedures, while the invoice extension error could reflect a control weakness in verification processes affecting monetary accuracy.

Transaction objectives affected include completeness (missing reports) and accuracy (extension error). Follow-up should involve locating the missing reports, understanding why they were omitted, and reviewing the invoice calculation procedures to prevent future errors, alongside verifying that all received goods are correctly documented and recorded.

Failure to detect these issues could lead to understated liabilities and distortions in reported expenses, affecting the overall reliability of financial reporting.

6. One check was for $100 less than the invoice amount.

This represents a monetary misstatement, possibly caused by errors in issuing checks or recording payments. It could also be a control deviation if proper review of the invoice and check amounts was not completed.

The relevant objective not met is the accuracy of disbursement recordings. Follow-up should include tracing the payment back to supporting documentation, confirming the reason for the discrepancy, and reviewing internal procedures for verifying payment amounts.

This misstatement might lead to understated expenses or liabilities and suggests weaknesses in payment verification processes requiring rectification.

7. A voided check was missing.

The missing voided check signifies a control test deviation, indicating inadequate documentation procedures for canceled payments. It does not directly cause a monetary misstatement but could imply broader weaknesses in record controls.

The transaction objective affected is record completeness and proper documentation. Follow-up should involve verifying whether the voided check exists in other records, understanding why it is missing, and strengthening the documentation process for canceled checks.

Failure to maintain proper voided check records could compromise audit trail integrity and internal control effectiveness.

Impact on the Audit Process

Each of these exceptions affects the overall audit process by highlighting areas where internal controls may be inadequate, which could increase audit risk. Control deviations suggest a need for revising control procedures, training staff, or implementing additional review steps. Monetary misstatements, if undiscovered, could distort financial statements, requiring auditors to perform detailed substantive procedures to verify balances independently.

Proper follow-up procedures include tracing transactions to source documents, reviewing internal control policies, and performing analytical procedures to assess the financial data's reasonableness. Corrective actions should focus on strengthening controls around invoice review, documentation, timely recording, and reconciliation processes.

In conclusion, addressing these exceptions enhances the reliability and accuracy of the client's financial reporting and ensures compliance with internal control standards and auditing principles.

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