Chapter07 - answer.doc

8/14/2019 Chapter07 - answer.doc

1/17

7-1. The quoted statement is not accurate. In their work on cash, auditors are primarilyconcerned with the risk of an overstatementof the cash balance. The listing of a

non-existent or fictitious check on the outstanding list would have the effect of

understating the clients cash position, because too large an amount for

outstanding checks would be deducted from the balance per bank, resulting in

understatement of the adusted balance.

The other element of the quoted statement relating to the auditors concern over

the possible omission of a deposit in transit is also in error. To omit a deposit intransit would cause an understatement of the year-end cash balance.

If the quoted statement were revised into acceptable form, it would read along the

following lines! "#hen auditors are verifying a clients bank reconciliation, they

are particularly concerned with the possibility that an outstanding check may be

omitted or that a non-existent deposit in transit may be included.

7-2. There is no assurance that the lapping activities of the cashier will be discoveredduring the annual audit. $ince no shortage exists as of the balance sheet date, the

only procedure which might disclose the irregularities would be a comparison ofthe individual checks listed on duplicate deposit tickets with the credits to

customers accounts. $ince a test of this nature would probably not be made for

more than a small sample of control listings it is likely that the "borrowing% and

subsequent restoration of borrowed funds might go undetected.

7-3. &a' "(apping% is a defalcation in which a cash shortage is concealed by delaying

the crediting of cash receipts to the proper accounts receivable. The first step

in the fraud is to withhold from a bank deposit cash remitted by a customer.) few days later, because the customer must receive credit for his remittance,

the first customers account is credited with an amount from a remittance

made by a second customer. The process requires the continuous shifting of

shortages from account to account and the crediting of subsequent receipts to

the wrong account receivable.

&b' The following audit procedures would be used to uncover lapping!

CHAPTER

7SUBSTANTIVE TESTS

OF CASH


2/17

7-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition

&*' +ompare the detail of mailroom control listings &if prepared' to entries in

the cash receipts ournal, postings to the accounts receivable subsidiaryledger, and the detail of authenticated duplicate deposit slips. This

procedure should indicate any delay in ournaliing, posting, andor

depositing incoming cash receipts.

&' If control listings are not prepared, compare the remittance advices

received with customers checks to the cash ournal entries, postings to

accounts receivable, and deposit slips. If the client stamps remittance

advices with the date received, particular attention should be given to

comparing this date with the date of the related ournal entry and posting.

&/' +onfirm accounts receivable and give close attention to exceptions madeby customers about payment dates. The confirmation procedure is better

applied as a surprise at an interim date so that a person engaged in

lapping will not have been able to bring the "lapped% accounts up to date.

If the confirmations are always prepared at year-end, the confirmationprocedure may be anticipated by the person doing the lapping and the

shortage given a different form such as kiting of checks. &+onfirmation

of accounts receivables has not been discussed in this chapter, but some

students may be familiar enough with this procedure to include it in their

answer.'

7-4. West, Inc.

The outstanding checks said by the controller to have been distributed after

0ecember /* should be reversed to the extent that they were actually distributed

after that date. )n actual overdraft should be revealed and not eliminated by

improper ournal entries. The primary purpose of the reversal is to properly cut

off the cash and show the proper cash balance. $howing the correct cash balanceeliminates "window dressing%1 recorded but undistributed checks would distortthe current ratio by reducing both cash and accounts payable.

7-5. Cavite Company

Requirement (a) )dusting 2ournal 3ntries - *./*.45

)23 &*' 6as and oil /4

$upplies expense 740elivery expense /4

8epairs and maintenance 744)dvances to employees 944

:etty cash fund *,;44

&' )dvances to employees 44

:etty cash fund 44


3/17

Substantive ests o! "as# 7-3

&/' )ccounts receivable - cashier *44

:etty cash fund *44

$hortage in :+< determined as follows!

Accounting!+urrency : *,44

+oins 44

+heck *,944

=nreplenished vouchers *,;44

>$< check 44

Total 9,;44

:+< per ledger 5,444

$hortage : &*44'

&9' +ash in bank 954 $alaries payable 954

Requirement (b)

+avite +ompany

:etty +ash


4/17


?alance of $< checks

*.

0etermine reason why >$< checks are still on hand.

.

+onfirm directly with drawers.

d. 8eturn of excess travel advance

*

.

3xamine liquidation of travel advance as reported and determine

accuracy of the amount returned.

.

Aouch supporting invoices.

e. $ale of money orders

*

.

3xamine latest report of the :ampanga +o. to establish proper

accountability.

.

+onfirm directly with the :ampanga +o. all unreported money orders

sold as well as unissued as of >ovember *4.

f. Aouchers subsequently presented

* 3xamine vouchers as to date, approval, amount and nature of


5/17


. expenditures.

.

+onfirm directly with employees those items representing wageadvance.

g. ?ook balance of the :etty +ash


6/17


*;5 7; /,7@

?alance as adusted : /,;74

?alance per books : /9,B44

)dd! >ote collected by bank 544

Total /5,44

(ess! $hortage ,94

?alance as adusted : /,;74

Requirement (b) $hortage isP2,240.

Requirement (c)

The cashier attempted to conceal the shortage by!

&*' =nderstating the outstanding checks

&a' 3xcluding check E*; :*,494

&b' =nderfooting list of outstanding checks 44

&' )dding instead of deducting note collected by bank

thereby covering up *,444

Total :,94

Requirement (d)

$uggestions to improve internal control!

&*' ?ank reconciliation statement should be prepared by someone other than the

cashier.

&' +ollections should be deposited intact.

7-9. Jonas Company

)nalysis of the bank statement and cash account will reveal the following!

a. 0eposit in-transit, 2une /4!....................................... :,B44

b. +hecks outstanding!

E 7........................................................................... : ;44

E 7@........................................................................... *,/44 :,44

c. Interest earned on bank balance................................ : *44

?ank 8econciliation, 2une /4

?ank ?ook

3nding 2une balance............. :,5@4 3nding 2une balance............. :,;@4


7/17


0eposits in-transit................. ,B44 Interest earned....................... *44

+hecks outstanding!E7................................. &;44'

E7@................................. &*,/44'

+orrect cash balance............. :/,4@4 :/,4@4

The following ournal entry must be made by 2onas +ompany!

+ash.................................................................................. *44

Interest revenue................................................. *44

7-10. Apple Company

Requirement ($)

&a' 0eposits in-transit C )ll deposits &E5* through E57' e'ceptE57 have beenrecorded by the bank1 therefore, the deposit in-transit is! E57, :/,544. This

amount can be verified as! :,444 F :*;4,444 C :*@@,544 G :/,544.

&b' +hecks outstanding! Inspection of the check numbers reveals that the

following are outstanding! E**, :*,4441 E*BB, :,5441 E*B@, :/,4441 and

E*B;, :*,5441 total, :@,444. This amount can be verified as! :7,444 F

:*;@,444 C :*;7,444 G :@,444.

Requirement (2)

%an& %oo&s

?alances, 0ecember *................................. :B7,554 :57,444

)dditions!+ash on hand........................................ 944

0eposit in-transit &E57'......................... /,544

>ote collected.......................................

:rincipal......................................... 7,444

Interest........................................... B4

$< check, +ustomer ?elinda........ ..... &44'

=nited


8/17


>ote receivable.............................. 7,444

Interest revenue............................. B4ovember &/.@5'

d' :roceeds of bank loan ;,@B5.44

e' 0eposit of *./.47 omitted from bank statement ,@;.9*

f' 8eturned check from Tome +o. &9*B.54'

g' 3rror by bank in entering *.*7.47 deposit,

understated by *.44

h' +heck of Hina Hfg. +o. erroneously chargedagainst Hindanao acct. ,;74.44

i' >ote of 2. $antos +o. collected by bank, *.*4.47 ,4*5.44

' 3rroneous bank debit memo 5,444.44

k' 3rror by bank in entering *.9.47 deposit1

overstated by & *4.44'

l' 0eposit of Hina Hfg. +o. erroneously credited

to the companys account & *,@*;.4'

Total : B4,B.** : B4,95.**

=nlocated difference B4.44

)dusted balance : B4,B.** : B4,B.**

Requirement (b) Adusting *ournal Entries+ ecember $, 2006

*. ?ank charges /.@5

+ash in bank /.@5

. +ash in bank ;,@B5.44


9/17


Interest expense **4.44

:repaid interest [email protected](oan payable *4,5//.44

/. )ccounts receivable 9*B.54+ash in bank 9*B.54

9. +ash in bank ,4*5.44

?ank charge 5.44

>otes receivable ,444.44

Interest income 4.44

5. +ash in bank B4.44

)ccounts receivable $ales Hiscellaneous income B4.44

7-12. Asia Envelope Company

)$I) 3>A3(D:3 +DH:)>

:roof of +ash

$< checks returned)pril /4 &@*5.44' &@*5.44'

Hay /* **@.44 &**@.44'

0raft collected by bank)pril *,544.44 &*,544.44'Hay 4.44 4.44

+heck >o. 7*; erroneously recorded in the check register

+orrect )mount :@B8ecorded as B@ ;.44 &;.44'

)dusted book balance :9,94.44 :9*,94.*B :94,;99.5 :9,7;B.;

=nadusted bank balance :B,94/.54 :9*,BB7.B :95,/*B.5B :/,@7.4)dd &0educt' )dustments

0eposit in transit

)pril /4 ;54.44 &;54.44'Hay /* ;5.94 ;5.94


10/17


Dutstanding checks

)pril /4 &9,97/.44' &9,97/.44'Hay /* *9;.7@ &*9;.7@'

+hecks of )sia 3ngine +orp. erroneously charged

to companyJs account)pril /9;.54 &/9;.54'Hay KKKKKKKK KKKKKKKKK &74.44' 74.44

)dusted bank balance :9,94.44 :9*,94.*B :94,;99.5 :9,7;B.;

7-13. Tarlac Co!a"#

($)

Tarlac +ompany:roof of +ash

$< checks returned in

0ecember &95' 950eposits in transit

>ovember /4 ,544 &,544'0ecember /* /,544 /,544

?ank charges>ovember 4 4

0ecember &5' 5+heck of another company

erroneously charged by bank in >ovember, corrected in

0ecember 74 &74'

?alance per books : /@,44 :*44,B94 : *@,;;4 : ;,BB4

(2)

)dusting 2ournal 3ntries - *./*.47

*. )ccounts receivable 95

+ash in bank 95


11/17


. ?ank charges 5

+ash in bank 5

()

?alance per books *./*.47 :;,BB4

(ess! )23 &*' :95

&' 5 B4

?alance as adusted :;,544

7-14. eni!s Company

a. :ost-dated check C report as accounts receivable because it is not negotiable

until the date on the check.

b. 8eport as an account receivable because it is not a negotiable instrument at

this time. 0ebit )ccounts 8eceivable, and credit +ash. If ultimately not

collectible, write off as a bad debt.

c. 8eport as >ote 8eceivable or as a short-term investment. It is inappropriate

to report &or record' this as cash.

d. Include the :44 balance in petty cash in the balance reported as cash.

Immediately replenish the fund for :*7@ and record it on 0ecember /* as adebit to expenses &including the :* cash short' and a credit to +ash.

)lternatively, an adustment may be made debiting expenses for :*7@ and

crediting petty cash fund on 0ecember /*, 445.

e. 8eport the :/4 of postage stamps as prepaid postage expense C stamps are not

cash.

f. Include the cashiers check in the balance because it will be accepted by

banks for immediate deposit.

g. These checks should not be recorded as 445 payments because the company

still has full control of them.

h. The note and interest should not be included in the cash balance it has notbeen collected. The :4,444 should be reported as a note receivable and

interest of :954 &i.e., :4,444 x ;L x /*' should be accrued by a debit to

interest receivable and a credit to interest revenue for :954. Mowever, if the

bank reports that the note has been collected on or before 0ecember /* and a

credit to the companys account has been made, this item may be included inthe cash balance.

7-15.Balance Sheet Classification


12/17


Cash

Cash

Equivalent

ST

Investments OtherChecking account X

Savings account X

Rare coins kept for long-termspeculation X

Postdated checks received X

Money orders received X

Petty cash fund X

Treasury bills purchased when twomonths remain in term X

Compensating balance for a short-term loan X

* shown separatelyBalance Sheet Classification

CashCash

EquivalentST

Investments OtherSinking fund to retire a bond in five

years X

Certificate of deposit !si"-monthterm# X

Short-term investment inmarketable e$uity securities X

7-16. Cordial Company

?ank 8econciliation, *./*.47

?ank ?ooks

=nadusted balance :/54,444 :;/,544

)dd &0educt' )dustments

0eposit in transit &:*B5,54 - :54,444' *5,54 &*'

:ost dated customers check recorded

on *./*.47 & 54,444'

>ote collected by bank *5,444

Dutstanding checks

&:97,B54 - :*9,B54 - :/B,*4' &*;9,B;4' &'+heck payable to a supplier released on

2an. 5, 44B *9,B54 &7'

+heck dated 2an. 9, 44B recorded and

released in 0ec., 447 /B,*4 &7'

3rroneous bank credit corrected

on 2an. , 44B &/4,444'

)s corrected 54,974 /*4,974

=nlocated difference &shortage' &74,444' &9'


13/17


?alance as adusted :54,974 :54,974 &/'

Suggested ans1er to t#e multiple c#oice questions+

*. b . d /. b 9. c 5. a 7. d

7-17. Pa"lo Corporation

:)?(D +D8:D8)TID>

:roof of +ash

2uly /*, 447

Reconciliation6/0/06

*ulyReceipts

*ulyisbursements

Reconciliation/$/06

?ank cash balance0eposit in transit!

2uly

2une=ndeposited cash

Dutstanding checks!

2uly! E*/95

E*/5/

E*/59

2une! E*4@

E*4@7E*4@B

)dusted balance

?ook cash balance

>$< check

3rror>ote collected

Interest$ervice charge

)dusted balance

:*/,4/*.B@

*97.B/

&/B.*5'

&55.94' &*;7.@4'

:*,45B.*7

:*,45B.*7

:*,45B.*7

:*4,45*.*B

*,4;@.5*

&*97.B/' 9B.54

:**,9B5.95

:*4,974.95

*,444.44

*5.44

:**,9B5.95

:5,/7.5

B.44

*/./

*9.9

&/B.*5'

&55.94' &*;7.@4'

:9,5;.79

:9,*4.7;

**/.*5

/7.44

B.@4

:9,5;.79

:*B,B57.9/

*,4;@.5*

9B.54

&B.44'

&*/./'

&*9.9'

:*;,B.;B

:*@,9*9.;

&**/.*5'

&/7.44' *,444.44

*5.44 &B.@4'

:*;,B.;B


14/17


7-18. Jayce Corporation

2)+3 +D8:D8)TID>

:roof of +ash

)ugust /*, 447

Reconciliation

/$/06

August

Receipts

August

isbursements

Reconciliation

3/$/06

?ank cash balance

0eposit in transit!

)ugust

2uly=ndeposited cash

Dutstanding checks!

)ugust! E75

E7;

EB4

2uly! E*54

E*5*

E*5)dusted balance

?ook cash balance

>$< check

3rror in recording check>ote collected

Interest

$ervice charge)dusted balance

: ;,@5.97

;5/.B*

&/95.7'

&*57.B'

&;B.9/':*4,47.B7

:*4,47.B7

:*4,47.B7

:*7,B55.79

*,/5./

&;5/.B*' 9*.7@

:*B,95@.;/

:*5,;*/.;/

*,544.44

95.44

:*B,95@.;/

:*9,;@.@5

57.@;

/9*.B

*@5.B5

&/95.7'

&*57.B'

&;B.9/':*9,;*/.@4

:*9,@*/.;5

;7.B5

&;.44'

*.*4:*9,;*/.@4

:**,7B;.5

*,/5./

9*.7@

&57.@;'

&/9*.B'

&*@5.B5'

:*,B5*.@;

:**,/47.B9

&;7.B5'

;.44 *,544.44

95.44

&*.*4':*,B5*.@;


15/17


7-19. #irsten $im, Inc.

*. )pril * :etty +ash................................................................ 44

+ash........................................................... 44

. )pril *4 +ash Dver and $hort................................................

Transportation-In..................................................... 74

$upplies 3xpense..................................................... 5

:ostage 3xpense...................................................... //

8eceivablesN3mployees........................................ *B

Hiscellaneous 3xpense............................................ /7

+ash &:44 C :B'................................. .... *B/

/. )pril 4 :etty +ash................................................................ *44

+ash........................................................... *44

)ssuming no disbursements were made from )pril 4 to )pril /4 and the cashier

made up the shortage of :, the answer is $300 %"&.

7-20. Franco's A!to (epair )ervice

+ash Dver and $hort....................................................... 7.95

)ccounts 8eceivableN3mployees................................. B9.44

&:94.44 F :/9.44'

>eo


16/17


;,95

0educt $ervice +harge &B')dusted cash balance, Hay /* :;,*@

:;,*@ F :/44 GP,+1 %a&

7-22. Poder Inc.

:owder, Inc.

?ank 8econciliation

>ovember /4, 447

?alance per bank statement, >ovember /4, 447 :57,B9.4

)dd!

+ash on hand, not deposited *,;*5.94

5@,*@;.74

0educt! Dutstanding checks

E*9 :*,7/5.;

E*/4 ,97@./4 E*/ /,75.*5

E*// 9@.*B @,*4.;*

+orrect cash balance, >ov. /4 :9;,;[email protected];

?alance per books, >ovember /4, 447 :9;,*B@. O

)dd!

?ond interest collected by bank *,944.44

54,5B@.

0educt!

?ank charges not recorded in books : B.94 +ustomers check returned >$< 5B.*/ 5;;.5/

+orrect cash balance, >ov. /4 $49%978.69 &c'


17/17


O+omputation of balance per books,

>ovember /4, 447 ?alance per books, Dctober /*, 447 : 9*,@9B.@5

)dd receipts for >ovember *B/,5/.;*

*5,/B*.B7 0educt disbursements for >ovember *77,*;/.59

?alance per books, >ovember /4, 447 : 9;,*B@.

Chapter07 - answer.doc

Documents

Transcript of Chapter07 - answer.doc