What controls can be used: a) to make sure cash accounts are accurate b) to make sure cash receipts are appropriately recorded c) to limit access for individuals who can initiate electronic transfers of cash

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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What controls can be used:

a) to make sure cash accounts are accurate

b) to make sure cash receipts are appropriately recorded

c) to limit access for individuals who can initiate electronic transfers of cash

Please use the illustration below to help you answer this question.  Hint:  Look at 'Examples of Controls' column for the answers

## Internal Control Objectives and Testing

### Objective 1: Cash Accounts Are Accurate
- **Examples of Controls:**
  - Client management reviews monthly bank reconciliations completed by employees.
  
- **How Control Would Be Tested:**
  - Review evidence of management reviews and determine if evidence is persuasive that the reviews are effective. This includes reviewing the frequency of control, assessing effectiveness through reviews of reports, and evaluating descriptions of corrective actions taken.
  
- **Implications if Control is Not Working:**
  - There might be unusual cash transactions caused by fraud or errors. The auditor will prepare a year-end bank reconciliation using the client’s cash records and a bank cutoff statement. Expand confirmations.

### Objective 2: Cash Receipts Are Appropriately Recorded
- **Examples of Controls:**
  - a. There is segregation of duties between those handling cash and those recording cash transactions.
  - b. Remittance advices are prepared for cash receipts.
  
- **How Control Would Be Tested:**
  - a. Perform a walkthrough of the processing of cash collections. Review documentation providing evidence of segregation of duties.
  - b. Same as (a).

- **Implications if Control is Not Working:**
  - a. If there exists inadequate segregation of duties between cash received and cash deposited, employees can steal cash and cover it up with a lapping scheme. The auditor will expand confirmations with customers, select a sample of daily deposits, and trace to accounts receivable credits for payments.
  - b. Same as (a).

### Objective 3: Limit Access for Individuals Who Can Initiate Electronic Transfers of Cash
- **Examples of Controls:**
  - Appropriate procedures exist for authorizing passwords or other access codes related to initiating electronic transfers of cash.
  
- **How Control Would Be Tested:**
  - Review procedures for passwords and access codes and obtain related documentation.
  
- **Implications if Control is Not Working:**
  - If there is lax oversight in this regard, a fraudster could inappropriately access cash. The auditor will review a list of individuals who have access to initiating electronic transfers of cash. The auditor may elect to perform background checks on some of these individuals on a random basis, alerting all such individuals to this scrutiny.
Transcribed Image Text:## Internal Control Objectives and Testing ### Objective 1: Cash Accounts Are Accurate - **Examples of Controls:** - Client management reviews monthly bank reconciliations completed by employees. - **How Control Would Be Tested:** - Review evidence of management reviews and determine if evidence is persuasive that the reviews are effective. This includes reviewing the frequency of control, assessing effectiveness through reviews of reports, and evaluating descriptions of corrective actions taken. - **Implications if Control is Not Working:** - There might be unusual cash transactions caused by fraud or errors. The auditor will prepare a year-end bank reconciliation using the client’s cash records and a bank cutoff statement. Expand confirmations. ### Objective 2: Cash Receipts Are Appropriately Recorded - **Examples of Controls:** - a. There is segregation of duties between those handling cash and those recording cash transactions. - b. Remittance advices are prepared for cash receipts. - **How Control Would Be Tested:** - a. Perform a walkthrough of the processing of cash collections. Review documentation providing evidence of segregation of duties. - b. Same as (a). - **Implications if Control is Not Working:** - a. If there exists inadequate segregation of duties between cash received and cash deposited, employees can steal cash and cover it up with a lapping scheme. The auditor will expand confirmations with customers, select a sample of daily deposits, and trace to accounts receivable credits for payments. - b. Same as (a). ### Objective 3: Limit Access for Individuals Who Can Initiate Electronic Transfers of Cash - **Examples of Controls:** - Appropriate procedures exist for authorizing passwords or other access codes related to initiating electronic transfers of cash. - **How Control Would Be Tested:** - Review procedures for passwords and access codes and obtain related documentation. - **Implications if Control is Not Working:** - If there is lax oversight in this regard, a fraudster could inappropriately access cash. The auditor will review a list of individuals who have access to initiating electronic transfers of cash. The auditor may elect to perform background checks on some of these individuals on a random basis, alerting all such individuals to this scrutiny.
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