Auditing and assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

Cash in hand and cash at bank are commonly referred to as liquid assets. Because of this liquidity, these assets represent the most vulnerable of all the assets of an entity. You have recently been employed Korir and Associates (Certified Public
– Accountants) as an audit assistant. During your first audit assignment at Viwanda Ltd you have been allocated the audit of cash in hand and cash at bank.

(i) State and explain any the audit procedures you would undertake in order to determine whether or not there has been any misappropriation of cash.
(6 marks)
(ii) Explain any five controls over cash you would expect to be instituted a business entity in order to minimize cases of embezzlement of cash,
(5 marks)

(b) List the procedures you would follow to verify the following items:
(i) Petty cash balance. (3 marks)
(ii) Revaluation reserve. (3 marks)
(iii) Copyrights. (3 marks)
(Total: 20 marks)

(i) Cash sales
The following are the audit procedures that I would undertake in order to determine whether or not there has been any misappropriation of cash:-

i). Obtain analyses of cash balances and reconcile them to the general ledger: The auditors will prepare or obtain a schedule that list all of the client‘s cash accounts. For cash in bank accounts this schedule will typically list the bank, the account number, account type and the year-end balance per books. The auditors will trace and reconcile all accounts to the general ledger as necessary.

ii. Confirmation letters: send standard confirmation forms to financial institutions to verify amounts on deposit.
iii. Bank reconciliations: obtain or prepare reconciliation of bank accounts as of the balance sheet date and consider need to reconcile bank activity for additional montus. Also obtain a cut off bank statement containing transactions of at least seven days subsequent to balance sheet date.

iv. Cash count: the auditor should count and list cash on hand. Cash on hand consists of undeposited cash receipts, petty cash funds and change funds. Auditors should make a surprise count of these funds.

v. Analyze bank transfers for the last week of audit year and first week of following year to discover whether there is kiting.
vi. Investigation: investigate any checks representing large or unusual payments to related parties.
vii. Evaluation: evaluate proper financial statement presentation and disclosure of cash.

Credit Sales
• For amounts collected from debtors, the auditor should verify the counterfoil or the carbon copy of the receipts issued to customers.
• For large firms where transactions are voluminous, the receipts issued should be traced into the serially numbered cash book to check the correctness or otherwise of the entry.
• The auditor should the amount is entered on the same day of the receipt i.e. the dates of the receipt should correspond to the date on which the receipts are recorded in the cash book.
• For discounts allowed to customers, the auditor should ensure that the company policies regarding the same are followed and further authorized the responsible officer.

• The cashiers who operate cash tills must be properly trained and sincere to management.
• The activities of the operators should be checked and controlled supervisor on duty.
• The cashiers should not be involved in preparation of ledger accounts. This practice reduces opportunities of committing ‗teeming and lading‘.
• The cashiers should work in shifts then the supervisor on duty should remove the till roles to which the cashiers do not have any access. A new till roll should be inserted for the new operator at the start of a new shift.
• All cheques for payment should be signed ALL the signatories before issue to creditors.
• The individual responsible for banking daily collections should be a person working in a department other than the cashiers. This reduces chances of collusion with creditors.
• At the end of every day, the cashier should be made to sign against the amount of cash she/he has handled- monies collected, banked and carried forward.


(i) Petty cash balance
• The auditor should verify that the petty cash float is not allowed to contain expenses supported IOUs unless these have been authorized a responsible official.
• Verify the use of petty cash control account in the general ledger.
• Verify that petty cash vouchers for which payment has been made bear the ‗paid‘ stamp.
• For substantial petty cash transactions, the auditor should check whether there are supporting documents attached.

(ii) Revaluation Reserve
• Whether the revaluation was carried out on assets that have actually in existence for a considerable period of time.
• In the case of land, the new value of land leading to the revaluation must have been certified experts in the field i.e. land valuers and certificate of valuation availed to the auditor.
• The auditor should probe to find out more information where exorbitant amounts of money have been transferred to the reserve account.
• The auditor should check to find out the frequency of revaluation; revaluations carried out after every other year should be probed into.

(iii) Copyrights
• The existence of Copyrights should be verified examining the actual copyright and it should be seen that the same has been duly registered.
• If the copyright has been purchased, the assignment should also be seen together with a receipt for the purchase consideration.
• The copyright register should be inspected to see that the copyright has been included therein.
• It should be verified that the copyright is carried in the books at cost less depreciation. The registration cost should form part of the cost while periodic renewal fee paid should be charged in the profit and loss account.
• Incase of joined registration of a copyright, registered assignment the other party should be examined. The copyright may otherwise be subjected to litigation about its title.

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