Auditing and assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

Internal control systems are designed, amongst other things, to prevent error and misappropriation.

Required:

Describe the errors and misappropriations that may occur if the following are not properly controlled:

(i) Receipts paid into bank accounts; (2 marks)
(ii) Payments made out of bank accounts; (3 marks)
(iii) Interest and charges debited and credited to bank accounts. (2 marks)

ANSWER
a) Errors and misappropriations – cash

(i) Receipts

 Money paid into the bank may be stolen. If cash is not properly controlled it is possible to falsify documentation in relation to receivables, and to pay company receipts into private bank accounts. This is sometimes known as ‗teeming and lading‘.
 Money paid into the bank may be incorrectly accounted for, either the bank or the company, if there are no controls to check the accuracy of the company‘s records or the bank statements. This could mean that the internal records and the financial statements are incorrect.

(ii) Payments

 Money paid out of the bank may be paid to incorrect suppliers, or may be paid for incorrect amounts resulting in operational difficulties with cash and supplier management;
 Money paid out of bank accounts may also be misappropriated payments for goods and services that are not received, or simply payments into private bank accounts if there are no controls to prevent this.

(iii) Interest and charges

Banks make errors in calculating interest and charges. If the company does not check these, it may lose money and the amounts appearing in the financial statements may be incorrect. This is particularly important for companies that hold high levels of cash.



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