Original Question: (Do not reply to this one)
When a client does not adequately segregate duties, the possibility of cash being stolen before it is recorded is increased. If the auditor suspects that this type of defalcation is possible, what type of audit procedures can he or she use to test this possibility?
Student Discussions:
Reply to each student posts by commenting about their posts and building on the subject (About 100 words each) APA reference.
APA reference.
1-Ekaterina Cafano
Segregation of duties is particularly important in the revenue process due to the increased risk of theft. For example, the cash receipts function should be segregated from accounts receivable function. If these two functions are performed by the same employee, there is a potential of cash theft being covered by the manipulation of data within the accounts receivable account. An employee can use lapping procedure in which cases an employee covers the shortage of money in one customer’s account by “borrowing” money from another customer’s account. Employees involved in the order entry, credit, shipping or billing functions should not have access to the accounts receivable records, general ledger or any other cash receipts activities (Messier, Glover, Prawitt, XXXXXXXXXXIf an auditor determines that the customer failed to implement segregation of duties between employees in cash receipts and accounts receivable accounts, an auditor must exercise professional skepticism when determining appropriateness and sufficiency of audit evidence. The lack of segregation of duties can suggest the increased potential of cash being stolen from the company. An auditor must modify the planned audit procedures to address the increased inherent risk. The audit procedures that the auditor can implement to check if the cash is being stolen from the company can include tracing the cash receipts back to the customer’s invoices and shipping documentation to ensure that the cash receipts were posted to the relevant customer’s account. An auditor can also send out confirmation to the customers to confirm if the accounting records reflect the correct accounts receivable balance. If IT is used is the revenue process, an auditor must test internal controls and learn the steps the employees take to record cash receipts in the company’s system.
Reference:
Messier, W. F., Glover, S. M., & Prawitt, D. F XXXXXXXXXXAuditing & assurance services: A systematic approach (10th ed.). New York: McGraw-Hill/Irwin.
2-Shirley Stenbak
There are a couple audit procedures that can be used to test the possibility of stolen cash.One major way is the tests of details of account balances.This would allow the auditor to investigate the details of cash receipt transactions and ensure that they are correct.There are several assertions that are important to focus on, the first being the occurrence of transactions.An auditor can investigate specific transactions and trace random selected transactions to the source.This can be done by selecting a cash transaction and ensuring that the posting of the transaction has been completed by an authorized party.Reconciliation of bank statements can prove that all cash received has been deposited into the bank account of the organization.This would also prove that the cutoff assertion was appropriate depending on when the cash was received, applied to the proper account, and deposited in the correct accounting period.
The use of substantive analytical procedures is used more when the testing of account receivable is being performed.Segregation of duties can be a strong indicator of the likelihood of stolen cash and lapping and can be an effective method for auditors to determine the risk of stolen cash.An auditor can simply observe and evaluate the segregation of duties to ensure that duties are being performed in a manner that would prevent cash theft from occurring in the first place.
Reference:
Messier, W. F., Glover, S. M., & Prawitt, D. F XXXXXXXXXXAuditing & assurance services: A systematic approach (10th ed.). New York: McGraw-Hill/Irwin. ISBN: XXXXXXXXXX