The following are various potential misstatements due to errors or fraud (1 through 7), and a list of auditing procedures (a. through h.) the auditor would
consider performing to gather evidence to determine whether the error or fraud is present.
Possible Misstatements Due to Errors or Fraud
1. The auditor suspects that a lapping scheme exists because an accounting department
employee who has access to cash receipts also maintains the accounts receivable led-
ger and refuses to take any vacation or sick days.
2. The auditor suspects that the entity is inappropriately increasing the cash reported
on its balance sheet by drawing a check on one account and not recording it as an
outstanding check on that account and simultaneously recording it as a deposit in a
second account.
3. The entity’s cash receipts of the first few days of the subsequent year were properly
deposited in its general operating account after the year end. However, the auditor
suspects that the entity recorded the cash receipts in its books during the last week of
the year under audit.
4. The auditor noticed a significant increase in the number of times that petty cash was
reimbursed during the year and suspects that the custodian is stealing from the petty
cash fund.
5. The auditor suspects that a kiting scheme exists because an accounting department
employee who can issue and record checks seems to be leading an unusually luxuri-
ous lifestyle.
6. During tests of the reconciliation of the payroll bank account, the auditor notices that
a check to an employee is significantly larger than other payroll checks.
7. The auditor suspects that the controller wrote several checks and recorded the cash
disbursements just before year end but did not mail the checks until after the first
week of the subsequent year.
List of Auditing Procedures
a. Send a standard bank confirmation confirming the balance in the bank at year end.
b. Compare the details of the cash receipts journal entries with the details of the corre-
sponding daily deposit slips.
c. Count the balance in petty cash at year end.
d. Agree gross amount on payroll checks to approved hours and pay rates.
e. Obtain the cutoff bank statement and compare the cleared checks to the year-end
reconciliation.
f. Examine invoices, receipts, and other documentation supporting reimbursement of
petty cash.
g. Examine payroll checks clearing after year end with the payroll journal.
h. Prepare a bank transfer schedule.
For each possible misstatement, identify one audit procedure that would be most effective in providing evidence regarding the potential misstatement. Listed auditing procedures may be used once, more than once, or not at all.
