Question

The auditors compare information on canceled checks with information contained in the cash disbursement journal. The objective of this test is to determine that:

1) Recorded cash disbursement transactions are properly authorized.
2) Proper cash purchase discounts have been recorded.
3) Cash disbursements are for goods and services actually received.
4) No discrepancies exist between the data on the checks and the data in the journal.

Answer 1

The auditors conduct tests to ensure the accuracy and authorization of cash disbursement transactions, correct recording of cash purchase discounts, actual receipt of goods and services for cash disbursements, and consistency between check data and journal entries. Overdraft occurs if spending exceeds the account balance, leading to fees. Regular checkbook balancing prevents this.

Step-by-step explanation:

The auditors' primary goal when comparing information on canceled checks with the cash disbursement journal is to ensure the accuracy and integrity of the company's financial transactions. Firstly, they aim to confirm that recorded cash disbursement transactions are properly authorized, indicating that each transaction was approved by the appropriate level of management within the organization. Secondly, they check if proper cash purchase discounts have been recorded, ensuring that any discounts the company is entitled to are appropriately accounted for in the journal. Thirdly, they verify that cash disbursements are for goods and services actually received by the company, thus preventing fraud or erroneous payments. Lastly, they look for any possible discrepancies between the data on the checks and the data in the journal, which could signal errors or misconduct.

Using a check for payment for goods and services provides a documented trail of the transaction that can be tracked and verified. When the store receives a check as payment, it deposits it into its bank account, and the funds are transferred from the customer's account to the store's account. An overdraft occurs when a person writes a check or makes a payment without having sufficient funds in their account, which can lead to overdraft fees.

Maintaining vigilance in balancing a checkbook is crucial to avoid overdraft and associated fees. By keeping accurate records of all checkbook transactions and regularly comparing the checkbook balance with the bank statement, an individual can manage their money effectively, monitor cash flow, and steer clear of financial mishaps.