Question

The following are misstatements that might be found in the client’s year-end cash balance (assume that the balance sheet date is June 30)

:A check that was dated June 26 and disbursed in June was not recorded in the cash disbursements journal, but it was included as an outstanding check on June 30
.A check was omitted from the outstanding check list on the bank reconciliation. It cleared the bank September 6.
The outstanding checks on the June 30 bank reconciliation were underfooted by $2,000.
A loan from the bank on June 26 was credited directly to the client’s bank account. The loan was not entered as of June 30.
A check was omitted from the outstanding check list on the June 30 bank reconciliation. It cleared the bank July 7.
Cash receipts collected on accounts receivable from July 1 to July 5 were included as June 29 and 30 cash receipts.
A bank transfer recorded in the accounting records on July 1 was included as a deposit in transit on June 30.
Required
a. Assuming that each of these misstatements was intentional (fraud), state the most likely motivation of the person responsible.
b. What control can be instituted for each fraud to reduce the likelihood of occurrence?
c. List an audit procedure that can be used to discover each fraud.

Answer 1

The intentional misstatement of including July cash receipts in June's figures might be motivated by a desire to inflate the year-end cash balance, while cut-off testing is an audit procedure used to detect such fraud.

Step-by-step explanation:

The subject of this question is the business topic of auditing and understanding financial statements, specifically in regards to the cash balance on a client's balance sheet and the valuation of loans in a secondary market. The misstatement example suggests fraud and requires the use of audit procedures to uncover such discrepancies.

a. If cash receipts from July were intentionally recorded as June receipts, the likely motivation for this fraud would be to inflate the year-end cash balance, possibly to meet financial targets, improve the appearance of cash flows before an audit, or influence financial ratios that may be tied to management bonuses or loan covenants.

c. An effective audit procedure to detect this type of misstatement involves cut-off testing. This involves reviewing the timing of transactions around the year-end to ensure they've been recorded in the correct period. This could include examining bank statements, reconciliations, and verifying dates of receipt or shipment of goods.