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):

1. The outstanding checks on June 30 bank reconciliation were underfooted by $2,000.
2. 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.
3. A check was omitted from the outstanding checklist on the June 30 bank reconciliation. It cleared the bank on July 7.
4. A check was omitted from the outstanding checklist on the bank reconciliation. It cleared the bank on September 6.
5. Cash receipts collected on accounts receivable from July 1 to July 5 were included as June 29 and 30 cash receipts.
6. A bank transfer recorded in the accounting records on July 1 was included as a deposit in transit on June 30.
7. 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.
List an audit procedure that can be used to discover each fraud.

Answer 1

An audit procedure that can be used to discover the frauds mentioned is a bank reconciliation. By comparing the client's cash balance in the accounting records to the cash balance in the bank statement, discrepancies and misstatements can be identified. Some specific examples of frauds discovered through bank reconciliation are underfooting of outstanding checks, omitted checks from the outstanding checklist, and incorrect inclusion of cash receipts or bank transfers.

Step-by-step explanation:

An audit procedure that can be used to discover the frauds mentioned in the question is a bank reconciliation. A bank reconciliation involves comparing the client's cash balance in the accounting records to the cash balance in the bank statement to identify any discrepancies and misstatements.

For the frauds mentioned:

1. A bank reconciliation would reveal the underfooting of outstanding checks by comparing the client's records to the bank statement.
2. An examination of the bank statement and the client's records would uncover the loan credited directly to the bank account that was not entered as of June 30.
3. A review of the bank statement for July would identify the check that cleared the bank on July 7, which was omitted from the outstanding checklist on the June 30 reconciliation.
4. Similarly, a review of the bank statement for September would reveal the check that cleared the bank on September 6, which was also omitted from the outstanding checklist.
5. Comparing the client's cash receipts records to the bank statement for July 1 to July 5 would identify the inclusion of those cash receipts in the June 29 and 30 cash receipts.
6. Examining the bank statement for July 1 would show that the bank transfer recorded as a deposit in transit on June 30 was actually recorded in the accounting records on July 1.
7. Lastly, a comparison of the cash disbursements journal to the outstanding checks list on June 30 would reveal the check dated June 26 and disbursed in June that was not recorded in the journal but was included as an outstanding check.