Question

You are working on the audit of Bubble Ltd and have just completed an evaluation of controls

in the cash receipts area. You note the following key controls as part of your evaluation:

• All cash handling is independent of the accounting function.

• Cash receipts are matched to specific sales invoices before being posted to the

accounts receivable master file.

• There is an independent check that cash receipts are recorded in the correct

account.

• There is a comparison of deposit slips, prelists and the posting to the cash receipts

journal.

• There is a policy of depositing cash receipts each day.

(a) For each of the five controls identified above:

I. Describe the purpose of the control- what is the control designed to prevent or

detect?

II. Identify the account(s) and assertion(s) that this control will have an effect on in

the financial report.

III. Give one example of a procedure that could be used to test the control.
(b) Mr Simon, one of the audit assistants, tested the controls in relation to cash receipts

and documents the following:

Sixty cash receipts transactions were selected from the cash receipts journal (five per

month) and tests performed as per the audit plan. Four (04) immaterial errors were

found. These errors were discussed with the client, who corrected them based on

information provided. As the errors were immaterial and subsequently corrected, it is

concluded that cash receipts controls are working satisfactorily and there is sufficient

appropriate audit evidence to rely upon them. The tolerable rate of deviation for this

test, as per the audit plan, is 5 per cent.

Do you think the audit assistant’s conclusion regarding the cash receipt controls is

correct or not? Explain.

Answer 1

(a)

I. The purpose of the control "All cash handling is independent of the accounting function" is to prevent any misappropriation of cash by separating the responsibilities of handling cash from the accounting function.

II. This control will have an effect on the account "Cash" and the assertion "Existence" in the financial report. It ensures that cash actually exists and is not being mishandled.

III. To test this control, a procedure could be to review the organizational structure and job descriptions to confirm that the cash handling and accounting functions are separate.

For the control "Cash receipts are matched to specific sales invoices before being posted to the accounts receivable master file":

I. The purpose of this control is to detect and prevent any misposting or misallocation of cash receipts, ensuring that they are accurately recorded against the correct sales invoices.

II. This control will have an effect on the accounts "Accounts Receivable" and the assertion "Accuracy" in the financial report. It ensures that the recorded cash receipts are accurately matched to the corresponding sales invoices.

III. To test this control, a procedure could be to select a sample of cash receipts and verify that they are appropriately matched to the corresponding sales invoices in the accounts receivable master file.

For the control "There is an independent check that cash receipts are recorded in the correct account":

I. The purpose of this control is to prevent misclassification of cash receipts, ensuring that they are recorded in the correct accounts to reflect the nature of the transactions.

II. This control will have an effect on the accounts in the financial report where cash receipts are recorded, such as "Sales Revenue" or "Other Income," and the assertion "Classification." It ensures that the cash receipts are correctly classified in the financial statements.

III. To test this control, a procedure could be to select a sample of cash receipts and verify that they are recorded in the appropriate accounts based on the nature of the transactions.

For the control "There is a comparison of deposit slips, prelists, and the posting to the cash receipts journal":

I. The purpose of this control is to detect any errors or discrepancies in the recording and posting of cash receipts, ensuring that they are accurately reflected in the cash receipts journal.

II. This control will have an effect on the accounts "Cash" and the assertion "Completeness" in the financial report. It ensures that all cash receipts are properly recorded and none are omitted.

III. To test this control, a procedure could be to compare a sample of deposit slips and prelists to the corresponding entries in the cash receipts journal, verifying the accuracy and completeness of the postings.

For the control "There is a policy of depositing cash receipts each day":

I. The purpose of this control is to prevent any delays or mishandling of cash receipts, ensuring that they are promptly deposited and not exposed to the risk of loss or misappropriation.

II. This control will have an effect on the accounts "Cash" and the assertion "Rights and Obligations" in the financial report. It ensures that the company has control and ownership over the cash receipts.

III. To test this control, a procedure could be to review bank statements and confirm that cash receipts are deposited daily, with supporting evidence such as deposit slips.

(b)

The audit assistant's conclusion regarding the cash receipt controls is not correct. Although the errors found were immaterial and corrected, the fact that there were errors indicates that the controls may not be working satisfactorily. The tolerable rate of deviation for this test, as per the audit plan, is 5 percent, and the findings exceeded this threshold with a deviation rate of 6.67 percent (4 errors out of 60 transactions).

Therefore, the audit assistant should not conclude that the cash receipt controls are working satisfactorily based on this test. Instead, further investigation and testing should be conducted to determine the root causes of the errors and to evaluate the effectiveness of the controls. This could involve selecting a larger sample size, conducting additional tests, and assessing the overall control environment in the cash receipts area to ensure that risks are adequately mitigated. The conclusion should be based on sufficient appropriate audit evidence rather than solely on the immateriality of the errors.