Question

Listed below are types of errors or fraud that might occur in financial statements. Although a number of audit procedures might detect an error or fraud, select the most likely effective audit procedure to each error or fraud item. Replies may be used more than once Audit Procedure a. Preparing and verifying a schedule of bank transfers. b. Tracing remittance advices to postings in the accounts receivable records. C. Comparing the serial numbers of securities on hand to numbers recorded in the prior year's audit working papers. d. Review of the bank cutoff statement. e. Preparing a "proof of cash" for the entire audit period. f. Confirm terms of debt agreements using a debt confirmation request form. 9. Confirm using public accounting profession's standard form to confirm account balance information with financial institutions. ebt confira forn to cont Procedure Error or Fraud 1. "Lapping" of accounts receivable. Receiving a loan from the company's primary banking Institution and not recording the entry, but placing the cash in overseas account not recorded in the company's accounting records. 3. Kiting" of cash 4. Recording fictitious cash sales throughout the year 5. Altering the ending balance on the year-end bank statement

Answer 1

	ERROR or FRAUD	AUDIT PROCEDURE	JUSTIFICATION
1	"Lapping" of accounts receivable	Tracing remittance advices to postings in the accounts receivable records	Lapping is a fraudulent activity wherein a subsequent receivable payment is used to cover a previous theft and the chain goes on. When every accounts receivable is traced to the remittance advice, the fraud will be immediately detected.
2	Receiving a loan from the company's primary banking institution and not recording the entry, but placing the cash in overseas account not recorded in the company's accounting records	Confirms terms of debt agreements using a debt confirmation request form	External debt confirmation letters are the most reliable way of verifying the balances reflecting (or not) in the books. On subsequent confirmation by the bank, whereabouts of the application of borrowed funds will further audited.
3	"Kiting" of cash	Confirm using public accounting profession's standard form to confirm account balance information with financial institutions	In Kiting, bank balance is artificially inflated/increased by writing checks and taking advantage of banking flotation rules. On verification of bank account balance, it can be tracked whether and when kiting is made,i.e. if and when a check is written despite of insufficient funds in the account.
4	Recording fictitious cash sales throughout the year	Preparing a "proof of cash" for the entire audit period	If every cash sale has an authentic evidence/proof, the scope for recording fictitious transactions gets substantially reduced.
5	Altering the ending balance on the year end bank statement	Review of the bank cut off statement	Cut off procedures are designed to verify for an bogus transactions that may have been entered/made during the period end.