Question

Alphine Cupcake Case Study

Based on your review of the testing of controls (TOC) procedures (working papers C.2.1 to C.2.11), you believe that there were some issues with the internal audit work performed in the area of cash receipts, disbursements and reconciliation. Review in detail the auditing procedures from the internal audit program and the related documentation provided (TOC part I and TOC part II).

1. Did the staff internal auditors perform all of the steps associated with the audit program? Did they perform the steps accurately? If not, describe the problem and follow-up on it to the extent possible with the information given (i.e. how would you have completed the testing?)

Answer 1

Answer -

A test of controls is basically an audit procedure to test the effectiveness of a control used by a client entity to prevent or detect material misstatements. Depending on the results of this test, auditors may choose to rely upon a client's system of controls as part of their auditing activities.

So after review of TOC procedure in Alphine Cupcake Case Study , Auditor believe that there are some discrepancies related to internal audit work performed in the area of cash receipts, disbursements and reconciliation.

The procedure and steps to be applied by auditor for test of controls in cash management transaction as-

Step- 1

Confirmation

The primary audit procedure used in testing cash balances is confirmation. In order to test confirmation, auditors ask the company's bankers to verify the balance of the bank accounts directly; responses are sent solely to the auditors. Bankers require electronic confirmation requests. The confirmation process also has an unintended benefit. When submitting the confirmation request, auditors commonly ask if the company has any loans with the bank as well. This helps to uncover any unrecorded liabilities present.

Step-2

Check Foreign Currency Translation

For companies that hold cash denominated in foreign currencies, part of the cash audit process includes a test of the translation process. In order to test translation, the auditor independently calculates the cash balance using the exchange rate in effect at 12/31. If the translation is materially close to the company's figure, the auditor documents this finding and moves on with the audit. If there is a difference in the rate used that results in a material difference, the auditor must determine if the company's rate is reasonable.

Step - 3

Reconciliation Testing

As a part of cash testing, auditors also test the bank reconciliation process. By examining cash confirmations, auditors gain assurance over the bank balance. However, differences may exist between the correct bank balance and the correct book cash balance. Usually these differences relate to deposits-in-transit and outstanding checks. By recalculating and testing the underlying information in the company's bank reconciliations, auditors can bridge the gap between the book and bank balance.

Step- 4

Classification

Auditors might also need to test for the correct classification of cash. Some cash balances, such as cash balances that are restricted from use due to contractual agreements or cash equivalents that have been pledged as collateral, have complicated rules related to disclosure and classification. In some cases, these balances should not be listed as cash on the balance sheet and might need to be listed as investments or restricted cash. If your business is subject to an audit and you have any contractual obligations related to cash collateral, be sure to examine these agreements to ensure proper classification

Conclusion- After applying above steps , Auditor may find the reasons on discrepancies belonging to company internal control on cash management.

Following is the answer to given questions as

Q 1 Did the staff internal auditors perform all of the steps associated with the audit program?

Ans. Yes, Internal auditors may skip important steps such as proper classification of cash transaction, reconciliation of cash ledger balance with physical cash voucher.

Q 2 Did they perform the steps accurately? If not, describe the problem and follow-up on it to the extent possible with the information given (i.e. how would you have completed the testing?)

Ans. If Company staff internal auditor did not follow steps accurately, We can ask for daily or monthly MIS for cash receipts and cash disbursement and reconciliation. We can also ask for policy paper to control cash receipts and disbursement.

we can check physical cash receipts and disbursement voucher on random basis.