Below is a transcript of conversation between Fran and Leslie.

LN: Hi Fran. How are things progressing on the Hillsburg audit? Do you have any updates for me? FN: Hi Leslie, I was just about to call you, there are a couple of things we need to talk about.

LN: Yes? Go ahead.

FN: Mitch was testing some controls over the cash balance.

You know how we look at a sample of monthly bank reconciliations to see if they are being reviewed by the accounting supervisor.

LN: Yes? Please don't tell me that the supervisor didn't sign off to indicate that a review was done? FN: Well. It turns out that the reviews pretty much stopped happening since Hillsburg's staff began working from home after the COVID-19 outbreak.

LN: Oh boy.

FN: Mitch took a closer look at one of the bank reconciliations from his sample and found some errors in the reconciliation. I guess the new person that Hillsburg hired to do this work is still learning the process.

LN: Did anyone review the bank reconciliation where Mitch found the errors? FN: No, that one wasn't reviewed. We also have a problem with a couple of bank account confirmations. One came back with an amount that is significantly different from what's posted in Hillsburg's accounting system.

LN: What's the discrepancy? FN: Just over fifty thousand. There is also another confirmation that is still outstanding.

LN: From which bank? FN: It's the small U.S. bank where Hillsburg opened their new U.S. dollar account last year.

REQUIRED

1. What risk (inherent risk or control risk) is increased due to the fact that Hillsburg stopped performing bank reconciliations?

2. Explain the impact of lack of bank reconciliations on Hillsburg's overall audit strategy and the audit approach for the cash balance. How should the audit team respond to this risk and what Mitch found?

3. Suggest specific procedures that the audit team should conduct in response to the issues with the two bank confirmations. Link your procedures to specific assertions that are at risk in each situation.