Items a through I represent possible errors and fraud that you suspect may be present at Rex

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Question:

Items a through I represent possible errors and fraud that you suspect may be present at Rex Company. The accompanying List of Auditing Procedures represents procedures that the auditor would consider performing to gather evidence concerning possible errors and fraud. For each item, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. The procedures on the list may be selected once, more than once, or not at all.

List of Auditing Procedures

A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips.

B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors’ invoices and management’s authorization.

C. Perform analytical procedures that compare documented authorized pay rates to the entity’s budget and forecast.

D. Obtain the cutoff bank statement and compare the cleared checks to the year-end bank reconciliation.

E. Prepare a bank transfer schedule.

F. Inspect the entity’s deeds to its real estate.

G. Make inquiries of the entity’s attorney concerning the details of real estate transactions.

H. Confirm the terms of borrowing arrangements with the lender.

I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges.

J. Send requests to confirm the entity’s accounts receivable on a surprise basis at an interim date.

K. Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer’s creditworthiness.

L. Examine the entity’s shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer.

M. Inspect the entity’s correspondence files for indications of customer disputes for evidence that certain shipments were on consignment.

N. Perform edit checks of data on the payroll transaction tapes.

O. Inspect payroll check endorsements for similar handwriting.

P. Observe payroll check distribution on a surprise basis.

Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department’s files.

R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks.

S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee.

T. Determine that the details of selected prenumbered vouchers match the related vendors’ invoices.

U. Examine the supporting purchase orders and receiving reports for selected paid vouchers.

Possible Misstatements Due to Errors and Fraud

a. The auditor suspects that a kiting scheme exists because an accounting department employee who can issue and record checks seems to be leading an unusually luxurious lifestyle.

b. An auditor suspects that the controller wrote several checks and recorded the cash disbursements Just before year-end but did not mail the checks until after the first week of the subsequent year.

c. The entity borrowed funds from a financial institution. Although the transaction was property recorded, the auditor suspects that the loan created a lien on the entity’s real estate that is not disclosed in its financial statements.

d. The auditor discovered an unusually large receivable from one of the entity’s new customers. The auditor suspects that the receivable may be fictitious because the auditor has never heard of the customer and because the auditor’s initial attempt to confirm the receivable has been ignored by the customer.

e. The auditor suspects that fictitious employees have been placed on the payroll by the entity’s payroll supervisor, who has access to payroll records and to the paychecks.

f. The auditor suspects that selected employees of the entity received unauthorized raises from the entity’s payroll supervisor, who has access to payroll records.

g. The entity’s cash receipts of the first few days of the subsequent year were property deposited in its general operating account after the year-end. However, the auditor suspects that the entity recorded the cash receipts in its books during the last week of the year under audit.

h. The auditor suspects that vouchers were prepared and processed by an accounting
department employee for merchandise that was neither ordered nor received by the entity.

i. The details of invoices for equipment repairs were not clearly identified or explained to the accounting department employees. The auditor suspects that the bookkeeper incorrectly recorded the repairs as fixed assets.

j. The auditor suspects that a lapping scheme exists because an accounting department employee who has access to cash receipts also maintains the accounts receivable ledger and refuses to take any vacation or sick days.

k. The auditor suspects that the entity is inappropriately increasing the cash reported on its balance sheet by drawing a check on one account and not recording it as an outstanding check on that account and simultaneously recording it as a deposit in a second account.

l. The auditor suspects that the entity’s controller has overstated sales and accounts receivable by recording fictitious sales to regular customers in the entity’s books.