CASE
STUDY
Moremoney & Associates, Chartered Acc. was hired
as the auditor for Jamins Ltd, Inc.., a company that manufactured high-
precision, computer operated lathes. The owner, Chick Viry, thought that Jamins
Ltd was ready to become a public company, and he hired Moremoney &
associates to conduct the upcoming audit and assist in the preparation of the
registration statement for the securities offering.
Because Jamins Ltd’s machines were large and
complex, they were expensive. Each sale negotiated individually by Chick Viry
and sales normally transpired over several months. As a result, improper
recording of one or two machines could represent a material misstatement of the
financial statements.
The engagement partner in charge of Jamins Ltd audit
was Fenty Fergy, who had significant experience in auditing manufacturing
companies. He recognized the risk for improper recording of sales, and he
insisted that his staff confirm all receivables at year end directly with
customers. Fenty Fergy conducted his review of the Jamins Ltd audit files the
same day that Chick Viry wanted to file the company’s registration statement
for the public stock offering with the Security Co. Fenty Fergy saw that
receivable for a major sale at year end was supported by fax, rather than the
usual written confirmation reply. Apparently, relations with this customer were
“touchy,” and Chick Viry had discouraged the audit staff from communicating
with the customer.
At the end of the day, there was a meeting In Jamins
Ltd’s office. It was attended by Fenty Fergy, Chick Viry, the underwriter of
the stock offering, and the company’s attorney. Fenty Fergy indicated that a
better form of confirmation would be required to support the receivables. After
hearing this, Chick Viry blew his stack. Jamins Ltd’s attorney stepped in and
calmed Chick Viry down. He offered to write a letter to Moremoney &
Associates stating that his opinion, a fax, had a legal substance as a valid
confirmation reply. Fenty Fergy, feeling tremendous pressure, accepted this
proposal and signed off on an unqualified audit opinion about Jamins Ltd’s
financial statements.
Six months after the stock offering, Jamins Ltd
issued a statement indicating that its revenues for the prior year were
overstated as a result of improperly recorded sales, including the sale
supported by the fax confirmation. The subsequent Security Co. investigation
uncovered that the fax was returned to the audit firm by Chick Viry, not the
customer. Moremoney & Associates was forced to pay substantial damages, and
Fenty Fergy was forbidden to practice before the Security Co. He subsequently
left public accounting.
1. Read
the case above and identify violations of Generally Accepted Auditing Standards.
2.
You are required to list the tests of
control and the substantive tests of transactions for the Cash Management
Audit.
Transaction Related Audit Objectives |
Key Existing Control |
Test of Control |
Substantive tests of Transactions |
Recorded cash receipts are for funds
actually received by the company (occurrence). |
Accountant
independently reconciles bank account (c1). Batch
totals of cash receipts are compared with computer summary reports. ( c4) |
(a)_______________ (b)______________ |
(i)_________________ (ii)________________ (iii)________________ |
Cash received is recorded in the cash
receipts journal (completeness). |
Prelisting
of cash receipts is prepared (c2). Checks are restrictively endorsed (c3). Batch
totals of cash receipts are compared with computer summary reports (c4). Statements
are sent to customers each month (c5) |
(a)__________________ (b)_________________ (c)________________ (d)________________ |
(i)_________________ (ii)________________ |
Cash receipts are deposited and
recorded at the amounts received (accuracy). |
Accountant
independently reconciles bank account (c1). Batch
totals of cash receipts are compared with computer summary reports (c4). Statements
are sent to customers each month (c5). |
(a)___________________ (b)__________________ (c)_________________ |
(i)__________________ (ii)________________ |
Cash receipts are correctly included
in the accounts receivable master file and are
correctly summarized (posting and summarization). |
Statements
are sent to customers each month (5). Computer
automatically posts transactions to the accounts receivable master file and
general ledger (c8). Accounts
receivable master file is reconciled to the general ledger on a monthly basis
(c9). |
(a)___________________ (b)__________________ (c)_________________ |
(i)_________________ (ii)_________________ (iii)_________________ |
Cash receipts transactions are
correctly classified (classification). |
Cash
receipts transactions are internally verified (c6). |
(a)__________________ |
(i)____________________ |
Cash receipts are recorded on the
correct dates (timing). |
Procedures
require recording of cash on a daily basis (c7). |
(a)___________________ |
(i)__________________ |
Get Free Quote!
358 Experts Online