Revenue/Receipts—Cash Flashcards
Which of the following would be the best protection for a company that wishes to prevent the “lapping” of trade accounts receivable?
Segregate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail.
Segregate duties so that no employee has access to both checks from customers and currency from daily cash receipts.
Have customers send payments directly to the company’s depository bank.
Request that customers’ payment checks be made payable to the company and addressed to the
Have customers send payments directly to the company’s depository bank.
This answer is correct because lapping of trade accounts receivable involves an abstraction of funds and subsequent delay in crediting receipts to accounts receivable. If customers send payments directly to a depository bank, there is no opportunity for abstraction of funds or subsequent misapplication.
Which of the following is not a basic rule for achieving strong internal control over cash?
Separate the cash handling and recordkeeping functions.
Decentralize the receiving of cash as much as possible.
Deposit each day’s cash receipts by the end of the day.
Have bank reconciliations performed by employees independent with respect to handling cash.
Decentralize the receiving of cash as much as possible.
This answer is correct because decentralization of cash receipts generally would not increase internal control; in fact, the additional points of cash receipt may well be more difficult to control.
Employers bond employees who handle cash receipts because fidelity bonds reduce the possibility of employing dishonest individuals and
Protect employees who make unintentional misstatements from possible monetary damages resulting from their misstatements.
Deter dishonesty by making employees aware that insurance companies may investigate and prosecute dishonest acts.
Facilitate an independent monitoring of the receiving and depositing of cash receipts.
Force employees in positions of trust to take periodic vacations and rotate their assigned duties.
Deter dishonesty by making employees aware that insurance companies may investigate and prosecute dishonest acts.
The requirement is to identify a reason that employers bond employees who handle cash receipts. Answer (b) is correct because employee knowledge that bonding companies often prosecute those accused of dishonest acts may deter employees’ dishonest acts. Answer (a) is incorrect because bonding protects the employer from dishonest acts, not the employee from unintentional errors. Answer (c) is incorrect because the bonding company does not serve the role of independent monitoring of cash. Answer (d) is incorrect because while rotation of positions and forcing employees to take periodic vacations are effective controls for preventing fraud, they are not accomplished through bonding.
Which of the following procedures would an auditor most likely perform to test controls relating to management’s assertion about the completeness of cash receipts for cash sales at a retail outlet?
Observe the consistency of the employees’ use of cash registers and tapes.
Inquire about employees’ access to recorded but undeposited cash.
Trace deposits in the cash receipts journal to the cash balance in the general ledger.
Compare the cash balance in the general ledger with the bank confirmation request.
Observe the consistency of the employees’ use of cash registers and tapes.
The requirement is to identify the procedure an auditor most likely would perform to test controls relating to management’s assertion about the completeness of cash receipts for cash sales at a retail outlet. Answer (a) is correct because the use of cash registers and tapes helps assure that all such sales are recorded. Answer (b) is incorrect because the cash has already been recorded. Answer (c) is incorrect because the procedure only deals with recorded deposits, and therefore the completeness assertion is not addressed as directly as in answer (a). Answer (d) is incorrect because one would not expect the cash balance in the general ledger to agree with the bank confirmation request amount due to items in transit and outstanding at the point of reconciliation.
When a customer fails to include a remittance advice with a payment, it is a common practice for the person opening the mail to prepare one. Consequently, mail should be opened by which of the following four company employees?
Credit manager.
Receptionist.
Sales manager.
Accounts receivable clerk.
Receptionist.
This answer is correct because remittances should be opened by an individual such as a receptionist who is independent of the sales function. That individual will prepare any needed remittance advice.
An auditor has identified the controller’s review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs.
Which of the following types of audit procedures do these actions illustrate?
Observation and inspection of records.
Confirmation and reperformance.
Inquiry and inspection of records.
Analytical procedures and reperformance.
Inquiry and inspection of records.
This answer is correct because the interview is an inquiry and the review is an inspection of records.
For good internal control, which of the following functions should not be the responsibility of the treasurer’s department?
Data processing.
Handling of cash.
Custody of securities.
Establishing credit policies.
Data processing.
This answer is correct because data processing is a recordkeeping function which is incompatible with the treasurer’s department’s custodial responsibility.
Upon receipt of customers’ checks in the mailroom, a responsible employee should prepare a remittance listing that is forwarded to the cashier. A copy of the listing should be sent to the
Internal auditor to investigate the listing for unusual transactions.
Treasurer to compare the listing with the monthly bank statement.
Accounts receivable bookkeeper to update the subsidiary accounts receivable records.
Entity’s bank to compare the listing with the cashier’s deposit slip.
Accounts receivable bookkeeper to update the subsidiary accounts receivable records
The requirement is to determine the individual or organization to which a list of remittances should be forwarded to in addition to the cashier. Answer (c) is correct because the accounts receivable bookkeeper will use the listing to update the subsidiary accounts receivable records. Answer (a) is incorrect because internal auditors will not normally investigate each day’s listing of remittances for unusual transactions. Answer (b) is incorrect because the treasurer will not in general compare daily listings to the monthly bank statement. Answer (d) is incorrect because the list will not be sent to the bank.
Which of the following controls most likely would reduce the risk of diversion of customer receipts by an entity’s employees?
A bank lockbox system.
Prenumbered remittance advices.
Monthly bank reconciliations.
Daily deposit of cash receipts.
A bank lockbox system.
The requirement is to identify the control most likely to reduce the risk of diversion of customer receipts by an entity’s employees. Answer (a) is correct because a bank lockbox system eliminates employee contact with cash receipts, and thereby greatly reduces the risk of diversion by employees. Answer (b) is incorrect because remittance advices are ordinarily prenumbered using the numbering schemes of the various customers and not of the client; also, even if a prenumbering system is instituted, difficulties remain in assuring that all receipts are recorded. Answer (c) is incorrect because a monthly bank reconciliation is only likely to be effective when receipts are deposited and then abstracted. Answer (d) is incorrect because while the daily deposit of cash receipts may reduce the risk of employee diversion of receipts, the procedure is not as effective as the bank lockbox system, which eliminates employee contact with the receipts.
Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom?
The cashier prepares the daily deposit.
The cashier makes the daily deposit at a local bank.
The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
The cashier endorses the checks.
The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
This answer is correct because posting the receipts to the accounts receivable subsidiary ledger cards provides the cashier with both recordkeeping and custodial responsibilities.
An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using
Employee fidelity bonds.
Independently prepared mailroom prelists.
Daily check summaries.
A bank lockbox system.
A bank lockbox system.
This answer is correct because a bank lockbox system will result in collection of receivables by a bank, thereby eliminating employee contact with the cash.
Sound internal control dictates that immediately upon receiving checks from customers by mail, a responsible employee should
Add the checks to the daily cash summary.
Verify that each check is supported by a prenumbered sales invoice.
Prepare a duplicate listing of checks received.
Record the checks in the cash receipts journal.
Prepare a duplicate listing of checks received.
The requirement is to identify the proper procedure to be performed immediately upon receipt of checks by mail. Sound internal control requires the use of adequate documentation to ensure that all transactions are properly recorded. This helps the company attain the financial statement assertion of completeness. Answer (c) is correct because the preparation of a duplicate listing of checks received provides the company with a source document of all the checks received that day. One list is then forwarded to the employee responsible for depositing the checks at the end of the day and the other list is sent to the accounting department so that they can post the amount to the cash receipts journal. Answer (a) is incorrect because the daily cash summary will ordinarily be prepared at the end of the day when all checks have been received. Answer (b) is incorrect because checks need not be compared to a sales invoice. Answer (d) is incorrect because the employee opening the mail should not also perform the recordkeeping function of recording the checks in the cash receipts journal.
Which of the following internal control procedures would most likely deter lapping of collections from customers?
Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries.
Authorization of write-offs of uncollectible accounts by a supervisor independent of credit approval.
Segregation of duties between receiving cash and posting the accounts receivable ledger.
Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries.
Authorization of write-offs of uncollectible accounts by a supervisor independent of credit approval.
Lapping occurs when a remittance received from one customer is stolen and the shortage is hidden by crediting the first customer’s account with the cash received from a second customer. Lapping is best prevented by separating custody from recording. The person responsible for receiving cash should not also be responsible for posting the amounts to the accounts receivable subsidiary ledger.
Immediately upon receipt of cash, a responsible employee should
Record the amount in the cash receipts journal.
Prepare a remittance listing.
Update the subsidiary accounts receivable records.
Prepare a deposit slip in triplicate.
Prepare a remittance listing.
The immediate preparation of a remittance listing upon receipt of cash ensures that a control over cash received is established.
An auditor would be most likely to limit substantive audit tests of sales transactions when control risk is assessed as low for the existence or occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting
Opening and closing inventory balances.
Cash receipts and accounts receivable.
Shipping and receiving activities.
Cutoffs of sales and purchases.
Cash receipts and accounts receivable.
Substantive tests of sales transactions would be limited when control risk is assessed as low for existence/occurrence and evidence has been gathered supporting cash receipts and accounts receivable. Consider the accounts which are impacted by sales transactions, DR Cash or Accounts Receivable and CR Sales. The combination of low control risk in this area plus evidence supporting cash receipts and accounts receivable provides the auditor with assurance that sales transactions have actually occurred.
While evidence supporting shipping activities would provide some support for the occurrence of sales transactions, it is not as strong as that provided by evidence supporting cash receipts and accounts receivable. Evidence supporting receiving activities would not necessarily provide any support for the occurrence of sales transactions.
Evidence supporting cutoffs of sales and purchases would impact the completeness assertion for those transactions rather than the existence/occurrence assertion.
Evidence supporting opening and closing inventory balances impacts the occurrence of purchases and cost of goods sold rather than sales.
