Cash Case Problems Case 1. Define and illustrate KITING? What controls should the company institute to prevent KITING? What auditing procedures should be used to detect it? Solution: Kiting takes place by transferring funds from one bank account to another bank account, but not recording the deposit and withdrawal in the same period. For example, a December 31 transfer would record the receipt in one account on December 31 but not record the disbursement on the other account until January resulting in the recording of the transferred amount twice as of December 31. Management has manipulated, or inadvertently misrecorded items, such that cash is recorded twice. The client should carefully label all inter-company transfers in order to avoid kiting. Although extra procedures can be incorporated, normal control procedures that would lead to timely recording of all transactions should be sufficient to prevent kiting. The primary audit procedure to detect kiting is the bank transfer schedule. Such a statement lists all the inter-company transfers during the last few days of one year and the next few days of the next year. The auditor then verifies the recording of the transactions and the date the transactions cleared the bank to determine if all the items are appropriately recorded in the correct time period. Case 2 The following items were discovered during the audit of a cash acct. For each item identified, indicate the substantive audit procedure that most likely would have led to the discovery of the misstatement. 1. The company had overstated cash by transferring funds at year end to another account but failed to record the withdrawal until after year end. 2. On occasion, customers with smaller balances send in checks without specific identification of the customer except the name printed on the check. The client has an automated cash receipts process, but the employee opening the envelopes pocketed the cash and destroyed other supporting documentation. 3. Same finding (2), but the employee prepared a turnaround document that showed either an additional discount for the customer or a credit to the customer account. 4. The controller was temporarily taking cash for personal purposes but intended to repay the company (which never occurred). The cover up was executed by understating outstanding checks in the monthly bank reconciliation. 5. The company had temporary investments in 6 month TDs at the bank. The TDs were supposed to yield and annual interest rate of 12% but apparently yielding 6% only. 6. Cash remittances are not deposited in a timely fashion and are sometimes lost. 7. Substantial bank charges have not been recorded by the client prior to year end. 8. A loan has been negotiated with the bank to provide funds for a subsidiary company. The loan was negotiated by the controller of the division, who apparently was not authorized by the management. 9. A check written to a vendor had been recorded twice in the cash disbursements journal to cover cash shortage. Solution: Audit Finding Audit Procedure 1. Kiting Preparation of an inter-bank transfer schedule noting the dates the deposits and disbursements were recorded. 2. Employee pockets cash and destroyed supporting documentation. Confirmation of accounts receivable balances. Review of client procedures for dealing with customer complaints. Review of summary reports on nature of customer complaints and follow-up to customer complaints. 3. Employee confiscates cash but prepares a turnaround document to show extra cash discount. Analytical review of discounts recorded in comparison with company policy and past amounts. 4. Controller defalcation covered up through understating outstanding checks. Independent testing of the year-end bank reconciliation. 5. Certificates of Deposit seem to be earning a Testing of marketable securities through a typical worksheet which lists investments, date of investment, interest rate, Sample selection of discounts taken and comparison with authorized discounts. Tests of transactions including the examination of support for disbursements. Audit Finding lower than usual rate. Audit Procedure interest earned, etc. The auditor should recompute expected interest earned and compare with the amount recorded. Confirmation of securities and interest rate with the financial institution holding the securities. 6. Cash remittances are lost or are not recorded on a timely basis. Detailed cash trace. 7. Substantial bank service charges have not been recorded by the client. Perform testing of year-end client bank reconciliation. Obtain bank cut-off statement as a basis for testing items in the yearend reconciliation. Selection of cash receipts and testing via tracing through the recording process, including the prompt deposit. 8. Loan negotiated for Review of company policies a subsidiary by an regarding authorization to unauthorized make loans. divisional manager. Confirmation with banks as to existence of loans and guarantees made on loans of others. Review of major new loans and investigation for the authority to make the loans. Review of Board of Director minutes for important new loans. Corporate policies and vigilant review of policies by the Board of Directors. 9. Check was recorded twice to cover a cash shortage. Periodic review of old outstanding checks by someone independent of the cash management function. Bank reconciliation. Statistical sample of disbursements and support for disbursements. Internal audits to periodically evaluate adherence to corporate policies. Review of all major loans by top management. Independent bank reconciliation. Case 3 Westbrook Company had poor internal control over its cash transactions. The following are facts about its cash position on November 30. Cash books showed a balanced of $18,901.62, which included undeposited receipts. A credit of $100 on the bank statement did not appear in the company’s books The balance, according to the bank statement, was $15,550. Outstanding checks: No 62 $116.25 No 183 $150.00 No 284 $253.25 No 8621 $190.71 No 8623 $206.80 No 8632 $145.28 The only deposit was in the amount of $3,794.41 on December 7. The cashier handles all incoming cash and makes the bank deposits personally. He also reconciles the monthly bank statement. His November 30 reconciliation follows: Balance per books, Nov 30 $18,901.62 Add outstanding checks 8621 $190.71 8623 206.80 8632 45.28 442.79 $ 19,344.41 Less undeposited receipts 3,794.41 Balance per bank, Nov. 30 $ 15,550.00 Less unrecorded credit 100.00 True Cash , Nov 30 $ 15,450.00 Requirements: a. You suspect that the cashier may have misappropriated some money and are concerned specifically with the undeposited receipts. Prepare a schedule showing your estimate of the loss. b. How did the cashier attempt to conceal the theft? c. On the basis of the above information, name two specific features of internal control that were apparently missing. d. If the cashier’s Oct 31 reconciliation is known to be proper and you start your audit on Dec. 10, what specific substantive audit procedures would help you discover the theft? Solution: a. Schedule of Amount Taken by Cashier Westbrook Company Computation of Amount Abstracted by Cashier Cash – per books, November 30 Add: Credit by bank Adjusted Cash Balance Less: Adjusted Bank Balance: Bank Balance, November 30 Less: Outstanding Checks: 62 183 284 8621 8623 8632 $ 18,901.62 100.00 $ 19,001.62 $15,550.00 116.25 150.00 253.25 190.71 206.80 145.28 1,062.29 Cash which should be on hand for deposit: Cash Reported Estimated Amount of Theft 14,487.71 $ 4,513.91 3,794.41 $ 719.50 b. It appears that the cashier removed $719.50. The most likely methods used to conceal the theft would be: Not listing all outstanding checks on the bank reconcilements. Under-footing outstanding checks shown on the reconciliation. Subtracting an item from the bank balance that should be added to the book balance. c. Some of the control procedures that would have been effective in preventing or detecting the irregularity would include: Someone other than the cashier should trace cash receipts to the deposits in the bank. Someone other than the cashier should be responsible for preparing the bank reconciliation. d. Additional audit procedures that might be performed: Prepare an independent bank reconciliation as of November 30. Verify the items on the reconcilement by obtaining a cut-off statement from the bank, or make arrangements to receive the 12-31 bank statement directly from the bank. Foot all the items on the bank reconcilement.
