Assume a major client is involved in transactions with customers such that almost all of the cash receipts are transferred to the client's bank electronically. The bank separates the remittance advices and sends that summary directly to the accounts receivable department of the client. At the end of the day, the bank also sends a complete cash receipts summary to the treasury department. In addition, the client purchases many products through e-commerce relationships with its major suppliers. It has signed contracts whereby a notification of receipt of goods in the client's system will cause an electronic transfer to be made to the major supplier within 10 days (i.e., 10 days of receipts will be paid on the 11th day) according to contracted prices and automated receiving documents.

Required

a. What are monitoring controls? How might monitoring controls be used to ensure that all receipts of cash are handled correctly and on a timely basis?

b. What major monitoring controls would the auditor expect to find over cash receipts? For each monitoring control identified, state how the auditor would test to see whether the control is operating effectively and the implication of effective operation on the conduct of other control tests.

c. What monitoring controls would the auditor expect to find over cash disbursements? For each monitoring control identified, state how the auditor would test to see whether the control is operating effectively and the implication of effective operation on the conduct of other control tests.

d. If effective monitoring controls are not present, and the auditor has identified the client as high risk because of financial liquidity problems, what kind of tests should the auditor perform to see that cash is being recorded correctly and is not overstated?