Shiny Happy Windows Co. (SHW) is a window cleaning company. Customers’ windows are cleaned monthly and the window cleaner then posts a stamped addressed envelope for payment through the customer’s front door.

SHW has a large number of receivable balances and these customers pay by cheque or cash, which is received in the stamped addressed envelopes in the post. The following procedures are applied to the cash receipts cycle:

1. A junior clerk from the accounting department opens the mail and if any cheques or cash have been sent, she records the receipts in the cash received log and then places all the monies into the locked cash box.

2. The contents of the cash box are counted each day and every few days these sums are deposited at the bank by whichever member of the accounting team is available.

3. The cashier records the details of the cash received into the cash receipts journal and also updates the sales ledger.

4. Usually on a monthly basis, the cashier performs a bank reconciliation, which he then files. If he misses a month, he catches it up in the following month’s reconciliation.

Required

a. For the cash cycle of SHW:

i. Identify and explain three deficiencies in the system.

ii. Suggest controls to address each of these deficiencies.

iii. List tests of controls the auditor of SHW would perform to assess if the controls are operating effectively.

b. Describe substantive procedures an auditor would perform in verifying this company’s bank balance.