5-14

Perez, CPA, is auditing the financial statements of Mayor Forwarders, Inc. (MFI) for the year ended January 31, 2015. Perez has compiled two lists. The first contains the possible errors and frauds that may result in the misstatement of MFI's financial statements. The second is a corresponding list of controls that, if properly designed and implemented, could assist MFI in preventing or detecting the errors and frauds.

REQUIRED:

For each possible error and fraud in the left column, select from the right column one control that, if properly designed and implemented, could most likely assist MFI in preventing or detecting the error and fraud. The entries in the list of controls may be selected once, more than once, or not at all.

5-23

The Art Appreciation Society operates a museum for the community's benefit and enjoyment. During hours when the museum is open to the public, two clerks are positioned at the entrance and collect a P5 admission fee from each nonmember patron. Members of the Art Appreciation Society enter free of charge on presenting their membership cards.

At the end of each day, one of the clerks delivers the proceeds to the treasurer.The treasurer counts the cash in the presence of the clerk and places it in a safe. Each Friday afternoon, the treasurer and one of the clerks deliver all cash held in the safe to the bank and receive an authenticated deposit slip, which provides the basis for the weekly entry in the cash receipts journal.

The board of directors of the Art Appreciation Society has identified the need to improve its internal control over cash admission fees. The board has determined that the cost of installing turnstiles or sales booths or of otherwise altering the physical layout of the museum would greatly exceed any benefits that may be derived. However, the board has agreed that the sale of admission tickets must be an integral part of its improvement efforts.

Santos has been asked by the board of directors of the Art Appreciation Society to review internal control over cash admission fees and to provide sddestions for improvement.

REQUIRED:

Indicate weaknesses that Santos should identify in the existing internal control over cash admission fees and recommend one improvement for each of the weaknesses you identifies. Organize your answer in two columns, as follows:

5-28

The following questions are included on the internal control questionnaire for Ingrid Company related to cash.

1. Do different people handle cash and maintain the records of cash receipts?

2. Is a prelisting of cash made immediately for mail receipts?

3. Are cash receipts deposited intact daily?

4. Is monthly bank reconciliation prepared by someone not involved in handling cash?

5. Does an employee verify and approve cash discounts taken?

6. Does someone other than the cashier obtain the validated deposit slip and compare the balance to the cash summary?

REQUIRED:

a. Identify the financial statement assertion to which the control relates.

b. Identify a potential misstatement that could arise from the absence of the control.

c. Identify the tests of controls an auditor might perform for controls that exist.

d. Indicate the substantive tests of transactions that an auditor might perform after performing the tests of controls if the control is ineffective.