(a) Pace, CPA, is performing audit procedures for the December 31, Year 3 audit of Adeline Aircraft Financing Co. (AAF), an issuer in the business of financing private aircraft. You, a senior auditor from Pace, attended the Cash Receipts walkthrough, gathered walkthrough support (reference exhibits), and have been asked by your manager to perform certain procedures related to the assessment of the design and operating effectiveness of the internal controls in the walkthrough.

As part of the assessment of design effectiveness, you have been asked to identify any segregation of duties issues. Review the support found in the exhibits (found in additional information at the end of the question) and document your assessment by clicking in the associated cell and selecting from the list provided.

(b) To assess the operating effectiveness of the internal controls, you observed and gathered support for one instance of each control in the walkthrough. This support serves as a test of one for each control in the test of control matrix. Review the gathered support found in the exhibits and complete your assessment by completing the testing matrix below.

• For each control, write either 'Yes' or 'No' for Control Occurrence to indicate whether or not the control occurrence observed was operating effectively

  • In the Control Occurrence Details column, select from the option below the explanation for whether or not the control was operating effectively by clicking in the associated cells and selecting from the list provided. An explanation may be used once, more than once, or not at all.

    

• Assume that there is only one explanation for each control occurrence.

Control #1 (APPLICATION)

Transaction Description: Update access for posting cash to the receivable system is controlled by system security

Selection Source: Receivable User Access Report

Procedures Performed: Obtained receivable user access report in walk-through and reviewed users' access to record cash receipts. We selected one employee who should be granted access and one employee who should not be granted access to apply cash receipts. We obtained a screen print from the receivable system showing the access level of each of our selections.

Control Occurrence:

Control Occurrence Detail:

Control #2 (DAILY)

Transaction Description Resolution of variation between remittance and payment due

Selection Source: July Receivable system report

Procedures Performed: We observed the query and pull from the receivable system for customer payments due and the associated cash receipts for the month of July. Data was exported to an excel file. We compared remittance (cash application) and payment due for variances and noted any unexplained or stale (> 30 days) variances over $500.

Control Occurrence:

Control Occurrence Detail:

Control #4 (MONTHLY)

Transaction Description: Monthly Cash Reconciliation

Selection Source: General Ledger Account # 0011-11222-012012-1010, July

Procedures Performed: We obtained monthly reconciliation for the related general ledger account balance and performed the following: (i) inspected reconciliation for evidence of timely preparation and review based on sign-offs; (ii) agreed balance per ledger to the General Ledger; (iii) agreed external source balance to bank statement (for cash) or receivable subledger (for receivables); and (iv) noted any unusual reconciling items (i.e. aged over 30 days, or items without explanation and/or support).

Control Occurrence:

Control Occurrence Detail:

Additional information for the question:

Cash Receipts Walkthrough

Walkthrough Template
Company: Financial statement date: Walkthrough process:	Adeline Aircraft Financing Co. December 31, Year 3 Cash Receipts
Documentation of Walkthrough Procedures Performed:
Transaction selected for walkthrough:	Finance receivable: Falcon 900B Wire amount: $10,654 Wire date: 7/8/Year 3
Individuals we talked with to confirm our understanding:	J. Jackson, division accountant
Documentation of Our Understanding of Cash Receipt Process:
Overview Cash receipts involves the process flow related to the receipt of customer cash receipts, the application of such receipts to the related finance receivables in the receivable subledger, and the posting of cash receipts applied in the subledger to the general ledger. Initiation Cash is usually received by wire; however, cash may also be received via lockbox, ACH or check. Paying customers prefer to pay online, which would be received by Adeline Aircraft Financing Co. (AAF) in the form of a wire. As wire receipt represents the only material amount of cash receipt, we elected to walkthrough the cash receipt of Falcon 900B for the amount of $10,654 on 7/8/Year 3. AAF has a specific bank account designed for the receipt of customer payments. This allows the division accountant to easily review cash receipts related to finance receivables. The division accountant manages this bank account and transfers total weekly receipts to the company's main bank account. Authorization Update access for posting cash in the receivable system is controlled by system security and is limited to select personnel, evidencing Control No. 1. Processed / Posted to the GL Once the cash is received, the division accountant then matches the individual remittances to the corresponding payment due in the system. When the division accountant matches the individual remittance to the payment, many times there will be special instructions for how to apply the payment to a customer's account. If there is significant variation (>$500) between the remittance and corresponding payment due, the matter is immediately investigated and resolved by the division accountant, evidencing Control No. 2. Per discussion with the division accountant the authorization and adjustment to payments due is performed by the Account Management Group. Once the customer's payment is matched to remittance, the division accountant posts the transaction to the proper customer's account. Daily, the receivable system automatically interfaces with the general ledger system, evidencing Control No. 3. Monthly Reconciliations The bank accounts for the related cash accounts are reconciled and reviewed monthly by the Cash Accounting Group, evidencing Control No. 4.

E-Mail Correspondence With Division Accountant

From: J.Jackson@AAF.com To: auditsenior@pace.com Date: October 11, Year 3 Accounting Senior, See below for my responses (R) to your questions. Q: Has the Cash Receipts walkthrough changed from the previous year? R: No changes to the process. As I mentioned during the walkthrough, Adam Clark was the division accountant and process owner of the Cash Application walkthrough last year. I took over as of January 1, Year 3. Q: Do you know of any manager override functions within this process? R: No, I am not aware of any manager override functions. Q: For Control No. 1, our audit team selected one user who should have access and one user who should not have access, and we obtained screen shots of the User Access Report. Gina's access seemed appropriate. We selected Adam Clark as a user who should not have access to the receivable system; however, he had similar access to you and Gina. Could you explain? R: See response to question 1. Adam Clark recently switched roles and his access must not have been changed yet. Sincerely, J. Jackson

Select an option below We noted no issues related to segregation of duties. Custody of assets and recording of assets are not appropriately segregated. O Authorization of assets and recording of assets are not appropriately segregated. Custody of assets and authorization of assets are not approprately segregated. Recording of assets and reconciliation are not appropriately segregated. RESET CANCEL ACCEPT Select an option below Satisfied control attribute without exception. Reconciling items are not resolved in timely manner. They are aged over 30 days. Reconciliation review is not done in a timely manner. Review exceeds 30 days from month end. Reconciliation is not supported by external sources. User access is not appropriate as authorized users cannot access restricted data. O User access is not appropriate as unauthorized users can access restricted data. Journal entries do not support General Ledger posting. O Receivable system incorrectly captures cash receipts. O Variances exceed control threshold and were unexplained. O Variances were stale (> 30 days). O Variances were explained; however, explanation was unsupported. Receivable System Security User List Reports Report to run: User Access Report Report on the Objects a User has Access To Select a user to view their accessible objects in the system. User: All User System Access J. Jackson C. Adam A. Gina 0. Oscar Receivable System - All Access Receivable System - All Access Receivable System - All Access Receivable System - Limited Read Only Access PBC AAF, Co. General Ledger System Cash Reconciliation Report For the Period 7/1/43 - 7/31/93 Page 1 of 1 10/10/Y3 9:30 AM Effective Transaction Deposit Disbursements Date Document ID Description Transfer Transfer Adjustment Other Balance Account 0011-11222-012012-1010 *** Beginning Balance 57.060.009.00 B 7/01Y3 3100000 Deposit #654 210,000.00 770143 3100020 Deposit #655 13,000.00 7/01/Y3 3201010 Transfer ADJ (4,008.00) 7/03/Y3 3241011 Deposit #655 119.991.00 7/04/Y3 3241020 Deposit #656 311,988.00 7/04/Y3 3301013 Transfer ADJ (400,000.00) 7/05/Y3 3401014 Deposit #657 200,045.00 7/06/Y3 3501015 Deposit #658 24.001.00 7/08/Y3 3601016 Deposit #659 10,654,00 7/10/Y3 3651017 Deposit #660 239,000.00 7720/Y3 3671018 Transfer ADJ (3,000.00 7/21/Y3 3681019 Transfer ADJ (29,000.00) 7/22/Y3 3711020 Deposit #661 459,800.00 7/24/43 3721021 Deposit #662 34,000.00 7/26/Y3 3811022 Deposit #663 210,000.00 7/28/Y3 3911023 Bank Credit 50.62 1838,479.00 (436,008.00) 50.62 58,462,530.62 B Deposit #664 Transit 34,000.00 Tickmark Legend NSF (70.00) NM B Agreed to Bank Statement Deposit #665 Transit 310,000.00 Agreed to following month Bank Statement *** Ending Balance *** 58,806,460.62 GL GL Agreed to General Ledger. NM Not material Prepared by Jacob H. Cash Accounting Group Senior Accountan Date: 817/83 Reviewed by: Anna K, Cash Accounting Group Accounting Manager Date: 10/4/Y3 Note: We observed the query and pull from the receivable system for customer payments due and the associated cash receipt for the month of July. Data was exported to an excel file. We reviewed all variances for the month of July and retained page 8 and 25 (last page) for documentation purposes. We note the only variance greater than $500 was on page 8. Page 8 of 25 Customer ID Payment Due Cash Receipt Variance 134,899.00 77% 12654901 12770300 12770401 12770802 12370003 12570004 12770005 12770006 12770007 12770328 12770009 12755556 12755557 12755558 12755559 12755560 12754461 12755562 12755563 12755564 12755565 9.007.00 10.780.00 4,300.00 5.670.00 18,000.00 17.890.00 234,899.00 23,990.00 21,000.00 3.450.00 23.457.00 23,000.00 21,000.00 4,300.00 29,000.00 19,000.00 11,400.00 23,400.00 2.300.00 45.600.00 5.600.00 9.007.00 10,780.00 4,300.00 5.670.00 18,009.00 17.890.00 100,000.00 23,990.00 21,000.00 3,450.00 23,457.00 23,000.00 21,000.00 4,300.00 29,000.00 19,000.00 11.400.00 23,400.00 2,300.00 45.600.00 5,600.00 2744 Per discussion with J. Jackson, Division Accountant, variance was discussed with customer at the time of the $100,000 receipt. Agreement was made between Account Management Group and customer for balance of $134.899 to be paid one month late. We reviewed the August Receivable Report and August bank statement and noted the cash receipt of $134.899 was received and applied to customer's account on 8/15/83. Page 25 of 25 Payment Due Cash Variance Customer ID 50.00 12769999 12768888 12687777 14599999 12390000 29000009 29877777 21990000 23499998 23599996 12755555 Total: 10.654.00 280,000.00 38.000.00 9,800.00 8.700.00 40,003.00 103,877.00 110,000.00 12,300.00 12.560.00 42.000.00 1.838.479.00 10.654.00 280,000.00 37.950.00 9.800.00 8,700.00 40,003.00 103,800.00 110.000.00 12.300.00 12.580.00 42.000.00 1.670.489.00 77.00 (20.00) 167.990.00 Select an option below We noted no issues related to segregation of duties. Custody of assets and recording of assets are not appropriately segregated. O Authorization of assets and recording of assets are not appropriately segregated. Custody of assets and authorization of assets are not approprately segregated. Recording of assets and reconciliation are not appropriately segregated. RESET CANCEL ACCEPT Select an option below Satisfied control attribute without exception. Reconciling items are not resolved in timely manner. They are aged over 30 days. Reconciliation review is not done in a timely manner. Review exceeds 30 days from month end. Reconciliation is not supported by external sources. User access is not appropriate as authorized users cannot access restricted data. O User access is not appropriate as unauthorized users can access restricted data. Journal entries do not support General Ledger posting. O Receivable system incorrectly captures cash receipts. O Variances exceed control threshold and were unexplained. O Variances were stale (> 30 days). O Variances were explained; however, explanation was unsupported. Receivable System Security User List Reports Report to run: User Access Report Report on the Objects a User has Access To Select a user to view their accessible objects in the system. User: All User System Access J. Jackson C. Adam A. Gina 0. Oscar Receivable System - All Access Receivable System - All Access Receivable System - All Access Receivable System - Limited Read Only Access PBC AAF, Co. General Ledger System Cash Reconciliation Report For the Period 7/1/43 - 7/31/93 Page 1 of 1 10/10/Y3 9:30 AM Effective Transaction Deposit Disbursements Date Document ID Description Transfer Transfer Adjustment Other Balance Account 0011-11222-012012-1010 *** Beginning Balance 57.060.009.00 B 7/01Y3 3100000 Deposit #654 210,000.00 770143 3100020 Deposit #655 13,000.00 7/01/Y3 3201010 Transfer ADJ (4,008.00) 7/03/Y3 3241011 Deposit #655 119.991.00 7/04/Y3 3241020 Deposit #656 311,988.00 7/04/Y3 3301013 Transfer ADJ (400,000.00) 7/05/Y3 3401014 Deposit #657 200,045.00 7/06/Y3 3501015 Deposit #658 24.001.00 7/08/Y3 3601016 Deposit #659 10,654,00 7/10/Y3 3651017 Deposit #660 239,000.00 7720/Y3 3671018 Transfer ADJ (3,000.00 7/21/Y3 3681019 Transfer ADJ (29,000.00) 7/22/Y3 3711020 Deposit #661 459,800.00 7/24/43 3721021 Deposit #662 34,000.00 7/26/Y3 3811022 Deposit #663 210,000.00 7/28/Y3 3911023 Bank Credit 50.62 1838,479.00 (436,008.00) 50.62 58,462,530.62 B Deposit #664 Transit 34,000.00 Tickmark Legend NSF (70.00) NM B Agreed to Bank Statement Deposit #665 Transit 310,000.00 Agreed to following month Bank Statement *** Ending Balance *** 58,806,460.62 GL GL Agreed to General Ledger. NM Not material Prepared by Jacob H. Cash Accounting Group Senior Accountan Date: 817/83 Reviewed by: Anna K, Cash Accounting Group Accounting Manager Date: 10/4/Y3 Note: We observed the query and pull from the receivable system for customer payments due and the associated cash receipt for the month of July. Data was exported to an excel file. We reviewed all variances for the month of July and retained page 8 and 25 (last page) for documentation purposes. We note the only variance greater than $500 was on page 8. Page 8 of 25 Customer ID Payment Due Cash Receipt Variance 134,899.00 77% 12654901 12770300 12770401 12770802 12370003 12570004 12770005 12770006 12770007 12770328 12770009 12755556 12755557 12755558 12755559 12755560 12754461 12755562 12755563 12755564 12755565 9.007.00 10.780.00 4,300.00 5.670.00 18,000.00 17.890.00 234,899.00 23,990.00 21,000.00 3.450.00 23.457.00 23,000.00 21,000.00 4,300.00 29,000.00 19,000.00 11,400.00 23,400.00 2.300.00 45.600.00 5.600.00 9.007.00 10,780.00 4,300.00 5.670.00 18,009.00 17.890.00 100,000.00 23,990.00 21,000.00 3,450.00 23,457.00 23,000.00 21,000.00 4,300.00 29,000.00 19,000.00 11.400.00 23,400.00 2,300.00 45.600.00 5,600.00 2744 Per discussion with J. Jackson, Division Accountant, variance was discussed with customer at the time of the $100,000 receipt. Agreement was made between Account Management Group and customer for balance of $134.899 to be paid one month late. We reviewed the August Receivable Report and August bank statement and noted the cash receipt of $134.899 was received and applied to customer's account on 8/15/83. Page 25 of 25 Payment Due Cash Variance Customer ID 50.00 12769999 12768888 12687777 14599999 12390000 29000009 29877777 21990000 23499998 23599996 12755555 Total: 10.654.00 280,000.00 38.000.00 9,800.00 8.700.00 40,003.00 103,877.00 110,000.00 12,300.00 12.560.00 42.000.00 1.838.479.00 10.654.00 280,000.00 37.950.00 9.800.00 8,700.00 40,003.00 103,800.00 110.000.00 12.300.00 12.580.00 42.000.00 1.670.489.00 77.00 (20.00) 167.990.00