Earthwear Clothiers Cash Testing December 31, 2016 Background: You are a staff auditor with Willis & Adams, CPAs. You have been assigned to the Earthwear Clothiers 2016 year end audit. Your senior has asked you to start year end field work by performing substantive testing procedures on the client's checking account. (Don't worry about the other cash accounts at this time.) Below is a summary of the instructions the senior has provided to you: Instructions: Leadsheet: Please cross reference the checking account balance you're testing on the leadsheet to the bank reconciliation provided by the client. 16-1: Please document the substantive testing procedures that you are going to perform in column G of this worksheet. Hint: See page 537 of your textbook for a recap of procedures to test bank reconciliations. 16-2a: The client has provided the December 2016 bank reconciliation for the checking account. Please document your substantive testing procedures performed in the tickmarks that have been added in the workpaper. You will perform substantive testing procedures of outstanding checks in worksheet 16-2b herein; however, all of your other testing procedures will be documented on the "Tickmarks" worksheet. Do not add any worksheets to this workpaper. 16-2b: Document your testing of the five selected outstanding checks in this worksheet. See the separate "Check copies" file for the copies of checks that you previously requested from the client for testing and the "Cutoff bank statement" file for the January 2017 cutoff bank statement Note: Some portions of this workpaper have already been completed for you. Earthwear Clothiers Note: Leadsheet The leadsheet is an 12/31/2016 excerpt of the client's general ledger Account # Account Name 105001 105002 105003 105004 Checking Account Savings Account Payroll Account - Imprest Account Petty Cash Total Cash $ % 12/31/2016 Ref 12/31/2015 Ref difference difference 3,859,114 3,624,946 234,168 6% 46,185,047 45,345,554 839,493 2% 1,000 1,000 5,000 6,500 (1,500) -23% 50,050,161 48,978,000 1,072,161 2% 0% Purpose: The purpose of this worksheet is to present the risks of material misstatement related to cash. For each risk, we will: (1) identify the relevant assertion, (2) identify whether the identified risk is also a fraud risk, and (3) outline substantive audit procedures that address the risk. Fraud Risk? Account Balance Business Cycle Identification of Risk of Material Misstatement ("What Could Go Wrong") Relevant Assertion Description of Fraud Risk Substantive testing procedure Yes/No Cash Cash balances recorded in the general ledger are not representative of valid accounts held Existence by the company. Yes Management could fraudulently misstate the cash balances by recording fictitious bank accounts in the general ledger. Cash Cash balances held by the company are not recorded in the general ledger. Completeness NO 6 N/A Cash The value of vash balances recorded in the general ledger are not recorded at the proper amounts as of year-end. Valuation and allocation No N/A Workpaper 16-2a Earthwear Clothiers Bank Reconciliation December 31, 2016 Checking Account Balance per Bank 3,705,473 (a) Balance per Books 3,864,514 Add: Add: Deposits in Transit 12/30/2016 12/28/2016 523,786 (c) 1,508,456 ! (c) 2,032,242 Subtract: NSF Check (5,400) (e) Subtract: Outstanding Checks C: 57692 C: 57693 C: 57694 C: 57695 C: 57696 W: 1862 C: 57697 357,830 (d) 223,195 (d) 87,915 (d) 219,473 (d) 428,504 (d) 539,114 (d) 22,570 (d) (1,878,601) Adjusted Balance 3,859,114 (b) Adjusted Balance 3,859,114 (6) Workpaper 16-2b Earthwear Clothiers Outstanding Check Testing 12/31/2016 Procedures: To test for understatement of subtractive items on the bank reconciliation, we used a reciprocal population of checks clearing the bank within the first 10 business days in January 2017. For each item selected, we will obtain a copy of the selected check, and examine it to determine if the item was properly included or excluded in the outstanding check listing of the reconciliation. Sample size: 5 Selection # Check # Amount Check Date Date Cleared Bank Properly Included/ Excluded? (h) Properly Excluded (f) 57702 (f) 134,043 () 1/5/2017 (g) 1/10/2017 1 $ $ 2 3 4 5 5 Tickmarks ) (a) (b) Recalculated bank reconciliation for mathematical accuracy. Agreed balance per bank reconciliation to general ledger (see Leadsheet). (c) ( (d) See testing of outstanding checks on worksheet 16-2b. (e) Reconciling item is deemed immaterial for testing. (f) (g) (h) Reviewed information per check copy and cutoff bank statement to determine if the selected check was properly included or excluded from the outstanding checks listing as of 12/31/2016 on the bank reconciliation (see 16-2a)