Page 1 of 9 Audit and Assurance Written Assignment Case Study: Cash Inquiry Key Information: Client: Brownie Bakers Inc Fiscal year end: December 31 Tolerable misstatement: $50,000 Planned scope for testing outstanding checks = 1/10 of tolerable misstatement Number of Employees = 25 Key Players: Duncan Hynes -- Staff auditor with Cookie, Cake & Cannoli PC Bettie Krocker -- Owner/President, Brownie Bakers Inc Debbie Little CFO, Brownie Bakers Inc Ed T Mine -- Accounts payable manager Sara Li -- Bookkeeping clerk Workpapers: Bank reconciliations and cancelled checks follow the script below. Duncan Hynes refers to them during his inquiry. Instructions: Read the following client inquiry scenario. Highlight significant audit evidence/issues. Indicate the Dos and Donts of interviewing techniques based on this given scenario (Duncans interview of Debbie). What would you do differently in this situation? Describe the business etiquette that should be followed compared to what is presented in the scenario. Duncan makes a number of unacceptable comments about the work he is doing for the audit, describe what they are and what should be done. Also mention any workpaper deficiencies you note. Extra credit for figuring out the actual issues behind the responses/lack of responses to Duncans inquiry. Script Duncan Hynes, Staff Accountant: Hi, Debbie Little! Whats happening? (Standing in doorway chewing gum and a wearing a wrinkled shirt.) Debbie Little, CFO: (Looking frazzled and distracted.) Huh? Oh, hi, Duncan Hynes. Did I miss seeing a meeting scheduled with you on my calendar? Duncan Hynes: No, we didnt have anything scheduled, but I have a few quick questions about cash that I wanted to get out of the way. (Walking into the office and sitting down without being invited.) Debbie Little: (Speaking sarcastically, while looking at watch). Well, why dont you have a seat? Duncan Hynes: Thanks, Debbie! Im trying to get out of here in time to catch a pick-up basketball game at the gym and then catch drinks with the fellas. This will just take a minute. Debbie Little: (Sarcastically again.) Really? Literally, just a minute? Duncan Hynes: Would I lie to you, my friend? Hey, I noticed that theres a $3,000 check on your operating accounts outstanding check list that appears pretty old. Do you know whats up with that? Debbie Little: No, not really. If you have a check number, I can get Ed T Mine, the accounts payable manager, to look it up for you. I recall there may be a check to one of our vendors that were holding because of a dispute over what we owe. Duncan Hynes: Nah, unfortunately I dont have the specific check details. Ill drop that by in the morning, but I cant promise what time because I dont know what time Ill get home tonight! (Laughing a little too loudly.) I also noticed theres a payroll check for $750 outstanding. Any idea what thats about? Debbie Little: Yes. Its for a bookkeeping clerk, Sara Li whos on emergency extended personal leave. She left unexpectedly and didnt have a chance to collect his check. Were just holding onto it until we figure out how to properly handle the situation. Most of the employees have direct deposit, so we usually carry a zero balance right after payroll is processed. Duncan Hynes: Oh. I hope everything is all right. I know that Ed thinks of her as a daughter. Hey, who are authorized check signers around here again? Debbie Little: Well, I sign all checks under $10,000. All checks over $10,000 require the signature of Bettie Krocker, the owner and President. Duncan Hynes: Did you hold any other checks at year-end besides the one you just mentioned? Debbie Little: Not that I recall. Duncan Hynes: (Shuffling through a stack of loose papers.) Uhhmm ...do you have a bank reconciliation for your savings account? I seem to be missing it. Debbie Little: We actually dont perform a formal reconciliation of the savings account, other than putting in the journal entry request to post the interest earned. I post these adjustments periodically. In fact, I post all the journal entries for cash reconciling items. Duncan Hynes: Okay. Ill just create a bank reconciliation to put in our workpapers for me to document my testing for that account. I dont want to get a review note asking me to do it later. By the way, how often is the operating account reconciled? Debbie Little: Ed reconciles it by the fifteenth of the following month. She gives the necessary journal entries to me to post. Duncan Hynes: Cool. Who reviews the operating account reconciliation? Debbie Little: Bettie. Duncan Hynes: Does he ever note anything unusual? Debbie Little: Well, this month Ed noted an error in the banks posting of check number 6020. The correct amount was $825, not $1,825 as the bank processed it. You will see $1,000 as a reconciling item in December. Duncan Hynes: Oh! So, have you talked to the bank about what happened yet? Debbie Little: (Sitting in silence for a few moments. Looking off in distance and not reacting.) Duncan Hynes: (Shifting uncomfortably in seat.) So did you get a credit from the bank yet? Debbie Little: (Still unresponsive.) Duncan Hynes: But your bank account balances otherwise, right? Debbie Little: (Shaking head like coming out of deep thought.) What? Oh, Im writing up a journal entry to post to correct the error. Duncan Hynes: Wow! Good thing you caught that! Debbie Little: (Looking sullen and distracted.) Yeah, good thing. Duncan Hynes: Hey, I read in last years workpapers that petty cash is generally reconciled monthly with a reimbursement check. However, I didnt see any checks written in December or January to post the current activity. Debbie Little: The receptionist maintains petty cash. I know I just signed a check in February for $250. Duncan Hynes: What was the petty cash that was being reimbursed used for? Debbie Little: Typically, its for charitable contributions, postage, and office supplies. Duncan Hynes: Cool. Maybe you can help me with this next one. I was testing some expenses at year-end, and I noted that this $10,750 invoice for S. Li Enterprises that was paid for with Check #6054 was not approved for payment. Im assuming this is probably an oversight. Was this invoice approval just missed? (Hands invoice to the client, wiping something off it.) Oops! Let me wipe that off! It looks like I got a little careless with my coffee late last night when I was working on this at home. Debbie Little: Yeah. (Looking a little nervous.) Duncan Hynes: Can you tell me more about this company? I notice it has a P.O. Box for an address. Debbie Little: (In a very defensive and angry tone.) Look! Whats this all about? I really dont have time to tell you about all of our vendors. Duncan Hynes: Hey, relax! I just want to make sure that this invoice was properly approved. Debbie Little: (Very assertively.) Trust me, it was! Duncan Hynes: Great! Ill document it that way as an isolated exception. Are you aware of any accounts subject to withdrawal restrictions or designated for a special purpose? Debbie Little: No. (Looking very annoyed and answering very curtly.) Duncan Hynes: (Looking uncomfortable and uncertain about what to do.) Uhhmm ...I guess Ill be going now. See you tomorrow. (Rushing out quickly without saying thank you, shaking hands, or waiting for a response.) Debbie Little: (Shakes head and puts head in hands.) Balance per bank statement as of 12/31/2022 50,100.00$ Deposit in transit 34,425.00 84,525.00 Less: Outstanding checks Number Amount 5025 3,000.00 6050 3,500.00 6052 7,500.00 6053 250.00 6054 10,750.00 6056 20,000.00 Total outstanding checks: 45,000.00 Less: Bank charges 25.00 Bank Error #6020 1,000.00 Total other receonciling: 1,025.00 Balance per general ledger 38,500.00$ Brownie Bakers Inc 12/31/2022 Cash - Operating Balance per bank statement 750.00 Deposit in transit 0.00 Less: Outstanding checks Number Amount 7785 750.00 7891 Void Total outstanding checks: 750.00 Balance per general ledger 0.00 Brownie Bakers Inc 12/31/2022 Cash - Payroll Brownie Bakers Inc CK# 6050 13 Cupcake Place Bakersvilles, NY 10019 Pay to the order of $ Three thousand five hundred and 00/100 Dollars Da Bank, Hershey, PA Memo 76321826054 Endorse Here: 2-JanCup of Sugar Supplies 2023 Brownie Bakers Inc CK# 6052 13 Cupcake Place Bakersvilles, NY 10019 Pay to the order of $ Seven thousand five hundred and 00/100 Dollars Da Bank, Hershey, PA Memo 76321826054 Endorse Here: Vanilla 2-Jan Unlimited 2023 12/23/2022Vanilla Unlimited 7,500.00 Debbie Little :123515645: Cup of Sugar Supplies :123515645: 3,500.00 12/23/2022Debbie Little Brownie Bakers Inc CK# 6053 13 Cupcake Place Bakersvilles, NY 10019 Pay to the order of $ Two hundred and fifty and 00/100 Dollars Da Bank, Hershey, PA Memo 76321826054 Endorse Here: 2-JanChocolate Chip Supplies 2023 Brownie Bakers Inc CK# 6054 13 Cupcake Place Bakersvilles, NY 10019 Pay to the order of $ Ten thousand seven hundred fifty and no/100 Dollars Da Bank, Hershey, PA Memo 76321826054 Endorse Here: Sara Li 5-Jan Baking Needs 2023 12/23/2022SL Baking Needs Bettie Krocker :123515645: 10750.00 :123515645: 12/23/2022Chocolate Chip Supplies 250.00 Debbie Little Brownie Bakers Inc CK# 6056 13 Cupcake Place Bakersvilles, NY 10019 Pay to the order of $ Twenty thousand dollars and 00/100 Dollars Da Bank, Hershey, PA Memo 76321826054 Endorse Here: Yeast for 2-Jan Bread 2023 Brownie Bakers Inc CK# 6057 13 Cupcake Place Bakersvilles, NY 10019 Pay to the order of $ Five hundred and 00/100 Dollars Da Bank, Hershey, PA Memo 76321826054 Endorse Here: Bettie Krocker 7-Jan 2023 :123515645: 12/23/2022Yeast for Bread 20,000.00 Debbie Little Bettie Krocker :123515645: 12/23/2022Bettie Krocker 500.00 Debbie Little