Question
You are working on the audit of Bubble Ltd and have just completed an evaluation of controls in the cash receipts area. You note the
You are working on the audit of Bubble Ltd and have just completed an evaluation of controls
in the cash receipts area. You note the following key controls as part of your evaluation:
All cash handling is independent of the accounting function.
Cash receipts are matched to specific sales invoices before being posted to the
accounts receivable master file.
There is an independent check that cash receipts are recorded in the correct
account.
There is a comparison of deposit slips, prelists and the posting to the cash receipts
journal.
There is a policy of depositing cash receipts each day.
(a) For each of the five controls identified above:
I. Describe the purpose of the control- what is the control designed to prevent or
detect? ( 5 Marks)
II. Identify the account(s) and assertion(s) that this control will have an effect on in
the financial report. (5 Marks)
III. Give one example of a procedure that could be used to test the control. (5 Marks)
(b) Mr Simon, one of the audit assistants, tested the controls in relation to cash receipts
and documents the following:
Sixty cash receipts transactions were selected from the cash receipts journal (five per
month) and tests performed as per the audit plan. Four (04) immaterial errors were
found. These errors were discussed with the client, who corrected them based on
information provided. As the errors were immaterial and subsequently corrected, it is
concluded that cash receipts controls are working satisfactorily and there is sufficient
appropriate audit evidence to rely upon them. The tolerable rate of deviation for this
test, as per the audit plan, is 5 per cent.
Do you think the audit assistants conclusion regarding the cash receipt controls is
correct or not? Explain. (5 Marks)
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