TASK
The following audit procedures are included in the audit program of Holland Equipment, Inc.
1. Use audit software to examine journal entries in the sales, cash receipts, purchases,
cash disbursements, payroll, and general journals for any amounts exceeding $1 mil-
lion and for any entries with unusual account codings. Review related supporting
documentation for reasonableness.
2. Examine the estimate for the Allowance for Doubtful Accounts recorded in the prior-year audited financial statements. Obtain information about receivable write- offs recorded during the current fiscal year for receivables included in the prior-year audited financial statements and obtain other information to perform a hindsight evaluation of the reasonableness of the allowance account included in the prior-year audited financial statements.
3. Continue to observe inventories at Holland’s two main distribution centers, but for this year examine inventories at its two smaller warehouses not examined in prior years. Management does not expect you to examine those additional warehouses.
4. During the current year, Holland has entered into a joint venture partnership with a company that serves similar customers but makes an entirely different product than Holland. Inquire of management about the business rationale for this transaction.
5. Review for reasonableness any manual journal entries made by management to ad- just the computer-generated accounting records.
a. What is the overarching purpose for performing all of these procedures?
b. How might each audit procedure in 1 through 5 help the auditor identify fraud risk?
Each year near the balance sheet date, when the president of Bargon Construction, Inc., takes a 3-week vacation to Hawaii, she signs several checks to pay major bills during the period she is absent. Jack Morgan, head bookkeeper for the company, uses this practice to his advantage. Morgan makes out a check to himself for the amount of a large vendor’s invoice and, because there is no acquisitions journal, he records the amount in the cash disbursements journal as an acquisition from the supplier listed on the invoice. He holds the check until several weeks into the subsequent period to make sure that the auditors do not get an opportunity to examine an electronic copy of the cancelled check. Shortly after
the first of the year when the president returns, Morgan resubmits the invoice for payment and again records the check in the cash disbursements journal. At that point, he marks the invoice “paid” and files it with all other paid invoices. Morgan has been following this practice successfully for several years and feels confident that he has developed a foolproof method.
a. What is the auditor’s responsibility for discovering this type of embezzlement?
b. What internal control weaknesses in Bargon’s processes exist?
c. What evidence can the auditor use to uncover the fraud?
The following are various potential frauds in the sales and collection cycle:
1. The company engaged in channel stuffing by shipping goods to customers that had not been ordered.
2. The allowance for doubtful accounts was understated because the company altered the aging of accounts receivable to reduce the number of days outstanding for delinquent receivables.
3. The accounts receivable clerk stole checks received in the mail and deposited them in an account that he controlled. He issued credit memos to the customers in the amount of the diverted cash receipts.
4. The company contacted a major customer and asked them to accept a major shipment of goods before year end. The customer was told that they could return the
goods without penalty if they were unable to sell the goods.
5. A cashier stole cash receipts that had been recorded in the cash register.
6. The company recorded “bill-and-hold sales” at year end. Although the invoices were recorded as sales before year end, the goods were stored in the warehouse and shipped after year end.
7. The company did not record credit memos for returns received in the last month of
the year. The goods received were counted as part of the company’s year-end physical inventory procedures.
8. A cashier stole cash receipts by failing to record the sales in the cash register.
9. The CFO recorded fictitious credit sales at the end of the year without recording the associated cost of sales and reduction in inventory.
a. Indicate whether the fraud involves misappropriation of assets or fraudulent financial reporting.
b. For those frauds that involve misappropriation of assets, state a control that would be effective in preventing or detecting the misappropriation.
c. For those frauds that involve fraudulent financial reporting, state an audit procedure that would be effective in detecting the fraud
