Problem 11 1 Page 472 Cash Receipts Control

Problem 11 -1, Page 472 Cash Receipts: Control Objectives and Control Examples Required: Prepare a table similar to Exhibit 11 -4 on internal control for cash receipts. General Specific Validity 1 If the remittance advice is not returned, the person opening the mail should prepare one so that each cheque received is represented by a remittance advice. Completeness 2 All cash receipts should be listed from remittance advices. Deposits prepared by a person separate from the one who opens the mail. Subsidiary customer accounts posted from remittance advices. General ledger control account posted from cash receipts journal. Bank statement reconciled independent of other functions. Control account reconciled to subsidiary ledger monthly. Authorization 3 (Authorization is usually not a problem for cash receipts on accounts receivable. ) Cash receipts from other than merchandise sales authorized on unique remittance advice forms. Accuracy 4 Daily remittance list compared to duplicate deposit slip received from bank by person independent of either function. Classification 5 Cash receipts entered properly in cash receipts journal as to the origin of the receipts. Separate deposits made for nonmerchandise sales cash receipts. Accounting 6 Monthly reconciliation of control account to customers' individual accounts and bank statement reconciled promptly. Proper period 7 Daily deposit of all cash receipts. Cash receipts recorded as period of date of receipt. Accounts posted as of date cash received. 1

Problem 2 The following are auditor judgments and audit sampling results for six populations. Assume large population sizes. 1 2 3 4 5 6 EPER (in percentage) 2 0 3 1 1 8 TER (in percentage) 6 3 8 5 20 15 ARACR (in percentage) 5 5 10 10 100 60 100 20 60 2 0 1 4 1 8 Actual sample size Actual number of exceptions in the sample REQUIRED a. For each population, did the auditor select a smaller sample size than is indicated by using attribute sampling tables for determining sample size? Evaluate, selecting either a larger or smaller size than those determined in the tables. b. Calculate SER and CUER for each population. c. For which of the six populations should the sample results be considered unacceptable? What options are available to the auditor? d. Why is analysis of the exceptions necessary even when the populations are considered acceptable? 2

12 -27 The sample sizes and CUERs are shown in the following table: a. The auditor selected a sample size smaller than that determined from the tables in population 1 and 3. The effect of selecting a smaller sample size than the initial sample size required from the table is the increased likelihood of having the computed upper exception rate exceed the tolerable exception rate. If a larger sample size is selected, the result may be a sample size larger than needed to satisfy tolerable exception rate. That results in excess audit cost. Ultimately, however, the comparison of CUER to tolerable exception rate determines whether the sample size was too large or too small. 1. 2. 3. 4. 5. 6. Actual Sample Initial Sample Size Tolerable Exception Sample Exception CUER from Size from Table 13 -7 Rate (SER) Table 13 -8 100 127 6. 0% 2. 0% 6. 2% 100 99 3. 0 0. 0 3. 0 60 65 8. 0 1. 7 6. 3 100 93 5. 0 4. 0 8. 9 20 60 18 60 20. 0 15. 0 13. 3 18. 1 >20. 0 b. The sample exception rate and computed upper exception rate are shown in columns 5 and 6 in the above table. c. The population results are unacceptable for populations 4 and 6. In each of those cases, the CUER exceeds tolerable exception rate. In population 1, the CUER is marginally more than the TER. d. The auditor’s options are to change tolerable exception rate or ARACR, increase the sample size, or perform other substantive tests to determine whethere actually material errors in the population. Increasing sample size would not likely result in improved results for either population 4 or 6 because the CUER exceeds tolerable exception rate by a large amount. e. Analysis of exceptions is necessary even when the population is acceptable because the auditor wants to determine the nature and cause of all exceptions. If, for example, the auditor determines that an error was intentional, additional action would be required even if the CUER was less than tolerable exception rate. 3

EXPECTED POPULATION DEVIATION RATE (IN PERCENTAGE) 2 TOLERABLE DEVIATION RATE (IN PERCENTAGE) 4 5 6 7 8 9 10 15 3 20 5 PERCENT RISK OF OVER RELIANCE (ARACR) 0. 00 0. 25 0. 50 0. 75 1. 00 1. 25 1. 50 1. 75 2. 00 2. 25 2. 50 2. 75 3. 00 3. 25 3. 50 3. 75 4. 00 5. 00 6. 00 7. 00 149 236 . . . . 99 157 208 . . . . 74 117 117 156 192 227 . . . 59 93 93 124 153 181 208 . . 49 78 78 78 103 127 150 173 195 . . . . 42 66 66 66 88 88 88 109 129 148 167 185 . . 36 58 58 58 77 77 95 95 112 129 146 . . . 32 51 51 68 68 84 84 84 100 158 . . 29 46 46 61 61 61 76 76 89 116 179 . 19 30 30 30 30 40 40 50 68 14 22 22 22 22 30 30 37 4

EPDR 0. 00 0. 25 0. 50 0. 75 1. 00 1. 25 1. 50 1. 75 2. 00 2. 25 2. 50 2. 75 3. 00 3. 25 3. 50 3. 75 4. 00 4. 50 5. 00 5. 50 6. 00 7. 50 8. 00 8. 50 2 3 4 5 6 7 8 9 10 15 20 10 PERCENT RISK OF OVER RELIANCE (ARACR) 114 194 265 . . 76 129 129 176 221 . . 57 96 96 132 166 198 . . . . 45 77 77 77 105 132 158 209 . . . 38 64 64 64 88 88 88 110 132 153 194 . . 32 55 55 75 75 75 94 94 113 131 149 218 . . . . 28 48 48 65 65 82 82 98 98 130 160 . . . 25 42 42 42 58 58 73 73 73 87 115 142 182 . . 22 38 38 38 52 52 52 65 65 78 103 116 199 . . . 15 25 25 25 25 34 34 34 45 52 52 60 68 11 18 18 18 18 18 25 25 32 5

Table 12 -10 ACTUAL NUMBER OF DEVIATIONS FOUND SAMPLE SIZE 0 1 2 3 4 5 6 7 8 9 10 5 PERCENT RISK OF OVER RELIANCE 25 30 35 40 45 50 55 60 65 70 75 80 90 100 125 150 200 11. 3 9. 5 8. 2 7. 2 6. 4 5. 8 5. 3 4. 9 4. 5 4. 2 3. 9 3. 7 3. 3 3. 0 2. 4 2. 0 1. 5 17. 6 14. 9 12. 9 11. 3 10. 1 9. 1 8. 3 7. 7 7. 1 6. 6 6. 2 5. 8 5. 2 4. 7 3. 1 2. 3 . 19. 5 16. 9 14. 9 13. 3 12. 1 11. 0 10. 1 9. 4 8. 7 8. 2 7. 7 6. 8 6. 2 4. 9 4. 1 3. 1 . . . 18. 3 16. 3 14. 8 13. 5 12. 4 11. 5 10. 7 10. 0 9. 4 8. 4 7. 6 6. 1 5. 1 3. 8 . . 19. 2 17. 4 15. 9 14. 6 13. 5 12. 6 11. 8 11. 1 9. 9 8. 9 7. 2 6. 0 4. 5 . . . 19. 9 18. 1 16. 7 15. 5 14. 4 13. 5 12. 7 11. 3 10. 2 8. 2 6. 9 5. 2 . . . . 18. 8 17. 4 16. 2 15. 2 14. 3 12. 7 11. 5 9. 3 7. 7 5. 8 . . . . 19. 3 18. 0 16. 9 15. 8 14. 1 12. 7 10. 3 8. 6 6. 5 . . 19. 7 18. 4 17. 3 15. 5 14. 0 11. 3 9. 4 7. 1 . . 20. 0 18. 8 16. 8 15. 2 12. 2 10. 2 7. 7 . . . 18. 1 16. 4 13. 2 11. 0 8. 3 6

Sample size ACTUAL NUMBER OF DEVIATIONS FOUND 0 1 2 3 4 5 6 7 8 9 10 . . . . 17. 9 15. 7 14. 0 12. 7 10. 6 8. 0 6. 4 19. 5 17. 2 15. 3 13. 8 11. 6 8. 7 7. 0 . . 10 PERCENT RISK OF OVER RELIANCE 20 25 30 35 40 45 50 55 60 70 80 90 100 120 160 200 10. 9 8. 8 7. 4 6. 4 5. 6 5. 0 4. 5 4. 1 3. 8 3. 2 2. 8 2. 5 2. 3 1. 9 1. 4 1. 1 18. 1 14. 7 12. 4 10. 7 9. 4 8. 4 7. 6 6. 9 6. 3 5. 4 4. 8 4. 3 3. 8 3. 2 2. 4 1. 9 . 19. 9 16. 8 14. 5 12. 8 11. 4 10. 3 9. 4 8. 6 7. 4 6. 5 5. 8 5. 2 4. 4 3. 3 2. 6 . . . 18. 1 15. 9 14. 2 12. 9 11. 7 10. 8 9. 3 8. 3 7. 3 6. 6 5. 5 4. 1 3. 3 . . 19. 0 17. 0 15. 4 14. 0 12. 9 11. 1 9. 7 8. 7 7. 8 6. 6 4. 9 4. 0 . . . 19. 6 17. 8 16. 2 14. 9 12. 8 11. 3 10. 1 9. 1 7. 6 5. 7 4. 6 . . . . 18. 4 16. 9 14. 6 12. 8 11. 4 10. 3 8. 6 6. 5 5. 2 . . . . 18. 8 16. 2 14. 3 12. 7 11. 5 9. 6 7. 2 5. 8 18. 6 16. 6 15. 0 12. 5 9. 5 7. 6 7

Problem 11 -3, Page 474 Cash Receipts: Weaknesses and Recommendations. The Pottstown Art League operates a museum for the benefit and enjoyment of the community. During hours when the museum is open to the public, two volunteer clerks positioned at the entrance collect a $5 admission fee from each nonmember patron. Members of the Art League are permitted to enter free of charge on presentation of their membership cards. At the end of each day, one of the clerks delivers the proceeds to the treasurer. The treasurer counts the cash in the presence of the clerk and places it in a safe. Each Friday afternoon, the treasurer and one of the clerks deliver all the cash held in the safe to the bank, and they receive an authenticated deposit slip that provides the basis for the weekly entry in the cash receipts journal. The board of directors of the Pottstown Art League has identified a need to improve the system of internal control over cash admissions fees. The board has determined that the cost of installing turnstiles or sales booths or otherwise altering the physical layout of the museum will greatly exceed any benefits that may have derived. However, the board has agreed that the sale of admission tickets must be an integral part of its improvement efforts. Required: The board of directors has requested your assistance. Prepare a report for presentation and discussion at their next board meeting that identifies the weaknesses in the existing system of cash admission fees and suggest recommendations. (AICPA adapted. ) 8

1. Weakness: There is no segregation of duties between persons responsible for collecting admission fees and persons responsible for authorizing admission. Recommendation: One clerk (hereafter referred to as the collection clerk) should collect admission fees and issue prenumbered tickets. The other clerk (hereafter referred to as the admission clerk) should authorize admission upon receipt of the ticket or proof of membership. 2. Weakness: An independent count of paying patrons is not made. Recommendation: The admission clerk should retain a portion of the prenumbered admission ticket (admission ticket stub). 3. Weakness: There is no proof of accuracy of amounts collected by the clerks. Recommendation: Admission ticket stubs should be reconciled with cash collected by the treasurer daily. 4. Weakness: Cash receipts records are not promptly prepared. Recommendation: The cash collections should be recorded by the collection clerk daily on a permanent record that will serve as the first record of accountability. 5. Weakness: Cash receipts are not promptly deposited. Cash should not be left undeposited for a week. Recommendation: Cash should be deposited at least once each day. 6. Weakness: There is no proof of accuracy of amounts deposited. Recommendation: Authenticated deposit slips should be compared with daily cash collection records. Discrepancies should be promptly investigated and resolved. In addition, the treasurer should establish a policy that includes an analytical review of cash collections. • Weakness: There is no record of the internal accountability of cash. Recommendation: The treasurer should issue a signed receipt of all proceeds received from the collection clerk. These receipts should be maintained and should be periodically checked against cash collection and deposit records. 9