Problem DC 11-5, Page 612

The Patrick Company had poor internal control over its cash transactions. Facts about its cash position at November 30 were as
follows:
The cash books showed a balance of $18,901.62, which included undeposited receipts. A credit of $100 on the bank statement did not appear
on the books of the company. The balance according to the statement was $15,550.
When you receive the cutoff bank statement on December 10, the following cancelled cheques were enclosed: No. 6500 for $116.25, No.
7126 for $150.00, No. 7815 for $253.25, No. 8621 for $190.71, No. 8623 for $206.80, and No. 8632 for $145.28. The only deposit was in
the amount of $3,794.41 on December 7.
The cashier handles all incoming cash and makes the bank deposits personally. He also reconciles the monthly bank statement. His
November 30 reconciliation is shown below.

Balance, per books, November 30 $18,901.62

Add: Outstanding Cheques
8621 190.71
8623 206.80
8632 145.28 442.79
Less: Undeposited receipts 3,794.41
Balance per bank, November 30 15,550.00
Deduct: Unrecorded credit 100.00
True cash, November 30 $15,450.00

Required:
1. You suspect that the cashier has stolen some money. Prepare a schedule showing your estimate of the loss
2. How did the cashier attempt to conceal the theft?
3. Based only on the information above, name two specific features of internal control that are missing.
4. If the cashier’s October 31 reconciliation is known to be in order and you start your audit on December, what
specific auditing procedures could you perform to discover the theft? Cash 1
Cash balance, per books on November 30 $18,901.62

Add: Credit by the bank 100.00

Adjusted cash balance $19,001.62

Less:

Bank balance, November 30 $15,550.00

Less outstanding cheques

6500 $116.25

7126 150.00

7815 253.25

8621 190.71

8623 206.80

8632 145.28 1,062.29 14,487.71

Cash which should be on hand for deposit 4,513.91

Cash reported deposit 3,794.41

Amount of theft $719.50

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 The minimum amount of the theft is $719.50 if the cash reported as “undeposited
receipts” ($3,794.41) was actually on hand, represented November receipts, and
was deposited intact in December.

If the $3,794.41 was not available to deposit or represented December receipts,

the maximum loss could be $4,513.91 (719.50 + 3,794.41) for November.

Such a shortage (minimum or maximum) for November and the attempt to

conceal the shortage would alert the auditors to examine the bank reconciliations
throughout the year for other concealed shortages.

b. He attempted to conceal his theft by:

1. Not listing all outstanding cheques.
2. Miscalculating the outstanding cheques shown on the reconciliation.
3. Subtracting an item from the bank balance that should be added to book
balance.

c. No one other than the cashier is responsible for tracing cash receipts to
the deposits in the bank.
The cashier is also responsible for preparing the bank reconciliation.
The following auditing procedures on December 5 would uncover the theft if the
October 31 reconciliation is known to be correct:
1. Compare cheques returned since October 31 with cheques outstanding at
that time and with cheque register for November in order to ascertain
outstanding cheques.
2. Trace cash on hand at October 31 as well as receipts during November to
deposits in bank, ascertaining undeposited cash at November 30.
3. Count cash on hand on December 5, and by adding deposits since
November 30 and subtracting receipts since November 30 to develop
cash on hand at November 30.
4. Compare adjusted cash on hand developed in count (Step 3) with
undeposited cash ascertained in tracing (Step 2).
 Problem 17-22, Page 541
The following are fraud and other irregularities that might be found in the client’s year-end cash balance.
(Assume the balance sheet date is June 30.)
1.A cheque was omitted from the outstanding cheque list on the June 30 bank reconciliation. It cleared the
bank July 7.
2.A cheque was omitted from the outstanding cheque list on the bank reconciliation. It cleared the bank
September 6.
3.Cash receipts collected on accounts receivable from July 2 to July 5 were included as June 29 and June
30 cash receipts.
4.A loan from the bank on June 26 was credited directly to the client’s bank account. The loan was not
entered in the books as of June 30.
5.A cheque that was dated June 26 and disbursed in June was not recorded in the cash disbursements
journal, but it was included as an outstanding cheque on June 30.
6.A bank transfer recorded in the accounting records on July 2 was included as a deposit in transit on June
30.
7.The outstanding cheques on the June 30 bank reconciliation were underfooted by $2000.

REQUIRED
a)Assuming that each of these misstatements was intentional, state the most likely motivation of the
person responsible.
b)What control could be instituted for each intentional misstatement to reduce the likelihood of errors.
c)List an audit procedure that could be used to discover each misstatement.

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Solution to Problem 17-22

a. Motivation b. Internal Control Procedure c. Audit Procedure

Independent internal verification of bank

reconciliation, including accounting for all cheques Trace all cheques in the cutoff bank statement to
1. To cover a shortage
recorded in the cash disbursements journal as the outstanding list.
cleared or still outstanding

Prove the bank reconciliation by tracing all June 30

outstanding cheques recorded in cash
2. Same as 1 Same as 1 disbursements journal to the July 31 bank
reconciliation. All uncleared items should be on the
outstanding cheque list.

3. Hold open books to improve cash Trace deposits in transit to cutoff bank statements
Independent bank reconciliation
position to determine deposit date.

4. To cover a cash shortage or to

Independent bank reconciliation Obtain bank confirmation.
improve the current ratio

5. Original cheque was unauthorized Prove the bank reconciliation, including

Independent bank reconciliation that includes
and illegal. Outstanding cheque made disbursements for all material uncleared
accounting for all disbursement transactions
the bank reconcile. outstanding cheques.

6. Kiting-covering a defalcation Independent bank reconciliation Trace all bank transfers to accounting records.

7. To cover a shortage Internal verification of bank reconciliation Foot outstanding cheque list.

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