Concept explainers
Concept Introduction:
Internal controls are policies and procedures defined by the management to ensure the smooth functioning of the business processes. Internal controls ensure the complete and correct accounting and safeguards to the assets.
To indicate: The effect of cash controls over the nature, timing and extent of the
Explanation of Solution
Internal controls have direct relation with the misstatement in the financial statement. A good internal control system indicates lesser chance of misstatements and a weak internal control indicates higher chances of the material misstatements in the financial statements. The purpose of the audit is to find the material misstatement. Hence, the auditor should obtain the knowledge of the internal control before performing subtractive procedures.
Most of the business transactions involve cash payment/ receipt. Hence it is necessary for the auditor to check the controls over cash receipts and payments. Hence the auditor begins with test of control and checks the controls over the cash receipts and payments. Such test of control is preformed to check the existence and effective of the internal
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Chapter 16 Solutions
EBK AUDITING & ASSURANCE SERVICES: A SY
- What steps does an auditor ordinarily take when confirming cash balances held on deposits with financial institutions?arrow_forwardExplain the relationships among the initial assessed controlrisk, tests of controls and substantive tests of transactions for cash disbursements, andthe tests of details of cash balances. Give one example in which the conclusions reachedabout internal controls in cash disbursements will affect the tests of cash balancesarrow_forwardWhat is cash disbursement journal? Why it is useful to auditor in cash audit?arrow_forward
- What are the steps in approach to internal control over cash receipts that utilizes separation of duties?arrow_forwardWhich of the following statements are true regarding the control of cash receipts and cash payments? Custody over cash should be separate from the recordkeeping of cash.arrow_forwardExplain the relationships among the initial assessed controlrisk, tests of controls and substantive tests of transactions for cash receipts, and the testsof details of cash balances.arrow_forward
- What are the key management assertions related to cash? What are the most important assertions related to cash? How will auditors test these assertions?arrow_forwardWhat is the importance of cash discounts to the client and howcan the auditor verify whether they are being taken in accordance with company policy?arrow_forwardWhat are the internal controls that should be in place to ensure the accuracy and security of cash and cash equivalents?arrow_forward
- How do you asess the risk of material misstatement associated with the audit of cash?arrow_forwardAn auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control activities leave evidence, the auditor most likely will test the activities by Multiple Choice confirmation and observation. inquiry and analytical procedures. observation and inquiry. analytical procedures and confirmation. 13arrow_forwardWhich of the following procedures is least likely to be performed before the balance-sheet date?a. Observation of inventory.b. Review of internal control over cash disbursements.c. Search for unrecorded liabilities.d. Confirmation of receivables.arrow_forward
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