AUDITING LABORATORY

Section 9 Case 9.1

“Wally’s Billboard & Sign Supply”

Arranged by:

Syafira Azzahra 165020307141011

INTERNATIONAL UNDERGRADUATE PROGRAM IN ACCOUNTING
FACULTY OF ECONOMICS AND BUSINESS
BRAWIJAYA UNIVERSITY
MALANG
2019
BACKGROUND
Wally’s Billboard & Sign Supply, Inc. was founded four years ago by Walter Johnson.
The company specializes in providing locations for sign and billboard advertising and
has recently begun to enter the sign design market. After working several years in the
marketing department of a large corporation, Wally decided that there was a need in
his area for a company specializing in signs and billboards. Drawing on his marketing
experiences, he started his own company.

The company is now preparing to expand its business and has enlisted the help of
your firm, Taylor & Jones, LLP. Over the past two years your firm has provided
auditing and assurance services to prepare the company to seek badly needed outside
funding. Along with Bill Thompson, a senior auditor, you have been assigned to help
with the annual audit.

Your assignment is to conduct substantive testing of the company’s cash balances.

Bill has already conducted tests of controls for each of the company’s transaction
cycles and has assessed control risk as relatively low in those cycles. He has also
inquired of management regarding any restrictions imposed by external parties on the
use of cash. Management assured him there are no such restrictions, but you plan to
corroborate this response using bank confirmations.

Wally’s Billboard & Sign Supply currently has three separate bank accounts. The first
is a general account used mostly for business expenses and receipts. When payments
are collected they are deposited, along with any cash sale receipts, in the general
account. The second account is a payroll account. Funds are transferred twice a month
to this account from the general account to cover payroll. The third account is an
interest bearing account that the company uses to maintain extra cash for future needs.
For this assignment, you will not be required to test intrabank transfers.

REQUIRED
Complete the audit program found on working paper C 2, recording all your work on
the audit program and marking the provided documents (using auditing tick marks
such as the ones used on the cash lead sheet3working paper C 1) to serve as your
working papers. Document the results of your work on the Audit Summary sheet
(working paper C 3), noting any errors, concerns, adjustments, and/or
recommendations. If you make adjustments to the ending account balances, enter the
adjustments on the cash lead sheet. Note, you may also download electronic versions
of the working papers from www.pearsonhighered.com/beasley. After completing the
audit program, answer the following questions:

1) Why is the audit of cash an important part of the audit?

2) Bill performed tests of controls for all transaction cycles with good results. Why
is it important to also perform substantive audit procedures for the ending cash

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 balance even when tests of controls over transactions that affect the cash account
indicate that those controls are operating effectively?
3) According to AICPA auditing standards, what are the necessary ingredients for
audit evidence to be considered “appropriate”?
4) For each procedure listed in the audit program (schedule C 2), indicate the
primary assertion(s) targeted by the procedure.
5) For each error, concern, or adjustment you listed on the Audit Summary
(schedule C 3), briefly describe at least one additional test you could perform to
gain evidence as to whether or not the cash account is materially misstated.
6) The AICPA and the American Banker’s Association developed a standardized
bank confirmation form3see working paper C 6. What is the purpose for
confirming information in item number two on the bank confirmation form?
Identify the accounts and related audit assertion(s) to which the information in
item number two is relevant.
7) What audit procedures might you perform if you were to decide that the risk of
fraud involving the cash account was relatively high for this client?
8) Perform an online search for "electronic bank confirmations." Summarize in one
page or less what you learn about recent developments in the use of web-based
bank confirmations. Include a brief discussion of the advantages of electronic
confirmations in your write-up.

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ANSWER

1. Cash auditing is an important part of the audit because investors want to know the
accuracy when looking at the company's financial condition and because business
transactions will be ultimately settled through cash accounts, audit cash accounts also
assists in the verification of other asset and liability accounts. Usually cash auditing
seen as the routine part of audit, and is usually assigned to the interns or new hires. It
is used by investors to evaluates the company’s financial health. Auditor will look at
the current assets which the cash is part of when finding out the condition of the
company. Cash gets used when calculating the price of stock so it needs to be correct.
The auditors also have to look at every aspect of the audit for fraud, because cash the
most liquid asset in a company and it is an high inherent risk area since there is a
relatively high risk misappropriation.

2. The auditor can choose between two different audit strategies which are substantive
and reliance. Reliance can be used when the control test shows that the controls are
operating properly. The reliance strategy lets the auditor take the control effectiveness
into account but the audit standards need evidence for all the accounts. Substantive
testing is an audit procedure that examines the financial statements and supporting
documentation to see if they contain errors. These tests are needed as evidence to
support the assertion that the financial records of an entity are complete, valid, and
accurate. Substantive tests can’t be eliminated completely but the reliance strategy can
lessen the substantive testing that is needed for a particular account. So, Bill must
perform substantive tests of details, test to detect lapping and analytical procedures so
that he can conclude that the cash balances are reasonably accurate.

3. According to AICPA auditing standards, appropriateness is the measure of the

quality of audit evidence, that is, its relevance and its reliability in providing support
for, or detecting misstatements in, the classes of transactions, account balances, and
disclosures and related assertions. Audit evidence is considered reliable if
the evidence can be relied upon to signal the true state of the assertion being tested.
The auditor should consider the sufficiency and appropriateness of audit evidence to
be obtained when assessing risks and designing further audit procedures. The quantity
of audit evidence needed is affected by the risk of misstatement (the greater the risk,
the more audit evidence is likely to be required) and also by the quality of such audit
evidence (the higher the quality, the less the audit evidence that may be required).
Accordingly, the sufficiency and appropriateness of audit evidence are interrelated.
However, merely obtaining more audit evidence may not compensate if it is of a
lower quality.

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4.

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5.

Wally’s Billboard and Sign Supply

Audit Summary

For the Year Ended December, 31 2014

Working Paper Description of Error or Concern

Reference

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6. A standard bank confirmation form is used to confirm account balance information
with banks or financial institutions that maintain accounts for the audit client. The
confirmation confirms information supplied by the client about deposit
balances and item number two on the bank confirmation requests
confirmation regarding loan balances—i.e., liabilities of the client to the bank. The
accounts most likely to be involved are short- and long-term loans payable, and the
most relevant assertions are accuracy and completeness. Confirmations can provide
reliable evidence of the accuracy and completeness of these accounts. 1898 The
Standards of Field Work about a particular item affecting financial statement
assertions. The process includes:
 Selecting items for which confirmations are to be requested
 Designing the confirmation request
 Communicating the confirmation request to the appropriate party
 Obtaining the response from the third party
 Evaluating the information, or lack thereof, provided by the third party about the
audit objectives, including the reliability of that information.

7. Audit procedures that might be performed to decide the risk of fraud involving the
cash account was relatively high are:
1) Further testing on procedures of bank reconciliation to cash.
2) Proof of cash.
3) Check for kitting by seeing check date with deposit date.

8. Online audit confirmation for banks supported by the American Bank Association.
"Supported by ABA, Confirmation.com simplifies the audit confirmation process that
allows banks to comply with regulatory standards, increase productivity and reduce
costs." (Capital Confirmation, 2016) The advantages of electronic confirmation are:
a. Control the audit confirmation process - this helps protect client information. "It
is also about ensuring that responses are received from and sent to the authorized
applicant (ie the CPA company) and that authorized bank employees who
respond to confirmation requests. To do this, Confirmation.com uses a unique
Authentication and Authorization process to verify the authenticity of users.
"(Capital Confirmation, 2016)
b. Increasing Productivity and Reducing Costs - "This service streamlines
confirmation work flows, centralizes responses, and records responses
electronically. In addition, your bank can use the Staff appropriately for the Busy
Season using the popular Future-Dated ™ feature that allows you to see how
many confirmations in the queue for a particular day. "(Capital Confirmation,
2016)

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c. Increasing Client Retention - this helps increase the client's business and gives
them high service to keep them as clients. It also helps clients spend less time
searching for confirmation for auditors.
d. Credit Request Solution - banks can respond to credit requests from their desktop,
making responses faster than responding by fax.
e. Supporting Green Initiatives - banks can reduce paper which helps save time,
money and space.

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