Wally's billboard & sign supply case

CASE 9.1 Wally’s Billboard & Sign Supply

The Audit of Cash

Mark S. Beasley • Frank A. Buckless • Steven M. Glover • Douglas F. Prawitt

LEARNING OBJECTIVES

After completing and discussing this case you should be able to

[1] Understand the objectives of substantive audit procedures relating to the audit of cash balances

[2] Consider the effectiveness and reliability of audit procedures

[3] Identify and assess factors important when evaluating the sufficiency and appropriateness of different types of audit evidence

[4] Understand the layout and content of the standardized bank confirmation form.

INTRODUCTION

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.

The case was prepared by Mark S. Beasley, Ph.D. and Frank A. Buckless, Ph.D. of North Carolina State University and Steven M. Glover, Ph.D. and Douglas F. Prawitt, Ph.D. of Brigham Young University, as a basis for class discussion. Wally’s is a fictitious company. All characters and names represented are fictitious; any similarity to existing companies or persons is purely coincidental.

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 sheet—working 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 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 form—see 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.