Auditing and Assurance Services 1st Edition by Iris Stuart

Exercise 16

Testing internal controls. Tron Lumber prepares monthly reconciliations of the cash balance in its bank account with the cash balance on the books. An accounting clerk who does not deposit cash in the account or write checks makes this reconciliation and initials the monthly reconciliation, indicating that the balances agree and that any corrections needed have been made.
a. Explain why this is an internal control that an auditor could test. Describe the potential misstatement in the financial statements that this control could prevent. What is the assertion related to this internal control
b. Prepare a sampling plan to test the control.
c. The accounting firm has determined that the number of tolerable deviations for the internal control test is zero deviations. Explain how you will evaluate the results of your sample. State clearly the possible conclusions from your tests.
d. Is it possible that the accounting clerk initials the reconciliation form without performing the reconciliation Why would she or he do this and how would you know whether she or he has done the reconciliation
e. Can this internal control test be done as a dual-purpose test Explain your answer.
f. How will you control sampling risk and nonsampling risk in the test
g. Will you perform a statistical test or a nonstatistical test Explain your answer. How will your sample differ if you perform a statistical test instead of a nonstatistical test