Substantive Procedures for Cash Outflow Irregularities

Topics: Accounts payable, Invoice, Accounts receivable Pages: 5 (1134 words) Published: April 19, 2011
Substantive Procedures for Cash Outflow Irregularities

Substantive Procedures for Cash Outflow Irregularities

There are many irregularities that can arise within the different accounting departments at Apollo Shoes. An audit program will be designed according to the three cycles that will be outlined below. The first cycle that will be discussed is cash, then accounts payable and finally the payroll function. These cycles will be evaluated for substantive procedures for Apollo Shoes and detect irregularities for each section and an appropriate audit program will be designed for each department.


At Apollo Shoes irregularities or cash schemes, which could occur in the audit cycle of cash include fraudulent disbursement schemes and cash receipt schemes. Fraudulent disbursement schemes are those in which a distribution of funds is made from some company account in what appears to be a normal manner. Cash receipts schemes is the outright stealing of cash (Wells, 2005, p. 77).

Cash is the only account that is included in several cycles. The audit of cash balances is the last studied because the evidence accumulated for cash depends heavily on the results of the tests in other cycles. Auditors for Apollo Shoes will have to group the cash accounts into cycles to simplify the audit plan. The cash account appears in the cycles: finance and investment, production cycle, acquisition and expenditure, and revenue and collection cycle. The substantive audit program will consist of several audit programs related to each cycle (Louwers, Ramsay, Sinason & Strawser, 2007, pp. 79-80).

Substantive procedures for detecting irregularities in cash receipts include the following:

▪ review the cash receipts journal and master file for unusual transactions; ▪ trace cash receipts entries from the cash receipts journal entries to the bank statement; ▪ prepare a proof of cash receipts;

▪ obtain a prelisting of cash receipts and trace amounts to the cash receipts journal; ▪ use audit software to foot and cross-foot the sales journal and trace totals to the general ledger (Arens, Elder, & Beasley, 2006, pp. 428-429). Substantive procedures for detecting irregularities in cash disbursements include the following:

▪ review the cash disbursements journal, general ledger, and accounts payable master file for large or unusual amounts; ▪ trace the cancelled check to the related acquisitions journal entry and examine for the payee name and amount; ▪ reconcile recorded cash disbursements with the cash disbursements on the bank statement; ▪ prepare a proof of cash disbursements;

▪ compare dates on cancelled checks with the bank cancellation date (Arens, Elder, & Beasley, 2006, p. 591). Accounts Payable
Apollo Shoes, as with most successful and growing companies, has countless expenses, all of which flow through Accounts Payable before they are ultimately paid. As liabilities and related expenses are more likely to be understated or omitted from accounts payable, as opposed to being overstated, it is imperative that all items being vouched into accounts payable be reviewed and approved as valid payables before being recorded. When attempting to detect irregularities, close attention needs to be paid to the notion that sometimes in Apollo's efforts to improve the timeliness of financial reporting they may fail to completely and accurately recognize all valid liabilities and expenses.

Our main substantive procedure in attempting to detect issues within the accounts payable audit cycle is the search for unrecorded liabilities, which will allow us to ascertain that liabilities and expenses are not understated, which assess the completeness assertion. To do such, we should perform targeted testing of cash disbursements made subsequent to year end, unpaid invoices and open receiving...
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