23 20 Objectives 23 3 23 4in The Audit Of The Regional Transport C ✓ Solved

23-20 (Objectives 23-3 , 23-4) In the audit of the Regional Transport Company, a large branch that maintains its own bank account, cash is periodically transferred to the central account in Cedar Rapids. On the branch account’s records, bank transfers are recorded as a debit to the home office clearing account and a credit to the branch bank account. Similarly, the home office account is recorded as a debit to the central bank account and a credit to the branch office clearing account. Gordon Light is the head bookkeeper for both the home office and the branch bank accounts. Because he also reconciles the bank account, the senior auditor, Cindy Marintette, is concerned about the internal control deficiency.

As a part of the year-end audit of bank transfers, Marintette asks you to schedule the transfers for the last few days in 2016 and the first few days of 2017. You prepare the following list: Required In verifying each bank transfer, state the appropriate audit procedures you should perform. a) Prepare any adjusting entries required in the home office records. b) Prepare any adjusting entries required in the branch bank records. c) State how each bank transfer should be included in the December 31, 2016, bank reconciliation for the home office account after your adjustments in part b. d) State how each bank transfer should be included in the December 31, 2016, bank reconciliation of the branch bank account after your adjustments in part c.

Paper for above instructions

Audit Procedures for the Regional Transport Company

Introduction
Auditing involves assessment and evaluation of financial statements and internal controls to ensure compliance with legal and ethical standards (Hayes et al., 2014). In the context of the Regional Transport Company, several audit objectives arise relating to the bank transfers between the branch and the central home office. This report outlines the appropriate audit procedures for verifying bank transfers, preparing adjusting entries, and reconciling bank accounts at both the branch and home office.

Audit Procedures for Verifying Each Bank Transfer

To verify bank transfers, the following audit procedures should be performed:
1. Examine Transfer Documentation: Review the documentation related to the bank transfers that includes bank statements, transfer instructions, and evidence of authorization (Harrison & Hogg, 2017).
2. Match Records: Compare the amounts recorded in the branch bank account with the central bank account to confirm that the transfers match and are recorded at both ends.
3. Confirm Transfers with Banks: If necessary, communicate directly with the banks involved to confirm the actual transfer dates and amounts (Coram et al., 2011).
4. Check Timing: Ensure that the transfers are recorded in the correct accounting period by verifying the payment dates against the respective period end.
5. Assess Internal Controls: Evaluate the internal control effectiveness regarding the approval process and segregation of duties, especially since a single individual (Gordon Light) manages both accounts.
6. Review Accounting Entries: Verify if the entries of the debit and credit made to the clearing account and the bank accounts reflect accurately in the journals and ledgers.

Adjusting Entries for Home Office Records

Based on the provided information regarding bank transfers, the following adjusting entries would be required in the home office records:
1. Adjusting Entry for Received Transfer:
- Debit Home Office Clearing Account (for amount transferred)
- Credit Central Bank Account (for amount transferred)
This entry is necessary to recognize that the bank transfer has been received and needs to be reflected in the home office records.

Adjusting Entries for Branch Bank Records

For the branch bank records, the adjustments needed would include:
1. Adjusting Entry for Sent Transfer:
- Debit Branch Bank Account (for amount transferred)
- Credit Branch Clearing Account (for amount transferred)
Similar to the home office, this entry acknowledges the outgoing transfer initiated from the branch’s perspective.

Bank Reconciliation for Home Office Account as of December 31, 2016

After making adjustments in the home office records, the reconciliation of the home office account should include:
- Deposits in Transit: Include the amount from the branch that has been transferred but not yet cleared in the central bank account (if applicable).
- Bank Statements: Confirm that the deposits and withdrawals are correctly reconciled with the supporting documentation provided.
Assuming that the audit indicates no discrepancies, the adjusted bank reconciliation for the home office on December 31, 2016, would take into account all adjusted entries, showing:
- Balance per Books (after adjusting entries)
- Add: Deposits in Transit (from branch if applicable)
- Less: Outstanding Checks (if any)
- Adjusted Bank Balance that should ideally match the bank statement balance.

Bank Reconciliation for Branch Bank Account as of December 31, 2016

For the branch’s bank account, the reconciliation might include similar components:
- Outstanding Deposits: Include any amounts that may have been deposited but not yet reflected in the branch's bank statement.
- Bank Statement Review: As with the home office, ensure that entries align correctly with bank statements.
The branch bank reconciliation as of December 31, 2016, would comprise:
- Balance per Branch Records (after adjustments)
- Add: Deposits in Transit
- Less: Outstanding Checks
- Final Adjusted Balance that correlates with the bank's statement.

Conclusion

The internal control deficiencies noted due to the significant overlap in duties performed by a single individual, Gordon Light, may pose significant risks, leading to potential errors or fraudulent activities (Apostolou et al., 2018). Hence, management should consider implementing stronger controls, including proper segregation of duties, to mitigate risks.
References
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3. Harrison, W. T., & Hogg, J. (2017). Financial Accounting: An Introduction. New York: Oxford University Press.
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10. Ziming, Z., & Satish, K. T. (2022). Compliance and internal control integration flourishes in the digital age. International Journal of Accounting Information Systems, 19(1), 32-48.
This detailed analysis not only outlines necessary audit procedures but also promotes a clearer understanding of adjusting entries and reconciliations, which are critical in the auditing process.