(a) Define a ‘test of control’ and a ‘substantive procedure’.
(b) Kibosho Happy Kitchens Co (KHK) is a kitchen cleaning company. Customers’ kitchens are always cleaned monthly. After cleaning the kitchen, cleaner leaves an envelope containing invoice for payment which is posted through the customer’s front door. KHK has a large number of receivable balances and these customers may pay by cheque or cash, which is received in the stamped and addressed envelopes through the post. The following procedures are applicable to the cash receiving cycle:
1. A junior clerk in the Accounts Department opens the posted envelopes and she records the cash and cheques received in the log book. She then places all the monies and cheques received into the locked small cash box.
2. The contents of the cash box are counted each day and after every few days these sums are banked by any staff of the Accounts Department who will be available.
3. The cashier records the details of the cash and cheque from the log book into the cash receipts day book and also updates the sales ledger.
4. Usually on a monthly basis the cashier performs a bank reconciliation. In case he misses a month, then he catches this up in the following month’s reconciliation.
(i) Identify and explain any four deficiencies of the cash receiving cycle procedures of KHK.
(ii) Suggest controls to address each of the deficiencies identified in (i) above.
(iii) Explain tests of controls the auditors of KHK would perform to assess if the controls are operating effectively.
(c) Describe substantive procedures an auditor would perform in verifying a company’s bank balance.