CA Intermediate · Auditing and Ethics · Special Features of Audit of Different Type of Entities
CA Nikhil audits Sunrise Charitable Hospital Trust. He observes that cash receipts from outpatient fees are collected at several counters, and receipts are issued manually in pre-numbered books. There is no reconciliation of receipts issued with cash deposited in bank, and the trust has no cash counting by an independent person. Which of the following is the best audit response considering the risk of incomplete recording of receipts?
The auditor should treat the risk of unrecorded income as high, test the sequence of receipt books against cash deposited, expand substantive procedures and communicate the control deficiency to those charged with governance. Pre-numbered receipts without reconciliation to bank deposits do not give assurance over completeness of cash receipts.
- AConclude that the controls are effective since receipts are pre-numbered
- BAssess the risk of understatement of income as high, test the sequence of receipt books to cash banked and extend substantive procedures, and communicate the control weakness to those charged with governanceCorrect
- CReduce substantive testing because the trust is a non-profit entity
- DWithdraw from the engagement immediately without any further procedures
Explanation
Pre-numbering alone is not sufficient without reconciliation of receipts to bank deposits. Cash-based receipts with weak controls raise the risk of income not being recorded, so the auditor should assess the risk as high, test receipt book sequences against collections and bank credits, extend substantive procedures and communicate the deficiency. Reducing testing or withdrawing immediately is not the proper response.
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