Essay A

A. Given how straightforward the steps provided in the system of dealing with cash receipts,
it is possible that there are many possible errors or fraud that may occur. First, since all
sales are made on credit, it is possible that checks provided to the counter, who is the first
recipient of the check, may have missing entries that could invalidate the check.
Appropriate checking, including ensuring that the accounts used to pay for items are
existing accounts, should be performed. Second, the checks could be erroneously
received and recorded from the counter to those who will be encoding them to data
processing. While the case had not mentioned how many people are involved, too little
people could lead to collusion, while too many could lead to confusion. From the end of
those encoding, since it would be manually done, they could end up placing
typographical errors in to the system, be it crediting the amounts to the wrong customer,
encoding wrong amounts, and applying too much or too little discounts. Finally, since
checks are not recorded prior to their entry into the system, they could be lost before they
reach those who would encode them. As such, the counter must be one of the most
trustworthy in the system to ensure that the other parts of their cash receipts system could
function.
B. Keeping the answers to the first problem in mind, there is clearly some short coming with
regard to how the internal controls of the client work. With this in mind, the appropriate
recommendation is to skip the whole process of data processing. In lieu of this, the
checks must be transferred directly to the cashier, skipping the whole step of data
processing. The cashier must then endorse the check to the bank for deposit while
preparing a copy to be passed on to the data processing system. By rearranging the steps,
the likelihood that someone could perform fraud is reduced due to how the physical
check that could be encashed is handled by less people. Furthermore, since the data
processing system only handles a copy of the check, less errors can be made as the
cashier can confirm the information provided with the bank when depositing the check.
Upon applying the recommendation presented, additional steps can be taken by the
company to further improve its internal controls. First, an outsider who has no access to
the checks could compare the totals of the cash receipts from the counter to the amount
deposited to the bank. Additionally, these amounts can also be compared to what was
 recorded by the data processing system. Since there are three reference points, when a
discrepancy is found, the likely correct balance should be the one with two balances that
are the same. As for the outside person, they can be anyone in the organization and
should be replaced as often as possible. Second, the data processing system could
implement a two person confirmation system wherein one would encode while the other
would double check. Upon doing so, anything recorded is locked to prevent any future
changes. Should there be a need to change any entry, a third person must be involved and
would only grant access to editing if sufficient evidence is provided. Finally, a control
total could be established on a monthly basis to serve as a reference for any amounts that
may need reconciliation. This control should be computer generated to prevent any
fraudulent act that may modify it. However, this control hinges on how well the amounts
were recorded and should only serve as an additional security, not a guarantee.
C. With the implementation of skipping directly to the cashier, one applicable compensating
control could be to compare the prelisting of cash receipts to any deposits made should be
a sufficient control to detect any missing checks. If a discrepancy is found, the first place
to check should be the deposits in transit as the exact amount missing could be there.
However, since this is only a compensating control, this should only serve as a last line of
defense as it is impractical to do due to how long it would take to complete.
D. To test any of the controls, appropriate sampling be done by the auditor. Since it is
against the cost benefit principle to test all accounts, a representative sample should be
made. This should include a few entries every day at different times of day with the work
of different employees represented. The first sampling to be made should be of the daily
cash prelisting. This amount can then be compared to the general ledger for cash and to
the deposit tickets from the bank. Should it be possible, the amounts can also be
compared to those recorded in the data processing system. The second sample could be
done to customer statement copies. The random customers selected could then be asked
to provide a negative confirmation to verify if any discrepancies could have been made.
Additionally, if the selected customer is a large one, a positive confirmation may be
required. Finally, a fictional customer could be run through the process and checked
afterwards to determine if any errors were made along the way. It should be ensured that
 the employees are unaware of the auditor’s plans to ensure that they are treated the exact
same way.

Essay B

A. There are many sources that the CPA firm can consider when determining if a
prospective client is a worthy endeavor. First, different financial information prepared by
the prospective client can be analyzed. This can include interim financial statements,
annual reports to shareholders, and balance sheets to generate a rough idea of the
financial situation of the business. This can allow the CPA firm to compute different
financial statement ratios to identify key areas that can be focused on, should they pursue
the engagement. Second, the CPA firm can also look into various reports submitted by
the client to regulatory agencies. These can include SEC Forms and tax statements.
Similar to the first source of information, this approach can give early signs towards how
compliant the company is to government regulations. Third, with the consent of the
prospective client, they may also look towards the predecessor auditors to determine any
prior disagreements with management and establish how easy or difficult they are to deal
with. Out of the three, this is likely the most crucial source of information as any
difficulties pointed out are likely still present with management and could dictate whether
or not the engagement should still be pursued.
As for the inquiries that the firm’s partners can make, they should be in regard to the
special needs of the client. One such inquiry should be focused on whether or not the
business would also like to hire them as an underwriter for their plans on going public.
Additionally, the partner’s may also inquire about the intention of the audit to determine
if the services that the firm can offer matches the expectations of the business. Beyond
meeting the needs of the client, the partner’s may also inquire about any requirements for
particular skills or knowledge that they may be able to prepare for beforehand to ensure
that there is little to no gray area with regards to what the auditors could expect, and what
management could expect from them.
B. There are many factors to consider when accepting a client with a problematic history.
The first should be the likelihood of repeating the same mistakes. Given the name of
Funtech Software and Games, it could be noted that the hamburger franchise was likely
of a different industry. With this in mind, it is also likely that the hamburger franchise
business was significantly smaller than the current business. As such, the situation
surrounding how the franchise-fee income were recognized are very different. It would
have been a lot easier to get away with problematic recordings when the business was a
lot smaller. However, now, since the business is essentially a large corporation, more
people are handling the preparation of the financial statements, and it is less likely that
the aforementioned mistake can be repeated. The second consideration is with regard to
the character of the owner. The case mentions that Mr. Sello had made a civic impression
over the last 7 years. This had happened after the issues with the franchise fee income
recognition. It is possible that he had learned his lesson and had come forward with
different ways to atone for his mistakes. Additionally, it is important to note how the
business had become one of the largest employers of the city. To a certain extent, one
may feel obliged to become the auditor of this business to ensure that the employees are
treated appropriately and that the foundations of the business are good such that these
employees could have adequate job security.