Transcript Chapter 23 – Audit of Cash Balances

Audit of Cash Balances
Chapter 23
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder
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Learning Objective 1
Show the relationship of cash
in the bank to the various
transaction cycles.
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Relationships of Cash in the
Bank and Transaction Cycles
Capital Acquisition and Repayment Cycle:
Capital Stock – Common
Redemption Issue of
of stock
stock
Dividends Payable
Payment of
dividends
Paid-in Capital in Excess
of Par – Common
Redemption Issue of
of stock
stock
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Cash in Bank
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Relationships of Cash in the
Bank and Transaction Cycles
Acquisition and Payment Cycle:
Accounts Payable
Payment
Cash in Bank
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Relationships of Cash in the
Bank and Transaction Cycles
Sales and Collection Cycle:
Accounts Receivable
Cash
receipts
Cash Discounts Taken
Gross Sales
Cash
sales
Cash in Bank
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Relationships of Cash in the
Bank and Transaction Cycles
Payroll and Personnel Cycle:
Accrued Wages, Salaries,
Bonuses, and Commissions
Payment
Accrued Payroll
Tax Expense
Payment
Withheld Income Taxes
and Other Deductions
Payment
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Cash in Bank
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Cash in the Bank and
Transaction Cycles
Misstatements which may not be discovered
as a part of the audit of the bank reconciliation:
 Failure to bill a customer
 An embezzlement of cash by interception
of cash receipts from customers before
they are recorded, with the account
charged off as a bad debt
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Cash in the Bank and
Transaction Cycles
 Duplicate payment of a vendor’s invoice
 Improper payments of officers’ personal
expenditures
 Payment for raw materials that were not
received
 Payment to an employee for more hours
worked
 Payment of interest to a related party for
an amount in excess of the going rate
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Cash in the Bank and
Transaction Cycles
Misstatements which are normally discovered
as a part of the tests of a bank reconciliation:
 Failure to include a check that has not
cleared the bank, even though it has been
recorded in the cash disbursements journal
 Cash received by the client subsequent to
the balance sheet date but recorded as
cash receipts in the current year
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Cash in the Bank and
Transaction Cycles
 Deposits recorded as cash receipts near
the end of the year, deposited in the bank
in the same month, and included in the
bank reconciliation as a deposit in transit
 Payments on notes payable debited directly
to the bank balance by the bank but not
entered in the client’s records
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Learning Objective 2
Identify the major types of cash
accounts maintained by
business entities.
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Types of Cash Accounts
 General cash account
 Imprest accounts
 Branch bank account
 Imprest petty cash fund
 Cash equivalents
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Relationship of General Cash
to Other Cash Accounts
Branch Bank
Account
Imprest Payroll
Account
General
Cash
Cash
Equivalents
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Imprest Petty
Cash Fund
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Learning Objective 3
Design and perform audit tests
of the general cash account.
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Methodology for Designing Tests
of Balances for Cash in the Bank
Identify client business
risks affecting cash
in bank
Phase I
Set tolerable misstatement
and assess inherent
Phase I
risk for cash in bank
Assess control
risk for
several cycles
Phase I
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Methodology for Designing Tests
of Balances for Cash in the Bank
Design and perform
tests of controls and
substantive tests of Phase II
transactions for
several cycles
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Methodology for Designing Tests
of Balances for Cash in the Bank
Design and perform
analytical procedures Phase III
for cash in bank
Design tests of
details of cash in
bank to satisfy
balance-related
audit objectives
Audit procedures
Sample size
Phase III
Items to select
Timing
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Audit Schedule for a Bank
Reconciliation
Clawson Industries
Bank Reconciliation
12/31/07
Schedule A-2
Prepared by Client DED
Approved by SW
Date
1/10/08
1/18/08
Account 101 – General account, First National Bank
Balance per bank
Add: Deposits in transit
Deduct: Outstanding checks
Other reconciling items: Bank error
Balance per bank, adjusted
$109,713
21,117
– 87,462
– 15,200
$ 28,168
Balance per books before adjustments
Adjustments: Unrecorded bank service charge
NSF
Balance per books, adjusted
$ 32,584
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4,200
– 4,416
$ 28,168
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Balance-related Audit
Objectives
Detail tie-in:
Cash in the bank foots correctly and
agrees with the general ledger.
Existence:
Cash in the bank as stated on the
reconciliation exists.
Completeness:
Existing cash in the bank is recorded.
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder
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Balance-related Audit
Objectives
Accuracy :
Cash in the bank as stated on the
reconciliation is accurate.
Cutoff:
Cash receipts and cash disbursements
transactions are recorded in the proper
period.
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Procedures
 Receipt of a bank confirmation
 Receipt of a cutoff bank statement
 Tests of the bank reconciliation
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Extended Tests of the Bank
Reconciliation
When the auditor believes that the year-end bank
reconciliation may be intentionally misstated,
it is appropriate to perform extended tests
of the year-end bank reconciliation.
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Types of Audit Tests Used for
General Cash in Bank
Cash in Bank
Beginning balance
Cash receipts
Cash disbursements
Audited by
TOC-T, STOT, and AP
Audited by
TOC-T, STOT, and AP
Ending balance
Audited by
TOC-B, AP, and TDB
TOC-T + TOC-B + STOT + AP + TDB
= Sufficient appropriate evidence
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Learning Objective 4
Recognize when to extend audit
tests of the general cash account
to test further for material fraud.
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Fraud Oriented Procedures
The auditor must extend the procedures
in the audit of year-end cash to determine
the possibility of a material fraud.
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Extended Tests of the
Bank Reconciliation
When the auditor believes that the year-end
bank reconciliation may be intentionally
misstated, it is appropriate to perform
extended tests of the year-end bank
reconciliation.
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Proof of Cash
 All recorded cash receipts were deposited
 All deposits in the bank were recorded in
the accounting records
 All recorded cash disbursements were
paid by the bank
 All amounts that were paid by the bank
were recorded
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Proof of Cash
Includes the following reconciliation tasks:
1. The balance on the bank statement with
the general ledger balance at the
beginning of the proof-of-cash period
2. Cash receipts deposited per the bank with
the cash receipts journal for a given period
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Proof of Cash
Includes the following reconciliation tasks:
3. Cancelled checks clearing the bank with
those recorded in the cash disbursements
journal for a given period
4. The balance on the bank statement with the
general ledger balance at the end of the
proof-of-cash period
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Interbank Transfers
The accuracy of the information on the
interbank transfer schedule should be verified.
The interbank transfers must be recorded in
both the receiving and disbursing banks.
The date of the recording of the disbursements
and receipts for each transfer must be in
the same fiscal year.
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Interbank Transfers
Disbursements on the interbank transfer
schedule should be correctly included in or
excluded from year-end bank reconciliation
as outstanding checks.
Receipts on the interbank transfer schedule
should be correctly included in or excluded
from year-end bank reconciliations as
deposits in transit.
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Learning Objective 5
Design and perform audit tests of
the imprest payroll bank account.
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Audit of the Imprest Payroll
Bank Account
Typically, the only reconciling
items are outstanding checks.
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Learning Objective 6
Design and perform audit tests
of imprest petty cash.
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Petty Cash
Petty cash is a unique account because
it is often immaterial in amount, yet it is
verified on many audits.
The account is verified primarily because
of the potential for embezzlement and the
client’s expectation of an audit review
even when the amount is immaterial.
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Audit of Imprest Petty Cash
 Internal controls over petty cash
 Audit tests for petty cash
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End of Chapter 23
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