ch15 70 360

Chapter 15:
Audit of Cash Balances
1
Copyright © 2007 Pearson Education Canada
Chapter 15 objectives
 Identify different types of cash accounts
 Explain the relationship between cash and the transaction
cycles
 Describe the steps in auditing the general cash account
 List procedures to be conducted when there is suspicion
of fraud
 Explain how the audit of the payroll cash account differs
from the audit of the general cash account
 Discuss considerations for auditing electronic funds
transfers
15-2
Types of cash accounts
 General cash account
 Imprest payroll account
 Branch bank account
 Imprest petty cash fund
 Cash equivalents
15-3
Relationship between cash and
transaction cycles
 General cash is considered significant in
almost all audits, even when the ending
balance is immaterial
 The amount of cash flowing into and out of
the cash account is frequently larger than
for any other account in the financial
statements (e.g. cash for sales, cash for
purchase, cash for payroll)
15-4
15-5
General cash internal controls
 Controls over the transaction cycles:
– Appropriate controls over the receiving of
cash (sales and other receipts) and controls
over disbursements (payments to suppliers,
employees and others)
 Independent bank reconciliations:
– Should be completed on a timely basis
– Bank statements should be received unopened
by an independent reconciler
15-6
Audit of other transaction cycles can
discover errors associated with cash
 Examples of such errors include:
– Failure to bill a customer
– Billing customer at an incorrect price
– Duplicate payment of a vendor’s invoice
– Payment for raw materials not received
– Payment to an employee for hours not worked
– Payment to a related party at an inflated
interest rate
15-7
Methodology for designing tests of
details of balances for cash in the bank
15-8
Cash – materiality considerations
 The cash balance is immaterial on most

audits
 Cash transactions affecting the balance are
almost always material
 Potential for material misstatement of cash
exists
15-9
Cash – inherent risks
 Cash is more susceptible to theft than other
assets
 This results in high inherent risk for the
existence objective
 Inherent risk is typically low for other
audit objectives
15-10
Cash – control risk
 Control risk for cash needs to be addressed
on a cycle by cycle basis (particularly
controls over cash receipts and
disbursements)
 Control risk varies from organization to
organization
 Most important internal control is
independent bank reconciliations
15-11
Audit of the general cash account
 1. Assess controls over the transaction

cycles affecting the recording of cash
receipts and disbursements and
 2. Assess controls over the preparation of
independent bank reconciliations
 3. Test key controls to be relied upon (for
#1 with those cycles)
15-12
Audit of the general cash account
(cont’d)
 4. Analytical procedures may be limited if
the year end bank reconciliation is audited
100%
 5. Design and conduct audit procedures of
year end cash balances
15-13
Develop and audit program
15-14
Year-end audit procedures for cash
(Table 15-1)
 Detail tie-in: Tests of deposits in transit,
full bank reconciliation, trace reconciled
balance to general ledger
 Existence, completeness, accuracy: Send
and test bank confirmation, obtain and test
cut-off bank statement, extended tests of
bank reconciliation, or proof of cash
15-15
Year-end audit procedures for cash
(Table 15-1) (cont’d)
 Cut-off: Count cash on hand and trace to
subsequent deposit, tests of deposits in transit,
record last cheque number and followup use in
subsequent year, trace outstanding cheques to
subsequent reconciliation
 Presentation and disclosure: Examine minutes,
loan agreements, confirmations; review of
financial statements
15-16
Practice problem 15-12 (p. 472)
 In auditing the bank
reconciliation, discuss
the differences in
emphasis with respect
to deposits in transit
and outstanding
cheques
15-17
Bank confirmation
 A standard form approved by the CICA
and Canadian Bankers Association is used
 Auditor controls the sending of the bank
confirmation and has it returned to the
auditor’s office
 Provides information about cash accounts,
loans, guarantees or other holdings
15-18
 Discuss the difference
between positive
confirmations of
accounts receivable
and bank
confirmations.
15-19
Cutoff bank statement
 Is a partial bank statement from the month
after the client’s year end
 The client is requested to authorize the
bank to either send the bank statement to
the auditor’s offices or authorize the
auditor to pick it up directly from the bank
15-20
Fraud-oriented procedures
 Extended tests of bank reconciliation:
transactions are traced to source journals or
source documents
 Proof of cash: transactions are both traced
and reconciled to supporting journals or
source documents
 Tests for kiting: detailed bank transfer
schedule
15-21
 Identify motivations
for theft of cash
 Identify preventive
controls
 List audit procedures
for detection
15-22
Audit of payroll cash account
 Requires a short period of time if an
imprest account is used and the bank
reconciliation is current
 Reconciling items tend to be outstanding
cheques only
15-23
Audit of electronic cash
transactions
 Examples of electronic cash:
– Automated deposit of payroll to employees
– Electronic cash management (e.g. transfer from
general account to payroll account)
– Electronic data interchange (e.g. payment to suppliers
or payment from customers)
– Electronic funds transfer (e.g. transfer of cash to other
branches)
– Receipt of debit card payments from customers
15-24
Control over debit card cash
receipts
 Cash reconciliation processes should
continue as part of the cash receipts
function
 Debit card totals should be agreed on a
daily basis to amounts deposited in the
bank (reconciliation independent of point
of sale data entry)
15-25
Control over and audit of electronic
payments
 Automatic pre-authorized monthly
payments:
– Controls should be in place to ensure that only
authorized amounts are set up for payment
– Controls should exist to ensure that all
automatic withdrawals are recorded in the
accounts in the period made
 Payments tested as part of purchases,
payments cycle
15-26
payments (cont’d)
 Payroll payments:
– Should be paid using an imprest bank account
– Master file changes (e.g. new employee set up
and wage rate changes) should be properly
authorized and independently verified
– Independent approval of amounts paid and
bank accounts established should occur
 Tested as part of the personnel and payroll
cycle
15-27
payments (cont’d)
 Audit of electronic receipts and payments
– Extent of work depends upon assessed quality of
internal controls
– Usually fewer outstanding bank transactions for
electronic transactions than for paper-based
transactions
– Automatic transactions should be agreed to an
authorized schedule
– For imprest payroll, review documentation and agree
to the reconciliation
15-28
Petty cash
 Balance is frequently immaterial, however
usually audited because of
– Susceptibility to defalcation
– Client expectations
15-29
Internal controls over petty cash
 Most important control is that the fund is
the responsibility of one individual
 Should not be mingled with other receipts
 Funds should be kept separate from other
activities
 Disbursements and reimbursements should
be properly documented and authorized
15-30
Audit tests for petty cash
 Focus is on transactions rather than ending
balance
 As with other cycles, the auditor
documents and evaluates internal controls
prior to the actual conduct of tests, which
are tailored to the quality of the internal
controls
15-31

ch15 70 360

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

ch15 70 360

Uploaded by

Copyright:

Available Formats

Chapter 15:

Audit of Cash Balances

 The cash balance is immaterial on most

 1. Assess controls over the transaction

You might also like