Audit of Cash Balances

1. CHAPTER 20
Audit of Cash
Balances
20 - 1
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2. What are the auditor’s primary
concerns with regard to cash?
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3. What are the auditor’s primary
concerns with regard to cash?
- existence
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4. What are the auditor’s primary
concerns with regard to cash?
- existence
- completeness
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5. What are the auditor’s primary
concerns with regard to cash?
- existence
- completeness
- physical control
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6. What are the auditor’s primary
concerns with regard to cash?
- existence
- completeness
- physical control
- presentation and
disclosure
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7. Cash Audit Procedures
perform
analytical
procedures
to test the
reasonableness
of cash
balances
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8. Cash Audit Procedures
Enquire of management regarding any
cash requirements or restrictions from
debt agreements.
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9. What is kiting?
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10. What is kiting?
Kiting is an irregularity whereby
an overstatement of cash is created by a cash transfer between
bank accounts.
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11. What is kiting?
Kiting is an irregularity whereby
an overstatement of cash is created by a cash transfer between
bank accounts.
The deposit is
recorded in cash receipts but
the disbursement is not recorded in cash disbursements.
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12. Kiting example
On 12/31, Ace’s bookkeeper writes a $5,000 cheque
on the National Bank and deposits the cheque
in the Canadian Bank account.
National
Ace Co.
Ace Co.
12/31
5000
Canadian
National
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13. Kiting example
On 12/31, Ace’s bookkeeper writes a $5,000 cheque
on the National Bank and deposits the cheque
in the Canadian Bank account.
The bookkeeper records the deposit in the cash
receipts journal but does not record the cheque
in the cash payments journal.
He also fails to list the cheque as outstanding on the
National Bank reconciliation.
cash receipts journal
description
_ $$ _
Dec. 31, 2004
Misc. revenue
5000
cash payments journal
description
_ $$ _
Dec.31, 2004
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14. Kiting example
On 12/31, Ace’s bookkeeper writes a $5,000 cheque
on the National Bank and deposits the cheque
in the Canadian Bank account.
National
National will not be aware of
the cheque until notification from
Canadian, probably during the
first few days of January.
Canadian
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15. Kiting example
On 12/31, Ace’s bookkeeper writes a $5,000 cheque
on the National Bank and deposits the cheque
in the Canadian Bank account.
National
National will not be aware of
the cheque until notification from
Canadian, probably during the
first few days of January.
As a result of the deposit,
Canadian will increase Ace’s
account on 12/31.
Canadian
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16. On 12/31, Ace’s bookkeeper writes a $5,000 cheque
on the National Bank and deposits the cheque
in the Canadian Bank account.
National will not be aware of
National
the cheque until notification from
Canadian, probably during the
first few days of January.
As a result of the deposit, Canadian
will increase Ace’s account on 12/31.
Canadian
As a consequence, the bank records will reflect a
$5,000 cash overstatement for a few days until the
cheque clears. December bank statements will also
support this overstatement.
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17. From an internal control
perspective, why does kiting
occur?
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18. From an internal control
perspective, why does kiting
occur?
inadequate
segregation of
duties between
accounting and
cash custody
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19. What effect is changing
technology having on the
likelihood of kiting?
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20. What effect is changing
technology having on the
likelihood of kiting?
Kiting is becoming
less likely because
the “float” is
shrinking; i.e.,
cheques clear banks
faster than in the
past.
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21. What audit procedures
may detect kiting?
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22. What audit procedures
may detect kiting?
tests related to
the cutoff bank
statement and
schedule of
bank transfers
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23. Cash Audit Procedures
Obtain a bank cutoff statement directly
from the bank.
?
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24. Cash Audit Procedures
Obtain a bank cutoff statement directly
from the bank.
A bank cutoff
statement is prepared
ten business days after the
balance sheet date.
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25. Cash Audit Procedures
Obtain a bank cutoff statement directly
from the bank.
A bank cutoff
statement is prepared
ten business days after the
balance sheet date.
Most items that were outstanding at year-end have cleared
when the cutoff statement
is prepared (cheques, deposits).
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26. Cash Audit Procedures
Obtain a bank cutoff statement directly
from the bank.
Trace all cheques, deposits, and other
cash changes from the cutoff statement
to cash receipts and disbursements
records, paying particular attention to
dates and amounts.
20 - 26
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27. Cash Audit Procedures
Prepare a schedule of bank transfers
showing all transfers between the
client’s bank accounts during the last
week of the audit period and the first
week of the subsequent period.
20 - 27
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28. Cash Audit Procedures
Prepare a schedule of bank transfers
showing all transfers between the
client’s bank accounts during the last
week of the audit period and the first
week of the subsequent period.
The schedule should
be prepared using cash receipts
and payments journals, year-end
reconciliation, year-end bank statement, and cutoff bank statement.
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29. Cash Audit Procedures
Obtain or prepare a year-end bank
reconciliation or proof of cash for
each client bank account.
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30. Cash Audit Procedures
Obtain or prepare a year-end bank
reconciliation or proof of cash for
each client bank account.
What
is a proof
of cash?
20 - 30
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31. Cash Audit Procedures
Obtain or prepare a year-end bank
reconciliation or proof of cash for
each client bank account.
A proof of
cash is a working
paper prepared by the auditor to
reconcile the bank’s record of the
client’s beginning balance, cash
deposits, cleared cheques, and
ending balance for the period with
the client’s records.
20 - 31
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32. Cash Audit Procedures
Obtain or prepare a year-end bank
reconciliation or proof of cash for
each client bank account.
Trace amounts to
the schedule of bank transfers,
cash receipts and payments
journals, year-end reconciliation, year-end bank statement,
and cutoff bank statement.
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33. What will a bank reconciliation
help the auditor determine?
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34. What will a bank reconciliation help the
auditor determine?
- whether all client cash receipts
have been deposited
cash receipts journal
description
_ $$ _
Dec. 31, 2004
Misc. revenue
5000
Canadian
20 - 34
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35. What will a bank reconciliation help the
auditor determine?
- whether all bank deposits have
been recorded in client cash
receipts records
cash receipts journal
description
_ $$ _
Dec. 31, 2004
Misc. revenue
5000
Canadian
20 - 35
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36. What will a bank reconciliation help the
auditor determine?
- whether all client cash payments have been paid by the
bank
cash payments journal
description
_ $$ _
Dec. 31, 2004
Misc. expense
5000
Canadian
20 - 36
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37. What will a bank reconciliation help the
auditor determine?
- whether all bank payments have
been recorded in client cash
payments records
cash payments journal
description
_ $$ _
Dec. 31, 2004
Misc. expense
5000
Canadian
20 - 37
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38. What will not be detected by a
bank reconciliation?
20 - 38
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39. What will not be detected by a
bank reconciliation?
- unrecorded cheques that have not
cleared the bank (possible kiting)
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40. What will not be detected by a
bank reconciliation?
- unrecorded cheques that have not
cleared the bank (possible kiting)
- unrecorded deposits that have not
cleared the bank
20 - 40
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41. What will not be detected by a
bank reconciliation?
- unrecorded cheques that have not
cleared the bank (possible kiting)
- unrecorded deposits that have not
cleared the bank
- cheques written for incorrect
amounts
20 - 41
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42. Cash Audit Procedures
BANK
Confirm all cash
balances held by
third parties, such as
banks and other financial
institutions.
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43. Cash Audit Procedures
Confirm all cash balances held
by third parties, such as banks
and other financial institutions.
possibly through
use of the standard
bank confirmation
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44. Cash Audit Procedures
Count all cash on hand at the client’s
premises. If cash is located in multiple
places, count cash simultaneously to
avoid double counting.
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45. Cash Audit Procedures
Review cutoff
of cash receipts
and
disbursements.
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46. Cash Audit Procedures
Account for the numeric sequence of
cancelled cheques. Investigate missing
cheques.
Ace Company
6462
Ace Company
6461
Ace Company
6459
Ace Company
Ace Company
6458
?
6457
NATIONAL BANK
20 - 46
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47. Cash Audit Procedures
Review monthly
client-prepared
bank
reconciliations.
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48. Cash Audit Procedures
Investigate any cheques
made out to cash or bearer.
Ace Company
6458
CASH
NATIONAL BANK
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49. Cash Audit Procedures
Investigate any cheques that were
returned by the bank because the client
account had insufficient funds.
Ace Company
6458
F
S
N
NATIONAL BANK
20 - 49
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50. Cash Audit Procedures
Review and recalculate translations
of foreign currencies.
20 - 50
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51. Cash Audit Procedures
Trace a sample of entries from cash receipts journal
to a/r subsidiary ledger
cash receipts journal
description
_ $$ _
May 23, 2004
ABC Vending
23,000
___a/r subsidiary
customer
_ $$ _
ABC Vending
78,660
5/23/04 payment 23,000
balance
55,660
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52. Cash Audit Procedures
Trace a sample of entries from cash receipts journal
to a/r subsidiary ledger to bank statements
cash receipts journal
description
_ $$ _
May 23, 2004
ABC Vending
23,000
___a/r subsidiary
customer
_ $$ _
ABC Vending
78,660
5/23/04 payment 23,000
balance
55,660
Bank Statement
5/31/04
Deposits:
5/23
$23,000
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53. Cash Audit Procedures
Trace a sample of entries from cash receipts journal
to a/r subsidiary ledger to bank statements to
deposit slips.
cash receipts journal
description
_ $$ _
May 23, 2004
ABC Vending
23,000
Bank Statement
5/31/04
Deposits:
5/23
$23,000
___a/r subsidiary
customer
_ $$ _
ABC Vending
78,660
5/23/04 payment 23,000
balance
55,660
Deposit
Slip
5/23/04
23,000
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54. Cash Audit Procedures
Trace a sample of entries from cash payments
journal to a/p subsidiary ledger
cash payments journal
description
_ $$ _
January 23, 2004
a/p payment to
MGB Corp.
4,300
a/p subsidiary
vendor
_ $$ _
MGB Corp
8,780
1/23/04 payment 4,300
balance
4,480
20 - 54
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55. Cash Audit Procedures
Trace a sample of entries from cash payments
journal to a/p subsidiary ledger to bank statement
cash payments journal
description
_ $$ _
January 23, 2004
a/p payment to
MGB Corp.
4300
Bank Statement
1/31/04
a/p subsidiary
vendor
_ $$ _
MGB Corp
8,780
1/23/04 payment 4,300
balance
4,480
Deposits:
Payments:
1/26
$4300
20 - 55
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56. Cash Audit Procedures
Trace a sample of entries from cash payments
journal to a/p subsidiary ledger to bank statement to
cancelled cheques.
cash payments journal
description
_ $$ _
January 23, 2004
a/p payment to
MGB Corp.
4300
Bank Statement
1/31/04
Deposits:
a/p subsidiary
vendor
_ $$ _
MGB Corp
8,780
1/23/04 payment 4,300
balance
4,480
Ace Company
MGB Corp.
Payments:
4512
1/23/04
4300
NATIONAL BANK
1/26
$4300
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