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.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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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 Paid-in Capital in Excess of Par Common Redemption Issue of of stock stock
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

Dividends Payable Payment of dividends

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

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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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

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Cash in the Bank and Transaction Cycles

Duplicate payment of a vendors 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
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 23 - 8

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

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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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 clients records

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Learning Objective 2
Identify the major types of cash accounts maintained by business entities.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Types of Cash Accounts

General cash account
Imprest accounts

Branch bank account

Imprest petty cash fund

Cash equivalents

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Relationship of General Cash to Other Cash Accounts

Branch Bank Account
General Cash Cash Equivalents Imprest Petty Cash Fund

Imprest Payroll Account

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Learning Objective 3
Design and perform audit tests of the general cash account.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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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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2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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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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2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

Audit Schedule for a Bank Reconciliation

Clawson Industries Bank Reconciliation 12/31/07 Schedule A-2 Prepared by Client DED Approved by SW

1/10/08 1/18/08
$109,713 21,117 87,462 15,200 $ 28,168
$ 32,584

Date

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
Balance per books before adjustments Adjustments: Unrecorded bank service charge NSF Balance per books, adjusted
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

216 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.
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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.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Procedures
Receipt of a bank confirmation Receipt of a cutoff bank statement

Tests of the bank reconciliation

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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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.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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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 Ending balance Audited by TOC-B, AP, and TDB TOC-T + TOC-B + STOT + AP + TDB = Sufficient appropriate evidence
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 23 - 23

Audited by TOC-T, STOT, and AP

Learning Objective 4
Recognize when to extend audit tests of the general cash account to test further for material fraud.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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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.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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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.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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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

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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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

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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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

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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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.
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 23 - 30

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.
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 23 - 31

Learning Objective 5
Design and perform audit tests of the imprest payroll bank account.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Audit of the Imprest Payroll Bank Account

Typically, the only reconciling items are outstanding checks.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Learning Objective 6
Design and perform audit tests of imprest petty cash.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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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 clients expectation of an audit review even when the amount is immaterial.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Audit of Imprest Petty Cash

Internal controls over petty cash Audit tests for petty cash

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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End of Chapter 23

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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