CHAPTER 20 Audit of Cash Balances

1. CHAPTER 20Audit of Cash Balances

2. What are the auditor’s primary concerns with regard to cash?

3. What are the auditor’s primary concerns with regard to cash? - existence

4. What are the auditor’s primary concerns with regard to cash? - existence - completeness

5. What are the auditor’s primary concerns with regard to cash? - existence - completeness - physical control

6. What are the auditor’s primary concerns with regard to cash? - existence - completeness - physical control - presentation and disclosure

7. Cash Audit Procedures perform analytical procedures to test the reasonableness of cash balances

8. Cash Audit Procedures Enquire of management regarding any cash requirements or restrictions from debt agreements.

9. What is kiting?

10. What is kiting? Kiting is an irregularity whereby an overstatement of cash is cre- ated by a cash transfer between bank accounts.

11. What is kiting? Kiting is an irregularity whereby an overstatement of cash is cre- ated by a cash transfer between bank accounts. The deposit is recorded in cash receipts but the disbursement is not re- corded in cash disbursements.

12. National Canadian 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. Ace Co. 12/31 Ace Co. 5000 National

13. cash receipts journal description _ $$ _ Dec. 31, 2004 Misc. revenue 5000 cash payments journal description _ $$ _ Dec.31, 2004 - no activity - 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.

14. National Canadian 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 will not be aware of the cheque until notification from Canadian, probably during the first few days of January.

15. National Canadian 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 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.

16. National Canadian 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 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. 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.

17. From an internal control perspective, why does kiting occur?

18. From an internal control perspective, why does kiting occur? inadequate segregation of duties between accounting and cash custody

19. What effect is changing technology having on the likelihood of kiting?

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.

21. What audit procedures may detect kiting?

22. What audit procedures may detect kiting? tests related to the cutoff bank statement and schedule of bank transfers

23. Cash Audit Procedures Obtain a bank cutoff statement directly from the bank. ?

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.

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 outstand- ing at year-end have cleared when the cutoff statement is prepared (cheques, deposits).

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.

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.

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 state- ment, and cutoff bank statement.

29. Cash Audit Procedures Obtain or prepare a year-end bank reconciliation or proof of cash for each client bank account.

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?

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.

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 reconcilia- tion, year-end bank statement, and cutoff bank statement.

33. What will a bank reconciliation help the auditor determine?

34. cash receipts journal description _ $$ _ Dec. 31, 2004 Misc. revenue 5000 What will a bank reconciliation help the auditor determine? - whether all client cash receipts have been deposited Canadian

35. Canadian cash receipts journal description _ $$ _ Dec. 31, 2004 Misc. revenue 5000 What will a bank reconciliation help the auditor determine? - whether all bank deposits have been recorded in client cash receipts records

36. Canadian cash payments journal description _ $$ _ Dec. 31, 2004 Misc. expense 5000 What will a bank reconciliation help the auditor determine? - whether all client cash pay- ments have been paid by the bank

37. Canadian cash payments journal description _ $$ _ Dec. 31, 2004 Misc. expense 5000 What will a bank reconciliation help the auditor determine? - whether all bank payments have been recorded in client cash payments records

38. What will not be detected by a bank reconciliation?

39. What will not be detected by a bank reconciliation? - unrecorded cheques that have not cleared the bank (possible kiting)

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

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

42. Cash Audit Procedures BANK Confirm all cash balances held by third parties, such as banks and other financial institutions.

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

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.

45. Cash Audit Procedures Review cutoff of cash receipts and disbursements.

46. ? Ace Company 6458 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 6457 NATIONAL BANK

47. Cash Audit Procedures Review monthly client-prepared bank reconciliations.

48. Cash Audit Procedures Investigate any cheques made out to cash or bearer. Ace Company 6458 CASH NATIONAL BANK

49. NSF Cash Audit Procedures Investigate any cheques that were returned by the bank because the client account had insufficient funds. Ace Company 6458 NATIONAL BANK

50. Cash Audit Procedures Review and recalculate translations of foreign currencies.