Topic 15: Fieldwork ― Audit of Cash Balances

1. Topic 15: Fieldwork ― Audit of Cash Balances Auditing Arens Ch. 23 James J. McKinney jmckinney@rhsmith.umd.edu

2. Audit Topics Through All Audit Phases Topic 1: Overview Topic 2: Accounting Information System Topic 18: Legal Liability Fraud Detection IT Auditing Other Engagements – NOT AUDITING! Planning Fieldwork Audit Completion Topic 15: Cash (these topics affect fieldwork and completion) Topic 3: Cycles Topic 4: Management Assertions and Audit Objectives Topic 5: Evidence Topic 6: Materiality Topic 7: Audit Risk Topic 8: Test Types and Audit Plan Topic 9: Sampling in Tests of Controls and Substantive Tests of Transactions Topic 10: Tests of Controls Topic 11: Sampling in Tests of Details of Balances Topic 12: Sales and Collections Cycle Topic 13: Inventory and Warehousing Cycle Topic 14: Acquisition and Payment Cycle Topic 15: Cash Topic 16: Audit Completion Topic 17: Reporting

3. ! Overview of a Financial Statement Audit Audit Work Papers Planning Fieldwork Audit Completion • Substantive Testing: • Substantive Tests of Transactions • Analytical Procedures • Tests of Details of Balances Test of Controls and Reassessment of Control Risk • Perform: • Pre-Acceptance Client Review • Understand Business • Business Risk • Initial Analytical Procedures • Engagement Letter • Preliminarily Determine and Assess: • Controls • Materiality • Audit Risk • Risk of Material Misstatement • Detection Risk • Determine audit procedures based on previous assessments and: • Management Assertions • Audit Objectives • Evidence Availability, Persuasiveness, and Cost • Prepare: • Audit Plan • Audit Program • Complete the Audit: • Contingent Liabilities • Subsequent Events • Reassess: • Risk • Materiality • Evidence • Final Analytical Procedures • Management Representation Letter • Issue: • Audit Report on Financial Statements • Audit Report on Internal Controls (issuers) • Management Letters (SAS 115) not usually analytical procedures Opening Balances Sampling

4. Learning Objectives • Understand Cycle Overview • Understand how to utilize the bank reconciliation, cut-off statement, and cash confirmation • Recognize the use of the Interbank Transfer Schedule • Understand basics of Proof of Cash

6. Relationship of General Cash to Other Cash Accounts Branch Bank Account Imprest Payroll Account General Cash Cash Equivalents Imprest Petty Cash Fund

7. Learning Objectives • Understand Cycle Overview • Understand how to utilize the bank reconciliation, cut-off statement, and cash confirmation • Recognize the use of the Interbank Transfer Schedule • Understand basics of Proof of Cash

8. ! Bank Reconciliation, Cut-off Statement & Confirmation CLIENT EXTERNAL CASH CONFIRM Confirm balance as of 12/31/1X BANK RECONCILIATION @12/31/1X (usually PBC) Balance per Bank + Deposits in Transit (Overstatement) - Checks Outstanding (Understatement) _________________ G/L Cash Balance (Adj. Bal.per bank which equals Adj. Bal. per books) ================ Bank Statement 12/1/1X - 12/31/1X Vouch Cut-off Bank Statement (sent directly to auditor from bank) 1/1/1Y - 1/15/1Y G/L Cash Bal. (what were auditing) Trace Returned Checks Note: 1X is the year audited. 1Y is the year subsequent.

9. ! Prepared by Client

10. !

11. ! Bank Reconciliations • 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 • 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 • Deposits received by the bank on behalf of the company from credit card agencies and other vendors making payments electronically, but not recorded in the client’s records • Misstatements which may not be discovered as a part of the audit of the bank reconciliation: • Failure to bill a customer • Billing a customer at a lower price than called for by company policy • A defalcation of cash by interception of cash receipts from customers before they are recorded, with the account charged off as a bad debt • 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

12. Learning Objectives • Understand Cycle Overview • Understand how to utilize the bank reconciliation, cut-off statement, and cash confirmation • Recognize the use of the Interbank Transfer Schedule • Understand basics of Proof of Cash

13. ! • Tests of 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. • 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.

14. Learning Objectives • Understand Cycle Overview • Understand how to utilize the bank reconciliation, cut-off statement, and cash confirmation • Recognize the use of the Interbank Transfer Schedule • Understand basics of Proof of Cash

15. ! • 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. • Includes a reconciliation of: • the balance on the bank statement with the general ledger balance at the beginning of the proof-of-cash period • cash receipts deposited per the bank with the cash receipts journal for a given period • cancelled checks clearing the bank with the cash disbursement journal for a given period • the balance on the bank statement with the general ledger balance at the end of the proof-of-cash period

16. Additional Material

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