Audit of Cash Balances

1. Audit of Cash Balances

2. Types of Cash Accounts

3. The Relationship Between Cash in the Bank and Transaction Cycles • It is relatively easy to verify the client’s reconciliation of the balance in the bank account to the general ledger • What will not be discovered as a part of the audit of the bank reconciliation? See some examples in the table below.

4. Major Risk of Fraud or Error

5. Bank Reconciliation Misstatements Some types of misstatements normally discovered as part of the tests of a bank reconciliation include: Failure to include on the outstanding cheque Cash received by the client after year end Deposits made and recorded as cash receipts near the end of the year

6. Audit Process for Cash in Bank Set performance materiality, and assess audit risk and inherent risk and fraud risk for cash in bank. By assertion: Assess control risk for cash in bank. Identify assertions where substantive testing is insufficient, risk of material misstatement, and significance. Design and perform tests of controls for several cycles Design and perform analytical procedures as substantive tests for cash in bank balance Design tests of details of cash in bank balance to satisfy balance-related audit objectives Audit procedures Sample size Items to select Timing

7. Assessing Inherent Risk and Fraud Risk • There is high inherent risk • When assessing inherent risk what should auditor consider?

8. Materiality Considerations • The cash balance is immaterial on most audits • Thus often potential for material misstatement of cash.

9. Understanding Internal Control and Assessing Control Risk Internal control effectiveness over cash balances The most important internal control Internal controls over cash receipts and disbursements Individuals who are super users or have incompatible functions granted to them using computer systems

10. Thus Key Controls over Cash Internal controls over the year-end cash balances in the general account can be divided into two categories: Another common control for many companies

11. Analytical Procedures In most, if not all, audits, the year-end bank reconciliation is verified on a 100 percent basis. Testing the reasonableness of the cash balance is therefore less important than for most other audit areas. Similarly, auditors normally compare the ending balance in cash

12. Tests of Details Related to Cash Account

13. Bank Confirmations Standard bank confirmation form—a form approved by the CPA Canada and Canadian Bankers Association the It is typical for the bank to confirm loan information and bank balances on the same form.

14. The standard bank confirmation form is used to confirm deposit and loan balances.

15. Bank Cutoff Statement Auditors use cutoff bank statementto ensure the transactions were recorded in the proper accounting period. Shows transactions that hit your audit client's bank statement for the 7- to 10-day period after the end of the financial period. Trace all these cheques and deposits on the cutoff statement to the client's bank reconciliation

16. Tests of the Bank Reconciliation • Verify that the client’s bank reconciliation is • Trace the balance on the cutoff statement to • Trace cheques included with the cutoff bank statement to the list of outstanding cheques on the bank reconciliation and • Investigate all significant cheques or payments included on the outstanding cheque list that • Trace deposits in transit (outstanding deposits) to • Account for other reconciling items on the bank statement and bank reconciliation. These include such items as These reconciling items should be carefully investigated to ensure they have been treated properly by the client.

17. Extended Tests of the Bank Reconciliation When the auditor believes that the year-end bank reconciliation may be intentionally misstated Want to verify whether all transactions included in the journals for the last month of the year were correctly included in or excluded from the bank reconciliation and to verify whether all items in the bank reconciliation were correctly included.

18. Fraud-Oriented Procedures A major consideration in the audit of the general cash account is the possibility of fraud. The auditors must extend their year-end audit procedures to test more extensively for the possibility of material fraud This can be due to

19. Proof of Cash Auditors can prepare a proof of cash when the client has material internal control weaknesses in cash. Proof of cash is a four-column working paper used to reconcile the bank’s records of the client’s beginning balance, cash deposits, cleared cheques, and ending balance for the period with the client’s records. Used to determine whether the following occurred:

20. Alpha Bravo Company Proof of Cash For the Month of June 201X Prepared by GHY Dated 8/7/1X Reviewed by ^ Footed d Traced to cash disbursements journal b Traced to bank statement L Traced to general ledger r Traced to cash receipts journal j Customer’s NSF cheque redeposited on July 8 and cleared

21. Tests of Interbank Transfers (Kiting) Kiting refers to transferring money from one bank to another An example: Sally opens checking accounts at Bank A and Bank B. Initially, she deposits $500 in Bank A and $0 in Bank B. She then writes a $10,000 check on her account at Bank A and deposits it in Bank B. Unaware that Sally has insufficient funds in her account at Bank A, Bank B immediately gives her credit on her account. During the three business days it takes Bank B to clear the check on her account at Bank A, Sally writes a $10,000 check on her account at Bank B and deposits it in Bank A to cover her first $10,000 check. Bank A immediately gives her credit on her account, and Bank B clears Sally's first $10,000 check.  Sally continues writing bad checks between her accounts. By doing so, she illegally obtains a $10,000 interest-free loan

22. Tests of Interbank Transfers (Kiting) To test for kiting, as well as for unintentional errors in recording bank transfers Similarly, transfers deposited in the bank near the end of the year or included in deposits not yet credited

23. Other Audit Issues Related to Cash Many organizations receive cash or make cash payments electronically. More sophisticated or larger businesses could use EFTs and EDIs have the potential to improve internal controls, since there is no cash handling by employees.

24. Controls Over Debit Card Cash Receipts Most debit card transactions are processed accurately as most organizations keep track of payment methods automatically using their point-of-sale (POS) systems. Remember that daily sales are broken down into When performing the bank reconciliation, This reconciliation should be handled by a person independent of the POS function.

25. Controls Over Electronic Payments The organization under audit should have controls to ensure The extent of audit work conducted on the bank reconciliation depends on the assessed quality of internal controls.

26. Petty Cash Petty cash is verified primarily because of the potential for fraud and the client’s expectation of an audit review even when the amount is immaterial. The emphasis in verifying petty cash should be on An important part of testing petty cash is first determining the client’s procedures for handling the fund When testing petty cash, the two most common procedures are

27. Problem DC 11-5, Page 612 Required: You suspect that the cashier has stolen some money. Prepare a schedule showing your estimate of the loss How did the cashier attempt to conceal the theft? Based only on the information above, name two specific features of internal control that are missing. If the cashier’s October 31 reconciliation is known to be in order and you start your audit on December, what specific auditing procedures could you perform to discover the theft? The Patrick Company had poor internal control over its cash transactions. Facts about its cash position at November 30 were as follows: The cash books showed a balance of $18,901.62, which included undeposited receipts. A credit of $100 on the bank statement did not appear on the books of the company. The balance according to the statement was $15,550. When you receive the cutoff bank statement on December 10, the following cancelled cheques were enclosed: No. 6500 for $116.25, No. 7126 for $150.00, No. 7815 for $253.25, No. 8621 for $190.71, No. 8623 for $206.80, and No. 8632 for $145.28. The only deposit was in the amount of $3,794.41 on December 7. The cashier handles all incoming cash and makes the bank deposits personally. He also reconciles the monthly bank statement. His November 30 reconciliation is shown below.

28. Problem 17-22, Page 541 The following are fraud and other irregularities that might be found in the client’s year-end cash balance. (Assume the balance sheet date is June 30.) • A cheque was omitted from the outstanding cheque list on the June 30 bank reconciliation. It cleared the bank July 7. • A cheque was omitted from the outstanding cheque list on the bank reconciliation. It cleared the bank September 6. • Cash receipts collected on accounts receivable from July 2 to July 5 were included as June 29 and June 30 cash receipts. • A loan from the bank on June 26 was credited directly to the client’s bank account. The loan was not entered in the books as of June 30. • A cheque that was dated June 26 and disbursed in June was not recorded in the cash disbursements journal, but it was included as an outstanding cheque on June 30. • A bank transfer recorded in the accounting records on July 2 was included as a deposit in transit on June 30. • The outstanding cheques on the June 30 bank reconciliation were underfooted by $2000. REQUIRED • Assuming that each of these misstatements was intentional, state the most likely motivation of the person responsible. • What control could be instituted for each intentional misstatement to reduce the likelihood of errors. • List an audit procedure that could be used to discover each misstatement.