Cash Audit: Substantive Tests, Internal Control, and Procedures

1. Chapter 6 Audit of Cash Chapter 6

2. Substantive Tests –General Concepts • Audits are performed by dividing the f/s into smaller segments or components • Transaction cycles • Groups of repetitive transactions • Examples • Revenue Cycle • relating to sales, shipping, receivables, and collections • Acquisition Cycle • referring to purchases, payables, and payments • Production Cycle • relating to manufacturing products and storage • Also, payroll, investing, financing Chapter 6

3. Assertions, Objectives, Evidence and Procedures Little Match Company Chapter 6

4. Substantive Tests –General Concepts • Combining CR assessments • accounts affected by a single transaction cycle • accounts affected by more than one transaction cycle Chapter 6

5. Chapter 6

6. Substantive Tests –General Concepts (con’t) • Approaches for substantive tests • tests of details of balances • tests of details of transactions • overstatement errors • understatement errors • Designing substantive tests • nature • timing • extent Chapter 6

7. Chapter 6

8. Substantive Tests –General Concepts (con’t) • Types of substantive tests • tests of details • of transactions • of balances • effectiveness depends on type of test used and sample size • substantive analytical procedures • usually less effective than tests of details • usually lower in cost • can enhance effectiveness by • more reliable procedure (e.g., comparing ratios to industry average instead of just comparing account balance to prior year account balance, using nonfinancial data) • more reliable expectations, (more predictable relationships) (e.g., obtained from independent sources, independence level of internal sources) • effectiveness of internal control (i.e., source data is more reliable) • less effective procedure if data used is subject to management discretion (e.g., maintenance expense, advertising expense) Chapter 6

9. 2. Cash - Internal Control • Internal control over cash receipts • general rules for handling cash • separate functions: receiving cash, depositing cash, recording the transactions, reconciling • controls over cash sales, payments received through the mail • documents and records: remittance advice, cash receipts list, daily cash summary, deposit slip Chapter 6

10. 2. Cash - Internal Control • Internal control over cash disbursements • steps: pay from approved voucher, control check signing, mail payment, cancel voucher, record cash payment • documents and records: paid voucher file, cash disbursements journal Chapter 6

11. 2. Cash - Internal Control • Cash key control activities • Information processing • voucher packet (Purchase requisition, purchase order, receiving report, invoice) matched prior to cash disbursement authorization • deposits reconciled to amounts credited to accounts receivable ledger • bank reconciliation • Physical controls over the security of assets • deposit cash and checks daily and intact • lock box account • dual custody over cash • unused checks secured • check imprinting machine • Segregation of duties • separate authorization, custody, recording, reconciliation • Reconciliations Chapter 6

12. 3. Cash - Substantive Tests • Cash • Bank confirmation – paper or electronic • Cutoff bank statement • Bank reconciliation • Four-column proof of cash • Interbank transfer schedule • Cash cutoff tests • Count cash on hand Chapter 6

13. Exhibit 6.8Bank Confirmation Chapter 6

14. Proof of Cash Chapter 6

15. 3. Cash - Substantive Tests • Cash • Existence and Occurrence • confirmation, cutoff tests, cash count, reconciliation • Rights and Obligations • confirmation, cash count, reconciliation • Completeness • analytical procedures, confirmation, cutoff tests, cash count Chapter 6

16. 3. Cash - Substantive Tests • Cash • Valuation • little problem, confirmation, cash count • Presentation and Disclosure • compare statement presentation to GAAP • compensating balances, overdrafts, lines of credit, loan guarantees Chapter 6

17. Review Questions for Discussion • Chapter 6 6.12 6.13 6.15 6.16 6.17 6.20 Chapter 6

18. Purchase Transactions ICs • Purchase requisition – requesting department • Purchase order – purchasing department • Goods received – receiving dock • disclose quantities or not? • All documents to accounting department – accounts payable department • Receive purchase invoice from vendor Chapter 6

19. Cash Payments ICs • Accounting department (accounts payable) • match all documents (purchase requisition, purchase order, receiving reports, purchase invoice) • prepare check and transmit to treasurer’s office with documentation • Treasurer’s office • sign check/enter electronic payment • do not return check to accounting department • make payment on due date Chapter 6

20. Sales Transactions ICs • Receive customer order • Credit check • Ship goods – shipping dock • create shipping documentation • All documents to accounting department – accounts receivable department • Prepare sales invoice • Book sale Chapter 6

21. Cash Receipts ICs • Received by mail • >1 person open immediately • prepare remittance list • cash (checks) to treasurer’s office for deposit • prepare deposit slip and reconcile to remittance list • take to bank • compare bank receipt to deposit slip and remittance list • remittance list and remittance advice to accounting department • post to sub-ledger account and general ledger and reconcile amounts • compare total to bank deposit • Cash sales • deposit intact at least daily • safeguard cash on hand Chapter 6