22 - 1 audit of cash balances chapter 22 22 - 2 learning objective 1 show the relationship of cash...
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Audit of Cash Balances
Chapter 22
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Learning Objective 1
Show the relationship of
cash in the bank to the
various transaction cycles.
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Relationships of Cash in the Bank and Transaction Cycles
Cash in Bank
Capital Stock – Common
Paid-in Capital in Excessof Par – Common
Redemptionof stock
Redemptionof stock
Issue ofstock
Issue ofstock
Dividends PayablePayment ofdividends
Capital Acquisition and Repayment Cycle
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Relationships of Cash in the Bank and Transaction Cycles
Cash in Bank
Accounts PayablePayment
Acquisition and Payment Cycle
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Relationships of Cash in the Bank and Transaction Cycles
Cash in Bank
Accounts Receivable
Gross SalesCashsales
Cashreceipts
Cash Discounts Taken
Sales and Collection Cycle
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Relationships of Cash in the Bank and Transaction Cycles
Cash in Bank
Accrued Wages, Salaries,Bonuses, and Commissions
Withheld Income Taxesand Other Deductions
Payment
Payment
Accrued PayrollTax Expense
Payment
Payroll and Personnel Cycle
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Cash in the Bank and Transaction Cycles
• 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
Misstatements which may not be discoveredas a part of the audit of the bank reconciliation
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Cash in the Bank and Transaction Cycles
• 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
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Cash in the Bank and Transaction Cycles
Misstatements which are normally discoveredas 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
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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 client’s records
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Learning Objective 2
Identify the major types of
cash accounts maintained
by business entities.
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General cash account Imprest payroll account Branch bank account Imprest petty cash fund Cash equivalents
Types of Cash Accounts
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Relationship of General Cash to Other Cash Accounts
Branch Bank
CashEquivalents
Imprest Payroll
Imprest PettyCash Fund
GeneralCash
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Learning Objective 3
Design and perform audit tests
of the general cash account.
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Methodology for Designing Tests of
Balances – Cash In the Bank
Identify client business risksaffecting cash in bank.
Set tolerable misstatement andassess inherent risk for cash in bank.
Assess control risk for cash in bank.
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Methodology for Designing Tests of
Balances – Notes Payable
Design and perform tests ofcontrols and substantive testsof transactions several cycles.
Design and perform analyticalprocedures for cash in bank
balance.
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Methodology for Designing Tests of
Balances – Notes Payable
Design tests of detailsof cash in bank balance
to satisfy balance-relatedaudit objectives.
Audit proceduresSample size
Items to selectTiming
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Acct. 101 – General accountBalance per bank, 12/31 $63,275Add deposit in transit 12/31 11,250
$74,525Less outstanding check 8,000Balance per bank, adjusted $66,525
Audit Schedule for aBank Reconciliation
Schedule A-2 DatePrepared by CO 1/10/03Approved by PZ 1/18/03
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Balance per books, 12/31 $66,647Add: Note receivable
collected by the bank 1,325Interest income 265
$68,237Less: Payment of electric bill 1,500NSF check 200Service charge 12Balance per books, adjusted $ 66,525
Audit Schedule for aBank Reconciliation
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Balance-Related Objectives: General Cash in the Bank
Detailtie-in Cutoff Presentation
and disclosure
Existence Accuracy Completeness
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Receipt of a bankconfirmation
Receipt of a cutoffbank statement
Tests of the bankreconciliation
Existence, Accuracy,and Completeness
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Types of Audit Tests Usedfor General Cash in Bank
Cash in Bank
Ending balance
TOC-T + TOC-B + STOT + AP + TDP= Sufficient competent evidence per GAAS
Audited byTOC-T, STOT, and AP
Beginning balanceCash receipts Cash disbursements
Audited byTOC-T, STOT, and AP
Audited byTOC-B, AP, and TDP
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Learning Objective 4
Recognize when to extend audit
tests of the general cash account
to test further for material fraud.
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Extended Tests of theBank Reconciliation
When the auditor believes that the year-end bankreconciliation may be intentionally misstated,
it is appropriate to perform extended testsof the year-end bank reconciliation.
In addition to these tests, the auditor must alsocarry out procedures subsequent to the end of
the year with the use of the bank cutoff statement
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• 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.
Proof of Cash
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– 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
Proof of Cash
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– 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
Proof of Cash
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The accuracy of the information on the interbanktransfer schedule should be verified.
The interbank transfers must be recorded inboth the receiving and disbursing banks.
The date of the recording of the disbursementsand receipts for each transfer must be in
the same fiscal year.
Tests of Interbank Transfers
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Disbursements on the interbank transfer scheduleshould be correctly included in or excluded from
year-end bank reconciliation as outstanding checks.
Tests of Interbank Transfers
Receipts on the interbank transfer schedule shouldbe correctly included in or excluded from year-end
bank reconciliations as deposits in transit.
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Learning Objective 5
Design and perform audit tests of
the imprest payroll bank account.
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Typically, the only reconcilingitems are outstanding checks.
Audit of the ImprestPayroll Bank Account
Paycheck for
Dept. of Treasurer
John Doe
Paycheck for
Date
Dept. of Treasurer
Jane DoeDate
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Learning Objective 6
Design and perform audit
tests of imprest petty cash.
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Petty cash is a unique account because it isoften immaterial in amount, yet it is
verified on many audits.
The account is verified primarily becauseof the potential for defalcation and theclient’s expectation of an audit revieweven when the amount is immaterial.
Petty Cash
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Audit tests forpetty cash
Internal controlsover petty cash
Audit of Imprest Petty Cash
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End of Chapter 22