copyright © 2007 pearson education canada 1 chapter 15: audit of cash balances

Copyright © 2007 Pearson Education Canada1

Chapter 15: Audit of Cash Balances

Copyright © 2007 Pearson Education Canada

15-2

Chapter 15 objectives

Identify different types of cash accounts Explain the relationship between cash and the transaction

cycles Describe the steps in auditing the general cash account List procedures to be conducted when there is suspicion

of fraud Explain how the audit of the payroll cash account differs

from the audit of the general cash account Discuss considerations for auditing electronic funds

transfers


15-3

Types of cash accounts

General cash account Imprest payroll account Branch bank account Imprest petty cash fund Cash equivalents


15-4

Relationship between cash and transaction cycles

General cash is considered significant in almost all audits, even when the ending balance is immaterial

The amount of cash flowing into and out of the cash account is frequently larger than for any other account in the financial statements (e.g. cash for sales, cash for purchase, cash for payroll)


15-5

General cash internal controls

Controls over the transaction cycles:– Appropriate controls over the receiving of

cash (sales and other receipts) and controls over disbursements (payments to suppliers, employees and others)

Independent bank reconciliations:– Should be completed on a timely basis– Bank statements should be received unopened

by an independent reconciler


15-6

Audit of other transaction cycles can discover errors associated with cash

Examples of such errors include:– Failure to bill a customer– Billing customer at an incorrect price– Duplicate payment of a vendor’s invoice– Payment for raw materials not received– Payment to an employee for hours not worked– Payment to a related party at an inflated

interest rate


15-7

Methodology for designing tests of details of balances for cash in the bank


15-8

Cash – materiality considerations

The cash balance is immaterial on most audits

Cash transactions affecting the balance are almost always material

Potential for material misstatement of cash exists


15-9

Cash – inherent risks

Cash is more susceptible to theft than other assets

This results in high inherent risk for the existence objective

Inherent risk is typically low for other audit objectives


15-10

Cash – control risk

Control risk for cash needs to be addressed on a cycle by cycle basis (particularly controls over cash receipts and disbursements)

Control risk varies from organization to organization

Most important internal control is independent bank reconciliations


15-11

Audit of the general cash account

1. Assess controls over the transaction cycles affecting the recording of cash receipts and disbursements and

2. Assess controls over the preparation of independent bank reconciliations

3. Test key controls to be relied upon (for #1 with those cycles)


15-12

Audit of the general cash account (cont’d)

4. Analytical procedures may be limited if the year end bank reconciliation is audited 100%

5. Design and conduct audit procedures of year end cash balances


15-13

Practice problem 15-21 (p. 475)

Preparation of an audit program regarding the verification of year-end cash on hand


15-14

Year-end audit procedures for cash (Table 15-1)

Detail tie-in: Tests of deposits in transit, full bank reconciliation, trace reconciled balance to general ledger

Existence, completeness, accuracy: Send and test bank confirmation, obtain and test cut-off bank statement, extended tests of bank reconciliation, or proof of cash


15-15

Year-end audit procedures for cash (Table 15-1) (cont’d)

Cut-off: Count cash on hand and trace to subsequent deposit, tests of deposits in transit, record last cheque number and followup use in subsequent year, trace outstanding cheques to subsequent reconciliation

Presentation and disclosure: Examine minutes, loan agreements, confirmations; review of financial statements


15-16


In auditing the bank reconciliation, discuss the differences in emphasis with respect to deposits in transit and outstanding cheques


15-17

Bank confirmation

A standard form approved by the CICA and Canadian Bankers Association is used

Auditor controls the sending of the bank confirmation and has it returned to the auditor’s office

Provides information about cash accounts, loans, guarantees or other holdings


15-18


Discuss the difference between positive confirmations of accounts receivable and bank confirmations.


15-19

Cutoff bank statement

Is a partial bank statement from the month after the client’s year end

The client is requested to authorize the bank to either send the bank statement to the auditor’s offices or authorize the auditor to pick it up directly from the bank


15-20

Fraud-oriented procedures

Extended tests of bank reconciliation: transactions are traced to source journals or source documents

Proof of cash: transactions are both traced and reconciled to supporting journals or source documents

Tests for kiting: detailed bank transfer schedule


15-21


Identify motivations for theft of cash

Identify preventive controls

List audit procedures for detection


15-22

Audit of payroll cash account

Requires a short period of time if an imprest account is used and the bank reconciliation is current

Reconciling items tend to be outstanding cheques only


15-23

Audit of electronic cash transactions

Examples of electronic cash:– Automated deposit of payroll to employees– Electronic cash management (e.g. transfer from

general account to payroll account)– Electronic data interchange (e.g. payment to suppliers

or payment from customers)– Electronic funds transfer (e.g. transfer of cash to other

branches)– Receipt of debit card payments from customers


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Control over debit card cash receipts

Cash reconciliation processes should continue as part of the cash receipts function

Debit card totals should be agreed on a daily basis to amounts deposited in the bank (reconciliation independent of point of sale data entry)


15-25

Control over and audit of electronic payments

Automatic pre-authorized monthly payments: – Controls should be in place to ensure that only

authorized amounts are set up for payment– Controls should exist to ensure that all

automatic withdrawals are recorded in the accounts in the period made

Payments tested as part of purchases, payments cycle


15-26

Control over and audit of electronic payments (cont’d)

Payroll payments:– Should be paid using an imprest bank account– Master file changes (e.g. new employee set up

and wage rate changes) should be properly authorized and independently verified

– Independent approval of amounts paid and bank accounts established should occur

Tested as part of the personnel and payroll cycle


15-27

Control over and audit of electronic payments (cont’d)

Audit of electronic receipts and payments– Extent of work depends upon assessed quality of

internal controls– Usually fewer outstanding bank transactions for

electronic transactions than for paper-based transactions

– Automatic transactions should be agreed to an authorized schedule

– For imprest payroll, review documentation and agree to the reconciliation


15-28

Petty cash

Balance is frequently immaterial, however usually audited because of– Susceptibility to defalcation– Client expectations


15-29

Internal controls over petty cash

Most important control is that the fund is the responsibility of one individual

Should not be mingled with other receipts Funds should be kept separate from other

activities Disbursements and reimbursements should

be properly documented and authorized


15-30

Audit tests for petty cash

Focus is on transactions rather than ending balance

As with other cycles, the auditor documents and evaluates internal controls prior to the actual conduct of tests, which are tailored to the quality of the internal controls

copyright © 2007 pearson education canada 1 chapter 15: audit of cash balances

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