Chapter23 Audit of Cash Balances

©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 23 - 1

Audit of Cash BalancesAudit of Cash Balances

Chapter 23Chapter 23

©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 23 - 23 - 22

Learning Objective 1Learning Objective 1

Show the relationship of cashShow the relationship of cash

in the bank to the variousin the bank to the various

transaction cycles.transaction cycles.


Relationships of Cash in the Relationships of Cash in the Bank and Transaction CyclesBank 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:



Acquisition and Payment Cycle:

Cash in Bank

Accounts PayablePayment



Sales and Collection Cycle:

Cash in Bank

Accounts Receivable

Gross SalesCashsales

Cashreceipts

Cash Discounts Taken



Payroll and Personnel Cycle:

Cash in Bank

Accrued Wages, Salaries,Bonuses, and Commissions

Withheld Income Taxesand Other Deductions

Payment

Payment

Accrued PayrollTax Expense

Payment


Cash in the Bank and Cash in the Bank and Transaction CyclesTransaction Cycles

Failure to bill a customer An embezzlement of cash by interception

of cash receipts from customers beforethey are recorded, with the accountcharged off as a bad debt

Misstatements which may not be discoveredas a part of the audit of the bank reconciliation:



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



Misstatements which are normally discoveredas a part of the tests of a bank reconciliation:

Failure to include a check that has notcleared the bank, even though it has beenrecorded in the cash disbursements journal

Cash received by the client subsequent tothe balance sheet date but recorded ascash receipts in the current year



Deposits recorded as cash receipts nearthe end of the year, deposited in the bankin the same month, and included in thebank reconciliation as a deposit in transit

Payments on notes payable debited directlyto the bank balance by the bank but notentered in the client’s records



Identify the major types of cashIdentify the major types of cash

accounts maintained byaccounts maintained by

business entities.business entities.


General cash account

Imprest accounts

Branch bank account

Imprest petty cash fund

Cash equivalents

Types of Cash AccountsTypes of Cash Accounts


Relationship of General Cash to Relationship of General Cash to Other Cash AccountsOther Cash Accounts

Branch BankAccount

CashEquivalents

Imprest PayrollAccount

Imprest PettyCash Fund

GeneralCash



Design and perform audit testsDesign and perform audit tests

of the general cash account.of the general cash account.


Identify client businessrisks affecting cash

in bank

Methodology for Designing TestsMethodology for Designing Testsof Balances for Cash in the Bankof Balances for Cash in the Bank

Set tolerable misstatementand assess inherentrisk for cash in bank

Assess controlrisk for

several cycles

Phase I

Phase I

Phase I



Design and performtests of controls andsubstantive tests of

transactions forseveral cycles

Phase II


Timing

Items to select

Sample size

Audit procedures


Design and performanalytical procedures

for cash in bank

Design tests ofdetails of cash inbank to satisfybalance-relatedaudit objectives

Phase III

Phase III


Audit Schedule for a Bank Audit Schedule for a Bank ReconciliationReconciliation

Clawson IndustriesBank Reconciliation

12/31/09

Schedule A-2 DatePrepared by Client DED 1/10/10Approved by SW 1/18/10

Account 101 – General account, First National Bank

Balance per bank $109,713Add: Deposits in transit 21,117Deduct: Outstanding checks – 87,462Other reconciling items: Bank error – 15,200Balance per bank, adjusted $ 28,168

Balance per books before adjustments $ 32,584Adjustments: Unrecorded bank service charge 216

NSF 4,200 – 4,416Balance per books, adjusted $ 28,168


Balance-related Audit Balance-related Audit ObjectivesObjectives

Detail tie-in:Cash in the bank foots correctly andagrees with the general ledger.

Existence:Cash in the bank as stated on thereconciliation exists.

Completeness:Existing cash in the bank is recorded.


Balance-related Audit Balance-related Audit ObjectivesObjectives

Accuracy :Cash in the bank as stated on thereconciliation is accurate.

Cutoff:Cash receipts and cash disbursementstransactions are recorded in the properperiod.


Receipt of a bank confirmation

Receipt of a cutoff bank statement

Tests of the bank reconciliation

ProceduresProcedures


Extended Tests of the Bank Extended Tests of the Bank ReconciliationReconciliation

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.


Types of Audit Tests Used for Types of Audit Tests Used for General Cash in BankGeneral Cash in Bank

Cash in Bank

Ending balance

TOC-T + TOC-B + STOT + AP + TDB= Sufficient appropriate evidence

Audited byTOC-T, STOT, and AP

Beginning balance

Cash receipts Cash disbursements

Audited byTOC-T, STOT, and AP

Audited byTOC-B, AP, and TDB



Recognize when to extend auditRecognize when to extend audit

tests of the general cash accounttests of the general cash account

to test further for material fraud.to test further for material fraud.


Fraud Oriented ProceduresFraud Oriented Procedures

The auditor must extend the proceduresin the audit of year-end cash to determinethe possibility of a material fraud.


Extended Tests of theExtended Tests of theBank ReconciliationBank Reconciliation

When the auditor believes that the year-endbank reconciliation may be intentionallymisstated, it is appropriate to performextended tests of the year-end bankreconciliation.


Proof of CashProof 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


1. The balance on the bank statement withthe general ledger balance at thebeginning of the proof-of-cash period

2. Cash receipts deposited per the bank withthe cash receipts journal for a given period


Includes the following reconciliation tasks:


3. Cancelled checks clearing the bank withthose recorded in the cash disbursementsjournal for a given period

4. The balance on the bank statement with thegeneral ledger balance at the end of theproof-of-cash period


Includes the following reconciliation tasks:


The accuracy of the information on theinterbank transfer 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 inthe same fiscal year.

Interbank TransfersInterbank Transfers


Disbursements on the interbank transferschedule should be correctly included in orexcluded from year-end bank reconciliationas outstanding checks.

Interbank TransfersInterbank Transfers

Receipts on the interbank transfer scheduleshould be correctly included in or excludedfrom year-end bank reconciliations asdeposits in transit.



Design and perform audit tests of Design and perform audit tests of

the imprest payroll bank account.the imprest payroll bank account.


Typically, the only reconcilingitems are outstanding checks.

Audit of the Imprest Payroll Audit of the Imprest Payroll Bank AccountBank Account



Design and perform audit testsDesign and perform audit tests

of imprest petty cash.of imprest petty cash.


Petty cash is a unique account becauseit is often immaterial in amount, yet it isverified on many audits.

The account is verified primarily becauseof the potential for embezzlement and theclient’s expectation of an audit revieweven when the amount is immaterial.

Petty CashPetty Cash


Audit tests for petty cash

Internal controls over petty cash

Audit of Imprest Petty CashAudit of Imprest Petty Cash

©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 23 - 37

End of Chapter 23End of Chapter 23

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Chapter23 Audit of Cash Balances