Substantive audit tests for cash balances
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Substantive Audit Tests for Cash Balances The most common substantive audit tests for cash balances include: Cash counts Footing of the cash journals and tracing of postings to the general ledger Bank confirmations and cutoff bank statements Bank transfer schedules Proofs of cash

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Substantive Audit Tests for Cash Balances

  • The most common substantive audit tests for cash balances include:

    • Cash counts

    • Footing of the cash journals and tracing of postings to the general ledger

    • Bank confirmations and cutoff bank statements

    • Bank transfer schedules

    • Proofs of cash


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Cash Counts

  • Control cash until the count is finished.

  • Have the cash custodian present during the count.

  • Imprest Funds - Specific balance with one person responsible for the fund (e.g. petty cash).

  • Usually “cash on hand” is an immaterial financial statement item, but it still often is counted.


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Foot Cash Journals and Trace Posting to the General Ledger

  • Foot the cash receipts journal and the cash disbursements journal and trace posting to the general ledger.


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Financial Institution Confirmations

  • Confirmations are the most common substantive audit test for cash.

  • Use one standard form to confirm not only deposits, but also loan balances and related information.

  • Specific letters may be necessary to confirm some bank arrangements (e.g. lines of credit, compensating balances, etc.).

  • Cutoff bank statements are used to support the client’s year-end bank reconciliations.


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Bank Transfer Schedules

  • Procedure is used when a client has more than one bank account.

  • Primary purpose is to ensure that the same deposit is not recorded in two accounts at the same time (i.e. the primary procedure to uncover kiting).

  • Schedule usually examines a few dates before and after the client’s fiscal year-end.


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What is Kiting?

  • Kiting is intentionally manipulating bank transfers to overstate bank balances by showing the cash in two accounts at the same time.

  • Kiting is designed to either conceal a cash shortage (usually from theft) or to increase the cash reported on the balance sheet.

  • Good internal controls - particularly segregation of duties - make this difficult.


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Proof of Cash

  • A comprehensive bank reconciliation.

  • It is four different reconciliations:

    • Beginning of the month bank to book balances.

    • Bank receipts for the month to book receipts.

    • Bank disbursements for the month to book disbursements.

    • Ending of the month bank to book balances.

  • Primary purpose is to provide evidence about existence and rights.


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Audit of Sales

  • Sales is an income statement account that represents activity throughout the year, therefore an auditor emphasizes tests of transactions rather than tests of balances.

  • Strong client internal control policies for sales typically allow the auditor to support sales primarily through tests of controls rather than substantive testing.

  • Sales typically receives a low assessed level of control risk because of its interrelationships with cash and receivables.




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SAS No. 67 Requirement for Confirmations of Accounts Receivable

  • SAS No. 67 requires auditors to confirm accounts receivable unless they meet one of three conditions.

  • Accounts receivable are immaterial to the financial statements.

  • The use of confirmations would not be effective.

  • Confirmations are not necessary to reduce audit risk to an acceptably low level for the assertions relevant to accounts receivable.

  • Documentation must be in workpapers.


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When Are Negative Confirmations Appropriate?

  • They are appropriate ONLY when ALLTHREE of the following conditions exist:

    • The combined assessed level of inherent risk and control risk is low

    • A large number of small individual balances is involved

    • The auditor has no reason to believe that the confirmation recipients are unlikely to give them consideration


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Other Issues for Confirmations of Accounts Receivable

  • Nature of the Information Confirmed

    • Consider the customer’s record keeping system.

  • Timing of the Test - Interim or Year-end?

  • Extent of the Test

    • How many confirmations should be sent?

    • Which balances should be confirmed?

  • Subsequent Cash Collection is usually good support for receivable


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Lapping: A Type of Fraud

  • Lapping is when, to cover a cash theft, an employee defers recording cash receipts from one customer and covers the shortage with receipts from another customer.

  • Weak segregation of duties control allows an employee to record the cash receipts and to reduce the customer’s balance in subsidiary ledger.


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