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CHAPTER 20 Audit of Cash Balances. What are the auditor’s primary concerns with regard to cash ?. What are the auditor’s primary concerns with regard to cash ?. - existence. What are the auditor’s primary concerns with regard to cash ?. - existence - completeness.

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what are the auditor s primary concerns with regard to cash5
What are the auditor’s primary concerns with regard to cash?

- existence

- completeness

- physical control

what are the auditor s primary concerns with regard to cash6
What are the auditor’s primary concerns with regard to cash?

- existence

- completeness

- physical control

- presentation and

disclosure

cash audit procedures
Cash Audit Procedures

perform analytical procedures

to test the reasonableness

of cash balances

cash audit procedures8
Cash Audit Procedures

Enquire of management regarding any

cash requirements or restrictions from

debt agreements.

what is kiting10
What is kiting?

Kiting is an irregularity whereby

an overstatement of cash is cre-

ated by a cash transfer between

bank accounts.

what is kiting11
What is kiting?

Kiting is an irregularity whereby

an overstatement of cash is cre-

ated by a cash transfer between

bank accounts.

The deposit is

recorded in cash receipts but

the disbursement is not re-

corded in cash disbursements.

kiting example

National

Canadian

Kiting example

On 12/31, Ace’s bookkeeper writes a $5,000 cheque

on the National Bank and deposits the cheque

in the Canadian Bank account.

Ace Co.

12/31

Ace Co.

5000

National

kiting example13

cash receipts journal

description _ $$ _

Dec. 31, 2004

Misc. revenue 5000

cash payments journal

description _ $$ _

Dec.31, 2004

- no activity -

Kiting example

On 12/31, Ace’s bookkeeper writes a $5,000 cheque

on the National Bank and deposits the cheque

in the Canadian Bank account.

The bookkeeper records the deposit in the cash

receipts journal but does not record the cheque

in the cash payments journal.

He also fails to list the cheque as outstanding on the

National Bank reconciliation.

kiting example14

National

Canadian

Kiting example

On 12/31, Ace’s bookkeeper writes a $5,000 cheque

on the National Bank and deposits the cheque

in the Canadian Bank account.

National will not be aware of

the cheque until notification from

Canadian, probably during the

first few days of January.

kiting example15

National

Canadian

Kiting example

On 12/31, Ace’s bookkeeper writes a $5,000 cheque

on the National Bank and deposits the cheque

in the Canadian Bank account.

National will not be aware of

the cheque until notification from

Canadian, probably during the

first few days of January.

As a result of the deposit,

Canadian will increase Ace’s

account on 12/31.

slide16

National

Canadian

On 12/31, Ace’s bookkeeper writes a $5,000 cheque

on the National Bank and deposits the cheque

in the Canadian Bank account.

National will not be aware of

the cheque until notification from

Canadian, probably during the

first few days of January.

As a result of the deposit, Canadian

will increase Ace’s account on 12/31.

As a consequence, the bank records will reflect a

$5,000 cash overstatement for a few days until the

cheque clears. December bank statements will also

support this overstatement.

from an internal control perspective why does kiting occur18
From an internal control perspective, why does kiting occur?

inadequate

segregation of

duties between

accounting and

cash custody

what effect is changing technology having on the likelihood of kiting20
What effect is changing technology having on the likelihood of kiting?

Kiting is becoming

less likely because

the “float” is

shrinking; i.e.,

cheques clear banks

faster than in the

past.

what audit procedures may detect kiting22
What audit procedures may detect kiting?

tests related to

the cutoff bank

statement and

schedule of

bank transfers

cash audit procedures23
Cash Audit Procedures

Obtain a bank cutoff statement directly

from the bank.

?

cash audit procedures24
Cash Audit Procedures

Obtain a bank cutoff statement directly

from the bank.

A bank cutoff

statement is prepared

ten business days after the

balance sheet date.

cash audit procedures25
Cash Audit Procedures

Obtain a bank cutoff statement directly

from the bank.

A bank cutoff

statement is prepared

ten business days after the

balance sheet date.

Most items that were outstand-

ing at year-end have cleared

when the cutoff statement

is prepared (cheques, deposits).

cash audit procedures26
Cash Audit Procedures

Obtain a bank cutoff statement directly

from the bank.

Trace all cheques, deposits, and other

cash changes from the cutoff statement

to cash receipts and disbursements

records, paying particular attention to

dates and amounts.

cash audit procedures27
Cash Audit Procedures

Prepare a schedule of bank transfers

showing all transfers between the

client’s bank accounts during the last

week of the audit period and the first

week of the subsequent period.

cash audit procedures28
Cash Audit Procedures

Prepare a schedule of bank transfers

showing all transfers between the

client’s bank accounts during the last

week of the audit period and the first

week of the subsequent period.

The schedule should

be prepared using cash receipts

and payments journals, year-end

reconciliation, year-end bank state-

ment, and cutoff bank statement.

cash audit procedures29
Cash Audit Procedures

Obtain or prepare a year-end bank

reconciliation or proof of cash for

each client bank account.

cash audit procedures30
Cash Audit Procedures

Obtain or prepare a year-end bank

reconciliation or proof of cash for

each client bank account.

What

is a proof

of cash?

cash audit procedures31
Cash Audit Procedures

Obtain or prepare a year-end bank

reconciliation or proof of cash for

each client bank account.

A proof of

cash is a working

paper prepared by the auditor to

reconcile the bank’s record of the

client’s beginning balance, cash

deposits, cleared cheques, and

ending balance for the period with

the client’s records.

cash audit procedures32
Cash Audit Procedures

Obtain or prepare a year-end bank

reconciliation or proof of cash for

each client bank account.

Trace amounts to

the schedule of bank transfers,

cash receipts and payments

journals, year-end reconcilia-

tion, year-end bank statement,

and cutoff bank statement.

what will a bank reconciliation help the auditor determine34

cash receipts journal

description _ $$ _

Dec. 31, 2004

Misc. revenue 5000

What will a bank reconciliation help the auditor determine?

- whether all client cash receipts

have been deposited

Canadian

what will a bank reconciliation help the auditor determine35

Canadian

cash receipts journal

description _ $$ _

Dec. 31, 2004

Misc. revenue 5000

What will a bank reconciliation help the auditor determine?

- whether all bank deposits have

been recorded in client cash

receipts records

what will a bank reconciliation help the auditor determine36

Canadian

cash payments journal

description _ $$ _

Dec. 31, 2004

Misc. expense 5000

What will a bank reconciliation help the auditor determine?

- whether all client cash pay-

ments have been paid by the

bank

what will a bank reconciliation help the auditor determine37

Canadian

cash payments journal

description _ $$ _

Dec. 31, 2004

Misc. expense 5000

What will a bank reconciliation help the auditor determine?

- whether all bank payments have

been recorded in client cash

payments records

what will not be detected by a bank reconciliation39
What will not be detected by a bank reconciliation?

- unrecorded cheques that have not

cleared the bank (possible kiting)

what will not be detected by a bank reconciliation40
What will not be detected by a bank reconciliation?

- unrecorded cheques that have not

cleared the bank (possible kiting)

- unrecorded deposits that have not

cleared the bank

what will not be detected by a bank reconciliation41
What will not be detected by a bank reconciliation?

- unrecorded cheques that have not

cleared the bank (possible kiting)

- unrecorded deposits that have not

cleared the bank

- cheques written for incorrect

amounts

cash audit procedures42
Cash Audit Procedures

BANK

Confirm all cash

balances held by

third parties, such as

banks and other financial institutions.

cash audit procedures43
Cash Audit Procedures

Confirm all cash balances held

by third parties, such as banks

and other financial institutions.

possibly through

use of the standard

bank confirmation

cash audit procedures44
Cash Audit Procedures

Count all cash on hand at the client’s

premises. If cash is located in multiple

places, count cash simultaneously to

avoid double counting.

cash audit procedures45
Cash Audit Procedures

Review cutoff

of cash receipts

and

disbursements.

cash audit procedures46

?

Ace Company 6458

Cash Audit Procedures

Account for the numeric sequence of

cancelled cheques. Investigate missing

cheques.

Ace Company 6462

Ace Company 6461

Ace Company 6459

Ace Company 6457

NATIONAL BANK

cash audit procedures47
Cash Audit Procedures

Review monthly

client-prepared

bank

reconciliations.

cash audit procedures48
Cash Audit Procedures

Investigate any cheques

made out to cash or bearer.

Ace Company 6458

CASH

NATIONAL BANK

cash audit procedures49

NSF

Cash Audit Procedures

Investigate any cheques that were

returned by the bank because the client

account had insufficient funds.

Ace Company 6458

NATIONAL BANK

cash audit procedures50
Cash Audit Procedures

Review and recalculate translations

of foreign currencies.

cash audit procedures51
Cash Audit Procedures

Trace a sample of entries from cash receipts journal to a/r subsidiary ledger

___a/r subsidiary

customer _ $$ _

ABC Vending 78,660

5/23/04 payment 23,000

balance 55,660

cash receipts journal

description _ $$ _

May 23, 2004

ABC Vending 23,000

cash audit procedures52
Cash Audit Procedures

Trace a sample of entries from cash receipts journal to a/r subsidiary ledgerto bank statements

___a/r subsidiary

customer _ $$ _

ABC Vending 78,660

5/23/04 payment 23,000

balance 55,660

cash receipts journal

description _ $$ _

May 23, 2004

ABC Vending 23,000

Bank Statement

5/31/04

Deposits:

5/23 $23,000

cash audit procedures53

Deposit

Slip

5/23/04

23,000

Cash Audit Procedures

Trace a sample of entries from cash receipts journal to a/r subsidiary ledger to bank statements to deposit slips.

___a/r subsidiary

customer _ $$ _

ABC Vending 78,660

5/23/04 payment 23,000

balance 55,660

cash receipts journal

description _ $$ _

May 23, 2004

ABC Vending 23,000

Bank Statement

5/31/04

Deposits:

5/23 $23,000

cash audit procedures54
Cash Audit Procedures

Trace a sample of entries from cash payments journal to a/p subsidiary ledger

cash payments journal

description _ $$ _

January 23, 2004

a/p payment to

MGB Corp. 4,300

a/p subsidiary

vendor _ $$ _

MGB Corp 8,780

1/23/04 payment 4,300

balance 4,480

cash audit procedures55

Bank Statement

1/31/04

Deposits:

Payments:

1/26 $4300

Cash Audit Procedures

Trace a sample of entries from cash payments journal to a/p subsidiary ledgerto bank statement

cash payments journal

description _ $$ _

January 23, 2004

a/p payment to

MGB Corp. 4300

a/p subsidiary

vendor _ $$ _

MGB Corp 8,780

1/23/04 payment 4,300

balance 4,480

cash audit procedures56

Bank Statement

1/31/04

Deposits:

Payments:

1/26 $4300

Cash Audit Procedures

Trace a sample of entries from cash payments journal to a/p subsidiary ledger to bank statementto cancelled cheques.

cash payments journal

description _ $$ _

January 23, 2004

a/p payment to

MGB Corp. 4300

a/p subsidiary

vendor _ $$ _

MGB Corp 8,780

1/23/04 payment 4,300

balance 4,480

Ace Company 4512

1/23/04

MGB Corp.

4300

NATIONAL BANK