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Audit of Cash Balances. Chapter 22. Learning Objective 1. Show the relationship of cash in the bank to the various transaction cycles. Relationships of Cash in the Bank and Transaction Cycles. Capital Acquisition and Repayment Cycle. Capital Stock – Common. Dividends Payable. Redemption

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learning objective 1
Learning Objective 1

Show the relationship of

cash in the bank to the

various transaction cycles.

relationships of cash in the bank and transaction cycles
Relationships of Cash in the Bank and Transaction Cycles

Capital Acquisition and Repayment Cycle

Capital Stock – Common

Dividends Payable

Redemption

of stock

Issue of

stock

Payment of

dividends

Paid-in Capital in Excess

of Par – Common

Cash in Bank

Redemption

of stock

Issue of

stock

relationships of cash in the bank and transaction cycles1
Relationships of Cash in the Bank and Transaction Cycles

Acquisition and Payment Cycle

Accounts Payable

Payment

Cash in Bank

relationships of cash in the bank and transaction cycles2
Relationships of Cash in the Bank and Transaction Cycles

Sales and Collection Cycle

Accounts Receivable

Cash Discounts Taken

Cash

receipts

Gross Sales

Cash in Bank

Cash

sales

relationships of cash in the bank and transaction cycles3
Relationships of Cash in the Bank and Transaction Cycles

Payroll and Personnel Cycle

Accrued Wages, Salaries,

Bonuses, and Commissions

Accrued Payroll

Tax Expense

Payment

Payment

Withheld Income Taxes

and Other Deductions

Cash in Bank

Payment

cash in the bank and transaction cycles
Cash in the Bank and Transaction Cycles

Misstatements which may not be discovered

as a part of the audit of the bank reconciliation

  • 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
cash in the bank and transaction cycles1
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
cash in the bank and transaction cycles2
Cash in the Bank and Transaction Cycles

Misstatements which are normally discovered

as 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
cash in the bank and transaction cycles3
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
learning objective 2
Learning Objective 2

Identify the major types of

cash accounts maintained

by business entities.

types of cash accounts
Types of Cash Accounts
  • General cash account
  • Imprest payroll account
  • Branch bank account
  • Imprest petty cash fund
  • Cash equivalents
relationship of general cash to other cash accounts
Relationship of General Cash to Other Cash Accounts

Branch Bank

Imprest Payroll

General

Cash

Cash

Equivalents

Imprest Petty

Cash Fund

learning objective 3
Learning Objective 3

Design and perform audit tests

of the general cash account.

methodology for designing tests of balances cash in the bank
Methodology for Designing Tests ofBalances – Cash In the Bank

Identify client business risks

affecting cash in bank.

Set tolerable misstatement and

assess inherent risk for cash in bank.

Assess control risk for cash in bank.

methodology for designing tests of balances notes payable
Methodology for Designing Tests ofBalances – Notes Payable

Design and perform tests of

controls and substantive tests

of transactions several cycles.

Design and perform analytical

procedures for cash in bank

balance.

methodology for designing tests of balances notes payable1
Methodology for Designing Tests ofBalances – Notes Payable

Design tests of details

of cash in bank balance

to satisfy balance-related

audit objectives.

Audit procedures

Sample size

Items to select

Timing

audit schedule for a bank reconciliation
Audit Schedule for aBank Reconciliation

Schedule A-2Date

Prepared by CO 1/10/03

Approved by PZ 1/18/03

Acct. 101 – General account

Balance per bank, 12/31 $63,275

Add deposit in transit 12/31 11,250

$74,525

Less outstanding check 8,000

Balance per bank, adjusted $66,525

audit schedule for a bank reconciliation1
Audit Schedule for aBank Reconciliation

Balance per books, 12/31 $66,647

Add: Note receivable

collected by the bank 1,325

Interest income 265

$68,237

Less: Payment of electric bill 1,500

NSF check 200

Service charge 12

Balance per books, adjusted $ 66,525

balance related objectives general cash in the bank
Balance-Related Objectives: General Cash in the Bank

Detail

tie-in

Cutoff

Presentation

and disclosure

plus the three most important objectives:

Existence

Accuracy

Completeness

existence accuracy and completeness
Existence, Accuracy,and Completeness

Receipt of a bank

confirmation

Receipt of a cutoff

bank statement

Tests of the bank

reconciliation

types of audit tests used for general cash in bank
Types of Audit Tests Usedfor General Cash in Bank

Cash in Bank

Beginning balance

Cash receipts

Cash disbursements

Audited by

TOC-T,STOT, and AP

Audited by

TOC-T,STOT, and AP

Ending balance

Audited by

TOC-B,AP, and TDP

TOC-T + TOC-B+STOT+AP+TDP

= Sufficient competent evidence per GAAS

learning objective 4
Learning Objective 4

Recognize when to extend audit

tests of the general cash account

to test further for material fraud.

extended tests of the bank reconciliation
Extended Tests of theBank Reconciliation

When the auditor believes that the year-end bank

reconciliation may be intentionally misstated,

it is appropriate to perform extended tests

of the year-end bank reconciliation.

In addition to these tests, the auditor must also

carry out procedures subsequent to the end of

the year with the use of the bank cutoff statement

proof of cash
Proof 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.
proof of cash1
Proof of Cash

Includes a reconciliation of:

– 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 cash2
Proof of Cash

Includes a reconciliation of:

– 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

tests of interbank transfers
Tests of Interbank Transfers

The accuracy of the information on the interbank

transfer schedule should be verified.

The interbank transfers must be recorded in

both the receiving and disbursing banks.

The date of the recording of the disbursements

and receipts for each transfer must be in

the same fiscal year.

tests of interbank transfers1
Tests of Interbank Transfers

Disbursements on the interbank transfer schedule

should be correctly included in or excluded from

year-end bank reconciliation as outstanding checks.

Receipts on the interbank transfer schedule should

be correctly included in or excluded from year-end

bank reconciliations as deposits in transit.

learning objective 5
Learning Objective 5

Design and perform audit tests of

the imprest payroll bank account.

audit of the imprest payroll bank account
Audit of the ImprestPayroll Bank Account

Typically, the only reconciling

items are outstanding checks.

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learning objective 6
Learning Objective 6

Design and perform audit

tests of imprest petty cash.

petty cash
Petty Cash

Petty cash is a unique account because it is

often immaterial in amount, yet it is

verified onmany audits.

The account is verified primarily because

of the potential for defalcation and the

client’s expectation of an audit review

even when the amount is immaterial.

audit of imprest petty cash
Audit of Imprest Petty Cash

Internal controls

over petty cash

Audit tests for

petty cash