17 - 1 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Audit of Cash Balances Chapter 17

17 - 1©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley

Audit of Cash Balances

Chapter 17


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

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



Cash in Bank

Accounts PayablePayment

Acquisition and Payment Cycle



Cash in Bank

Accounts Receivable

Gross SalesCashsales

Cashreceipts

Cash Discounts Taken

Sales and Collection Cycle



Cash in Bank

Accrued Wages, Salaries,Bonuses, and Commissions

Withheld Income Taxesand Other Deductions

Payment

Payment

Accrued PayrollTax Expense

Payment

Payroll and Personnel Cycle


Cash in the Bank andTransaction Cycles

• 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

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 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



• 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



Identify the major types of

cash accounts maintained

by business entities.


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

Types of Cash Accounts


Relationship of General Cashto Other Cash Accounts

Branch Bank

CashEquivalents

Imprest Payroll

Imprest PettyCash Fund

GeneralCash



Design and perform audit tests

of the general cash account.


Methodology for Designing Testsof Balances – Cash In the Bank

Identify client business risksaffecting cash in bank.

Set tolerable misstatement andassess inherent risk for cash in bank.

Assess control risk for cash in bank.



Design and perform tests ofcontrols and substantive testsof transactions several cycles.

Design and perform analyticalprocedures for cash in bank

balance.



Design tests of detailsof cash in bank balance

to satisfy balance-relatedaudit objectives.

Audit proceduresSample size

Items to selectTiming


Acct. 101 – General accountBalance per bank, 12/31 $63,275Add deposit in transit 12/31 11,250

$74,525Less outstanding check 8,000Balance per bank, adjusted $66,525

Audit Schedule for aBank Reconciliation

Schedule A-2 DatePrepared by CO 1/10/03Approved by PZ 1/18/03


Balance per books, 12/31 $66,647Add: Note receivable

collected by the bank 1,325Interest income 265

$68,237Less: Payment of electric bill 1,500NSF check 200Service charge 12Balance per books, adjusted $ 66,525

Audit Schedule for aBank Reconciliation


Balance-Related Objectives: General Cash in the Bank

Detailtie-in Cutoff Presentation

and disclosure

Existence Accuracy Completeness


Receipt of a bankconfirmation

Receipt of a cutoffbank statement

Tests of the bankreconciliation

Existence, Accuracy,and Completeness



Recognize when to extend audit

tests of the general cash account

to test further for material fraud.


Extended Tests of theBank Reconciliation

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.

In addition to these tests, the auditor must alsocarry out procedures subsequent to the end of

the year with the use of the bank cutoff statement


The accuracy of the information on the interbanktransfer 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 in

the same fiscal year.

Tests of Interbank Transfers


Disbursements on the interbank transfer scheduleshould be correctly included in or excluded from

year-end bank reconciliation as outstanding checks.

Tests of Interbank Transfers

Receipts on the interbank transfer schedule shouldbe correctly included in or excluded from year-end

bank reconciliations as deposits in transit.



Design and perform audit tests of

the imprest payroll bank account.


Typically, the only reconcilingitems are outstanding checks.

Audit of the ImprestPayroll Bank Account

Paycheck for

Dept. of Treasurer

John Doe

Paycheck for

Date

Dept. of Treasure

r

Jane Doe

Date



Design and perform audit

tests of imprest petty cash.


Petty cash is a unique account because it isoften immaterial in amount, yet it is

verified on many audits.

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

Petty Cash


Audit tests forpetty cash

Internal controlsover petty cash

Audit of Imprest Petty Cash


End of Chapter 17

Documents

17 - 1 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Audit of Cash Balances Chapter 17