23 - 1 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Audit of Cash Balances Chapter 23

23 - 1©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Audit of Cash Audit of Cash BalancesBalances

Chapter 23Chapter 23


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 Bank Relationships of Cash in the Bank and Transaction Cyclesand Transaction Cycles

Cash in BankCash in Bank

Capital Stock – CommonCapital Stock – Common

Paid-in Capital in ExcessPaid-in Capital in Excessof Par – Commonof Par – Common

RedemptionRedemptionof stockof stock

RedemptionRedemptionof stockof stock

Issue ofIssue ofstockstock

Issue ofIssue ofstockstock

Dividends PayableDividends Payable

Payment ofPayment ofdividendsdividends

Capital Acquisition And Repayment CycleCapital Acquisition And Repayment Cycle



Acquisition and Payment CycleAcquisition and Payment Cycle


Accounts PayableAccounts PayablePaymentPayment



Sales and Collection CycleSales and Collection Cycle


Accounts ReceivableAccounts Receivable

Gross SalesGross SalesCashCashsalessales

CashCashreceiptsreceipts

Cash Discounts TakenCash Discounts Taken



Payroll and Personnel CyclePayroll and Personnel Cycle


Accrued Wages, Salaries,Accrued Wages, Salaries,Bonuses, and CommissionsBonuses, and Commissions

Withheld Income TaxesWithheld Income Taxesand Other Deductionsand Other Deductions

PaymentPayment

PaymentPayment

Accrued PayrollAccrued PayrollTax ExpenseTax Expense

PaymentPayment


Cash in the Bank and Transaction Cash in the Bank and Transaction CyclesCycles

• Failure to bill a customerFailure to bill a customer• Billing a customer at a lower price thanBilling a customer at a lower price than called for by company policycalled for by company policy• A defalcation of cash by interception ofA defalcation of cash by interception of cash receipts from customers beforecash receipts from customers before they are recorded, with the accountthey are recorded, with the account charged off as a bad debtcharged off as a bad debt

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



• Duplicate payment of a vendor’s invoiceDuplicate payment of a vendor’s invoice• Improper payments of officers’ personalImproper payments of officers’ personal expendituresexpenditures• Payment for raw materials that were notPayment for raw materials that were not receivedreceived• Payment to an employee for more hoursPayment to an employee for more hours workedworked• Payment of interest to a related party forPayment of interest to a related party for an amount in excess of the going ratean amount in excess of the going rate


Cash in the Bank and Transaction Cash in the Bank and Transaction CyclesCyclesMisstatements which are normally discoveredMisstatements which are normally discoveredas a part of the tests of a bank reconciliation.as a part of the tests of a bank reconciliation.

• Failure to include a check that has notFailure to include a check that has not cleared the bank, even though it has beencleared the bank, even though it has been recorded in the cash disbursements journalrecorded in the cash disbursements journal• Cash received by the client subsequent toCash received by the client subsequent to the balance sheet date but recorded asthe balance sheet date but recorded as cash receiptscash receipts in the current yearin the current year



• Deposits recorded as cash receipts nearDeposits recorded as cash receipts near the end ofthe end of the year, deposited in the bankthe year, deposited in the bank in the same month, and included in the bankin the same month, and included in the bank reconciliation as areconciliation as a deposit in transitdeposit in transit• Payments on notes payable debited directlyPayments on notes payable debited directly to theto the bank balance by the bank but notbank balance by the bank but not entered in the client’s recordsentered in the client’s records


Cash in the Bank and Transaction Cash in the Bank and Transaction CyclesCycles• Deposits received by the bank on behalfDeposits received by the bank on behalf of theof the company from credit card agenciescompany from credit card agencies and other vendors making paymentsand other vendors making payments electronically, but not recorded inelectronically, but not recorded in the client’s records.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 accountGeneral cash account Imprest payroll accountImprest payroll account Branch bank accountBranch bank account Imprest petty cash fundImprest petty cash fund Cash equivalentsCash equivalents

Types of Cash AccountsTypes of Cash Accounts


Relationship of General Cash to Relationship of General Cash to Other Cash AccountsOther Cash AccountsBranch BankBranch Bank

AccountAccount

CashCashEquivalentsEquivalents

Imprest PayrollImprest PayrollAccountAccount

Imprest PettyImprest PettyCash FundCash Fund

GeneralGeneralCashCash



Design and perform audit testsDesign and perform audit tests

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


Identify client business risks affecting cash inIdentify client business risks affecting cash inbank.bank.

Methodology for Designing TestsMethodology for Designing Testsof Details of Balances for A/Rof Details of Balances for A/R

Phase IPhase I

Set tolerable misstatement and assess inherentSet tolerable misstatement and assess inherentrisk for cash in bank.risk for cash in bank.

Assess control risk for cash in bank.Assess control risk for cash in bank.



Design and perform tests of controls andDesign and perform tests of controls andsubstantive tests of transactions forsubstantive tests of transactions forseveral cycles.several cycles.

Phase IIPhase II



Design and perform analytical procedures forDesign and perform analytical procedures forcash in bank balance.cash in bank balance.

Phase IIIPhase III

TimingTimingItems toItems toselectselect

SampleSamplesizesize

AuditAuditproceduresprocedures

Design tests of details of cash in bank balanceDesign tests of details of cash in bank balanceto satisfy balance-related audit objectives.to satisfy balance-related audit objectives.


Audit Schedule for a Bank Audit Schedule for a Bank ReconciliationReconciliation

Clawson IndustriesClawson IndustriesBank ReconciliationBank Reconciliation

12/31/0512/31/05

ScheduleSchedule A2A2 DateDatePrepared byPrepared by ClientClient DEDDED 1/10/051/10/05Approved byApproved by SWSW 1/18/051/18/05

Account 101 – General account, First National BankAccount 101 – General account, First National Bank

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

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

NSFNSF 4,2004,200 – 4,416 – 4,416Balance per books, adjustedBalance per books, adjusted $ 28,168$ 28,168


Balance-Related Objectives: Balance-Related Objectives: General Cash in the BankGeneral Cash in the Bank

Detail tie-inDetail tie-in CutoffCutoff PresentationPresentationand disclosureand disclosure

ExistenceExistence CompletenessCompleteness AccuracyAccuracy


Receipt of a bankReceipt of a bankconfirmationconfirmation

Receipt of a cutoffReceipt of a cutoffbank statementbank statement

Tests of the bankTests of the bankreconciliationreconciliation

Existence, Accuracy, and Existence, Accuracy, and CompletenessCompleteness


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


Ending balanceEnding balance

TOC-TTOC-T + + TOC-BTOC-B + + STOTSTOT + + APAP + TDB + TDB= Sufficient competent evidence per GAAS= Sufficient competent evidence per GAAS

Audited byAudited byTOC-TTOC-T,, STOTSTOT, and , and APAP

Beginning balanceBeginning balance

Cash receiptsCash receipts Cash disbursementsCash disbursements

Audited byAudited byTOC-TTOC-T,, STOTSTOT, and , and APAP

Audited byAudited byTOC-BTOC-B,, APAP, and , and TDBTDB



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.


Extended Tests of the Bank Extended Tests of the Bank ReconciliationReconciliation

When the auditor believes that the year-end bankWhen the auditor believes that the year-end bankreconciliation may be intentionally misstated,reconciliation may be intentionally misstated,it is appropriate to perform extended testsit is appropriate to perform extended testsof the year-end bank reconciliation.of the year-end bank reconciliation.

In addition to these tests, the auditor must alsoIn addition to these tests, the auditor must alsocarry out procedures subsequent to the end ofcarry out procedures subsequent to the end ofthe year with the use of the bank cutoff statement.the year with the use of the bank cutoff statement.


• All recorded cash receipts were deposited.All recorded cash receipts were deposited.• All deposits in the bank were recorded inAll deposits in the bank were recorded in

the accounting records.the accounting records.• All recorded cash disbursements wereAll recorded cash disbursements were

paid by the bank.paid by the bank.• All amounts that were paid by the bankAll amounts that were paid by the bank

were recorded.were recorded.

Proof of CashProof of Cash


– – the balance on the bank statement withthe balance on the bank statement with the general ledger balance at thethe general ledger balance at the beginning of the proof-of-cash periodbeginning of the proof-of-cash period

– – cash receipts deposited per the bank withcash receipts deposited per the bank with the cash receipts journal for a given periodthe cash receipts journal for a given period



– – cancelled checks clearing the bank withcancelled checks clearing the bank with the cash disbursement journal for athe cash disbursement journal for a given periodgiven period

– – the balance on the bank statement withthe balance on the bank statement with the general ledger balance at the endthe general ledger balance at the end of the proof-of-cash periodof the proof-of-cash period



The accuracy of the information on theThe accuracy of the information on theinterbank transfer schedule should be verified.interbank transfer schedule should be verified.

The interbank transfers must be recorded inThe interbank transfers must be recorded inboth the receiving and disbursing banks.both the receiving and disbursing banks.

The date of the recording of the disbursementsThe date of the recording of the disbursementsand receipts for each transfer must be inand receipts for each transfer must be inthe same fiscal year.the same fiscal year.

Tests of Interbank TransfersTests of Interbank Transfers


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

Tests of Interbank TransfersTests of Interbank Transfers

Receipts on the interbank transfer scheduleReceipts on the interbank transfer scheduleshould be correctly included in or excludedshould be correctly included in or excludedfrom year-end bank reconciliations asfrom year-end bank reconciliations asdeposits in transit.deposits 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 reconcilingTypically, the only reconcilingitems are outstanding checks.items are outstanding checks.

Audit of the Imprest Payroll Bank Audit of the Imprest Payroll Bank AccountAccount

Paycheck for

Dept. of Treasurer

John Doe

Paycheck for

Date

Dept. of Treasure

r

Jane Doe

Date



Design and perform audit testsDesign and perform audit tests

of imprest petty cash.of imprest petty cash.


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

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

Petty CashPetty Cash


Audit tests for petty cashAudit tests for petty cash

Internal controls over petty cashInternal controls over petty cash

Audit of Imprest Petty CashAudit of Imprest Petty Cash


End of Chapter 23End of Chapter 23

Documents

23 - 1 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Audit of Cash Balances Chapter 23