Arens22_Audit of Cash Balances

8/3/2019 Arens22_Audit of Cash Balances

1/35


2/35

2003 Prentice Hall Business Publishing,Auditing and Assurance Services 9/e, Arens/Elder/Beasley 22 - 2

Learning Objective 1

Show the relationship of

cash in the bank to the

various transaction cycles.


3/35


Relationships of Cash in the

Bank and Transaction Cycles

Cash in Bank

Capital Stock Common

Paid-in Capital in Excess

of Par Common

Redemptionof stock

Redemptionof stock

Issue ofstock

Issue ofstock

Dividends PayablePayment ofdividends

Capital Acquisition and Repayment Cycle


4/35




Cash in Bank

Accounts PayablePayment

Acquisition and Payment Cycle


5/35




Cash in Bank

Accounts Receivable

Gross SalesCashsales

Cashreceipts

Cash Discounts Taken

Sales and Collection Cycle


6/35




Cash in Bank

Accrued Wages, Salaries,

Bonuses, and Commissions

Withheld Income Taxes

and Other Deductions

Payment

Payment

Accrued Payroll

Tax ExpensePayment

Payroll and Personnel Cycle


7/35


Cash in the Bank and

Transaction 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 discovered

as a part of the audit of the bank reconciliation


8/35



Transaction Cycles

Duplicate payment of a vendors 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


9/35



Transaction CyclesMisstatements 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


10/35



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 thebank balance by the bank but not entered in the

clients records


11/35



Identify the major types of

cash accounts maintained

by business entities.


12/35


General cash accountImprest payroll account

Branch bank account

Imprest petty cash fundCash equivalents

Types of Cash Accounts


13/35


Relationship of General Cash

to Other Cash Accounts

Branch Bank

CashEquivalents

Imprest Payroll

Imprest PettyCash Fund

GeneralCash


14/35



Design and perform audit tests

of the general cash account.


15/35


Methodology for Designing Tests of

Balances Cash In the BankIdentify 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.


16/35



Balances Notes Payable

Design and perform tests of

controls and substantive testsof transactions several cycles.

Design and perform analyticalprocedures for cash in bank

balance.


17/35



Balances 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


18/35


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


19/35


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 1,500NSF check 200

Service charge 12

Balance per books, adjusted $ 66,525

Audit Schedule for a

Bank Reconciliation


20/35


Balance-Related Objectives:

General Cash in the Bank

Detailtie-in

CutoffPresentation

and disclosure

Existence Accuracy Completeness


21/35


Receipt of a bank

confirmation

Receipt of a cutoff

bank statement

Tests of the bank

reconciliation

Existence, Accuracy,

and Completeness


22/35


Types of Audit Tests Used

for General Cash in BankCash in Bank

Ending balance

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

= Sufficient competent evidence per GAAS

Audited byTOC-T, STOT, and AP

Beginning balance

Cash receipts Cash disbursements

Audited byTOC-T, STOT, and AP

Audited byTOC-B,AP, and TDP


23/35



Recognize when to extend audit

tests of the general cash account

to test further for material fraud.


24/35


Extended Tests of the

Bank 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 alsocarry out procedures subsequent to the end of

the year with the use of the bank cutoff statement


25/35


All recorded cash receipts were deposited.

All deposits in the bank were recorded inthe accounting records.

All recorded cash disbursements were

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

were recorded.

Proof of Cash


26/35


the balance on the bank statement with thegeneral ledger balance at the beginning

of the proof-of-cash period

cash receipts deposited per the bank withthe cash receipts journal for a given period

Proof of Cash


27/35


cancelled checks clearing the bank withthe cash disbursement journal for a

given period

the balance on the bank statement with thegeneral ledger balance at the end of the

proof-of-cash period

Proof of Cash


28/35


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 disbursementsand receipts for each transfer must be in

the same fiscal year.

Tests of Interbank Transfers


29/35


Disbursements on the interbank transfer schedule

should be correctly included in or excluded fromyear-end bank reconciliation as outstanding checks.

Tests of Interbank Transfers

Receipts on the interbank transfer schedule should

be correctly included in or excluded from year-endbank reconciliations as deposits in transit.


30/35



Design and perform audit tests of

the imprest payroll bank account.


31/35


Typically, the only reconciling

items are outstanding checks.

Audit of the Imprest

Payroll Bank Account


32/35



Design and perform audit

tests of imprest petty cash.


33/35


Petty cash is a unique account because it is

often immaterial in amount, yet it isverified on many audits.

The account is verified primarily because

of the potential for defalcation and theclients expectation of an audit review

even when the amount is immaterial.

Petty Cash


34/35


Audit tests for

petty cash

Internal controls

over petty cash

Audit of Imprest Petty Cash


35/35


End of Chapter 22

Documents

Arens22_Audit of Cash Balances