Chapter 1Chapter 16
16-*
Cash and the Effect of Other Business Processes
“Cash” reported in the financial statements represents currency on hand and cash on deposit in bank accounts, including certificates of deposit, time deposits, and savings accounts.
“Cash equivalents” are frequently combined with cash for presentation in the financial statements.
Definition: Short-term, highly liquid investments that are readily convertible to cash or so near their maturity that there is little risk of change in their value.
Examples: Treasury bills; commercial paper; and money market funds.
LO# 1
LO# 1
Types of Bank Accounts
In order to maximize its cash position, an entity implements procedures for accelerating the collection of cash receipts and properly delaying the payment of cash disbursements.
LO# 2
Substantive Analytical Procedures—Cash
This limited use of substantive analytical procedures is normally offset by (1) extensive tests of controls and/or substantive tests of transactions for cash receipts and disbursements or (2) extensive tests of the entity’s bank reconciliations.
LO# 3 & 4
Because of the residual nature of the cash account, the auditor’s use of substantive analytical procedures for auditing cash is limited to . . .
comparisons with prior years’ cash balances.
comparisons with budgeted amounts.
LO# 3 & 4
The Effects of Controls
The reliability of the client’s controls over cash affects the nature and extent of the auditor’s tests of details.
LO# 3, 4, & 5
Controls for Cash Receipts
Controls for Cash Disbursements
16-*
Copy of Bank Reconciliation
Standard Bank Confirmation
Cutoff Bank Statement
To audit a cash account, the auditor should obtain these items.
LO# 5
Cutoff Bank Statement
A cutoff bank statement normally covers the 7- to 10-day period after the date on which the bank account is reconciled.
Any reconciling item should have cleared the client’s bank account during the 7- to 10-day period.
LO# 5
7 to 10 Days
Tests of the Bank Reconciliation
The auditor uses the following audit procedures to test the bank reconciliation:
Test the mathematical accuracy and agree the balance per the books to the general ledger.
Agree the bank balance on the reconciliation with the balance shown on the standard bank confirmation.
Trace the deposits in transit on the bank reconciliation to the cutoff bank statement.
Compare the outstanding checks on the bank reconciliation with the canceled checks in the cutoff bank statement for proper payee, amount and endorsement.
Agree any charges included on the bank statement to the bank reconciliation.
Agree the adjusted book balance to the cash account lead schedule.
LO# 5
Auditing a Payroll or Branch Imprest Account
The audit of any imprest cash account such as payroll or a branch account follows the same basic audit steps discussed under the audit of the general cash account.
LO# 5
Extended Bank Reconciliation Procedures
In some instances, the year-end bank reconciliation can be used to cover cash defalcations. This is usually accomplished by manipulating the reconciling items in the bank reconciliation.
LO# 6
Here are some of the more important assertions for investments.
LO# 8
LO# 10