sesi-12c.-audit-cashhhhhhhhhhhhhhhhh.ppt

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1. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -1
Audit of Cash Balances
Chapter 23

2. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -2
Learning Objective 1
Show the relationship of cash
in the bank to the various
transaction cycles.

3. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -3
Relationships of Cash in the
Bank and Transaction Cycles
Cash in Bank
Capital Stock –Common
Paid-in Capital in Excess
of Par –Common
Redemption
of stock
Redemption
of stock
Issue of
stock
Issue of
stock
Dividends Payable
Payment of
dividends
Capital Acquisition and Repayment Cycle:

4. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -4
Relationships of Cash in the
Bank and Transaction Cycles
Acquisition and Payment Cycle:
Cash in Bank
Accounts Payable
Payment

5. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -5
Relationships of Cash in the
Bank and Transaction Cycles
Sales and Collection Cycle:
Cash in Bank
Accounts Receivable
Gross Sales
Cash
sales
Cash
receipts
Cash Discounts Taken

6. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -6
Relationships of Cash in the
Bank and Transaction Cycles
Payroll and Personnel Cycle:
Cash in Bank
Accrued Wages, Salaries,
Bonuses, and Commissions
Withheld Income Taxes
and Other Deductions
Payment
Payment
Accrued Payroll
Tax Expense
Payment

7. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -7
Cash in the Bank and
Transaction Cycles
Failure to bill a customer
An embezzlement of cash by interception
ofcash 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. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -8
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

9. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -9
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

10. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -10
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
bankreconciliation 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

11. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -11
Learning Objective 2
Identify the major types of cash
accounts maintained by
business entities.

12. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -12
General cash account
Imprest accounts
Branch bank account
Imprest petty cash fund
Cash equivalents
Types of Cash Accounts

13. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -13
Relationship of General Cash to
Other Cash Accounts
Branch Bank
Account
Cash
Equivalents
Imprest Payroll
Account
Imprest Petty
Cash Fund
General
Cash

14. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -14
Learning Objective 3
Design and perform audit tests
of the general cash account.

15. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -15
Identify client business
risks affecting cash
in bank
Methodology for Designing Tests
of Balances for Cash in the Bank
Set tolerable misstatement
and assess inherent
risk for cash in bank
Assess control
risk for
several cycles
Phase I
Phase I
Phase I

16. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -16
Methodology for Designing Tests
of Balances for Cash in the Bank
Design and perform
tests of controls and
substantive tests of
transactions for
several cycles
Phase II

17. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -17
Timing
Items to select
Sample size
Audit procedures
Methodology for Designing Tests
of Balances for Cash in the Bank
Design and perform
analytical procedures
for cash in bank
Design tests of
details of cash in
bank to satisfy
balance-related
audit objectives
Phase III
Phase III

18. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -18
Audit Schedule for a Bank
Reconciliation
Clawson Industries
Bank Reconciliation
12/31/09
ScheduleA-2 Date
Prepared byClient DED1/10/10
Approved bySW 1/18/10
Account 101 –General account, First National Bank
Balance per bank $109,713
Add: Deposits in transit 21,117
Deduct: Outstanding checks –87,462
Other reconciling items: Bank error –15,200
Balance per bank, adjusted $ 28,168
Balance per books before adjustments $ 32,584
Adjustments: Unrecorded bank service charge 216
NSF 4,200 –4,416
Balance per books, adjusted $ 28,168

19. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -19
Balance-related Audit
Objectives
Detail tie-in:
Cash in the bank foots correctly and
agrees with the general ledger.
Existence:
Cash in the bank as stated on the
reconciliation exists.
Completeness:
Existing cash in the bank is recorded.

20. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -20
Balance-related Audit
Objectives
Accuracy :
Cash in the bank as stated on the
reconciliation is accurate.
Cutoff:
Cash receipts and cash disbursements
transactions are recorded in the proper
period.

21. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -21
Receipt of a bank confirmation
Receipt of a cutoff bank statement
Tests of the bank reconciliation
Procedures

22. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -22
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.

23. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -23
Types of Audit Tests Used for
General Cash in Bank
Cash in Bank
Ending balance
TOC-T + TOC-B + STOT + AP + TDB
= Sufficient appropriate evidence
Audited by
TOC-T, STOT, and AP
Beginning balance
Cash receipts Cash disbursements
Audited by
TOC-T, STOT, and AP
Audited by
TOC-B, AP, and TDB

24. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -24
Learning Objective 4
Recognize when to extend audit
tests of the general cash account
to test further for material fraud.

25. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -25
Fraud Oriented Procedures
The auditor must extend the procedures
in the audit of year-end cash to determine
the possibility of a material fraud.

26. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -26
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.

27. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -27
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

28. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -28
1.The balance on the bank statement with
the general ledger balance at the
beginning of the proof-of-cash period
2.Cash receipts deposited per the bank with
the cash receipts journal for a given period
Proof of Cash
Includes the following reconciliation tasks:

29. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -29
3.Cancelled checks clearing the bank with
those recorded in the cash disbursements
journal for a given period
4.The balance on the bank statement with the
general ledger balance at the end of the
proof-of-cash period
Proof of Cash
Includes the following reconciliation tasks:

30. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -30
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.
Interbank Transfers

31. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -31
Disbursements on the interbank transfer
schedule should be correctly included in or
excluded from year-end bank reconciliation
as outstanding checks.
Interbank Transfers
Receipts on the interbank transfer schedule
should be correctly included in or excluded
from year-end bank reconciliations as
deposits in transit.

32. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -32
Learning Objective 5
Design and perform audit tests of
the imprest payroll bank account.

33. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -33
Typically, the only reconciling
items are outstanding checks.
Audit of the Imprest Payroll
Bank Account

34. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -34
Learning Objective 6
Design and perform audit tests
of imprest petty cash.

35. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -35
Petty cash is a unique account because
it is often immaterial in amount, yet it is
verified on many audits.
The account is verified primarily because
of the potential for embezzlement and the
client’s expectation of an audit review
even when the amount is immaterial.
Petty Cash

36. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -36
Audit tests for petty cash
Internal controls over petty cash
Audit of Imprest Petty Cash

37. ©2010 Prentice Hall Business Publishing, Auditing 13/e,Arens//Elder/Beasley 23 -37
End of Chapter 23