ACC 450 Ch 10
cash equivalents include
-money market funds -savings certificate -certificates of deposit
imprest account
- low balance; maintained at a fixed amount (ex: petty cash)
why do auditors spend time on cash
-Liabilities, revenue, expenses, and most other assets flow through the Cash account; that is, these items either arise from or result in cash transactions.
auditors will prepare a schedule that lists all of the client's cash accounts, including ___
-account number -bank name -year-end balance per books
advantage of requiring disbursement by check include
-centralization -a permanent record -obtaining evidence
the auditors objectives in the audit of cash and cahs transactions are to
-consider the inherent risks including fraud risks related ot cash -obtain an understanding of internal control over cash
proper disclosure of related party transactions should include
-dollar amount of the transaction -nature of the relationship -description of the transaction
to verify the client is not overstating cash balances, auditors should analyze bank transfers for the
-last week of the audit year -first week in the year following the audit
before verifying the client's cash on hand, auditors must establish control over
-securities and other investments -cash funds -note receivable
finance department assurances:
1) All cash that should have been received was in fact received, recorded accurately, and deposited promptly. 2) Cash disbursements have been made for authorized purposes only and have been properly recorded. 3) Cash balances are maintained at adequate, but not excessive, levels by forecasting expected cash receipts and payments related to normal operations. The need for obtaining loans or for investing excess cash is thus made known on a timely basis.
auditor's objectives in audit of cash
1) understanding of the client and its environment to consider inherent risks, including fraud risks, related to cash. 2) Obtain an understanding of internal control over cash. 3) Assess the risks of material misstatement of cash and design tests of controls and substantive procedures that: -Substantiate the existence of recorded cash and the occurrence of cash transactions. -Determine the accuracy of cash transactions. -Establish the completeness of recorded cash. (more on page 402)
compensating balance
Under the terms of a bank loan agreement, the cash in a company's general account sometimes must be maintained at a specified minimum balance
segregation of the function of custody and record keeping for financial investments may be achieved by using an independent safekeeping agent such as
a stockbroker
window dressing
action taken by the client shortly before the balance sheet date to improve the financial picture presented in the financial statements
Another reason contributing to extensive auditing of cash is that
cash is the most liquid of assets and offers the greatest temptation for theft, embezzlement, and misappropriation; high inherent risk
the major elements of adequate internal control over financial investments include
complete detailed records of all securities and derivatives instruments owned an investment committee that authorizes and reviews financial investment activities
the primary purpose of a standard bank confirmation is to corroborate the __ of recorded information
existence
the auditors prepare a list of all the client's cash accounts and related information. this information is traced and reconciled to the
general ledger
Derivatives
instruments that "derive" their value from other financial instruments, underlying assets, or indexes.
a client may conceal an ____ of cash by omitting an outstanding check from the year-end bank rec
overstatement
to document auditors of internal controls over cash, auditors often use a flowchart or internal control
questionnaire
the auditors may ask the financial institutions for cutoff bank statements in order to
test the accuracy of the year-end rec
auditors may use a client prepared year-end bank reconciliation but must examine it in detail
correct statement
cash equivalents
money market funds, certificates of deposit, savings certificates, and other similar types of deposits;any item that cannot be converted to cash on short notice should be classified as an investment, a receivable, or a prepaid expense, rather than as a cash equivalent.
the detection of fraud in relation to the audit of cash is
only relevant to the overall fairness of hte client's financial statements if material in amounts
substantive procedures to test the valuation of financial investments will best confirm
presentation