ATG 457 chapter 10

cash

-General checking account -Payroll checking accounts -Petty cash -Savings accounts

Audit time spent on cash

-Liabilities, revenues, expenses, and most other assets flow through cash (almost everything) -Cash is a liquid asset so greater temptation for misappropriation - Higher Risk

Cash Equivalents

-Money market funds Certificates of deposit

Internal Control- Cash Disbursements

-Segregation of duties -Payment by check or electronic funds transfer -Pre-numbered checks -Match of purchase order and receiving documents with vendor's invoice -Review of supporting documents by authorized check signer -Cancelation of supporting documents -Authorized check signer should mail checks -Monthly bank reconciliations

standard comfirmation

-Standard form agreed to by: -AICPA -American Bankers Association -Bank Administration Institute -Includes cash and loan balances -The confirmation process may be performed electronically if properly controlled

Bank Monthly Statements

-A bank statement typically shows activity for an entire month. -It's easy to use a bank statement to audit cash if the auditors are performing the audit more than one month after year-end. -For instance 12/31 year end: the auditors can obtain the January 31 bank statement if they are in the field after February 4 (or online by Feb 1).

Standard confirmation form

A form designed to provide corroborating evidence about the client's account balances and outstanding loans

substantive

After auditor reassess the level of control risk for each financial statement assertion regarding cash, they must decide what modifications, if any, are necessary to the planned--- procedures for cash transactions and balances

standard confirmation

Confirmation of amounts on deposit by direct communication with financial institution officials

balance sheet date

Petty cash funds and change funds may be counted at any time before or after the :

Bank Reconciliation

Reconciles the company cash balance and the bank cash balance.

Checks were not mailed until after year end

Unreasonable delays in the presentation for payment of checks listed as outstanding at year end implies:

less

the use of petty cash funds is becoming much ____common

questionnaire

to doc. auditors understanding of internal controls over cash, auditors often use a flowchart or internal control

proof of cash

An auditor procedure that reconciles the bank's record of cash activity with the client's accounting records for a test period is called a:

Cutoff Statements

Bank statements requested directly from the bank for the first 7-10 days after year-end. Auditor use them to prove out the ending cash balance (12/31 for example), prove o/s checks, prove deposits in transit. Also the auditor would note transfers, and other unusual items. NSF checks, checks to related parties, new debt, etc...

-Liabilities, revenues, expenses, and most other assets flow through cash (almost everything) -Cash is a liquid asset so greater temptation for misappropriation - Higher Risk

Cash often has a small account balance, but auditors typically devote more hours than justified by the balance because:

Fraud Scheme: Lapping

Embezzlers steal cash or divert checks for their own use and cover the disappearance of the funds by substituting and falsely recording subsequent collections.

Proof of cash

It's often necessary if books and records are messy, if you can't trust the simple bank reconciliation, or the simple bank reconciliation doesn't work. It's a roll forward from one period to the next. Sometimes the whole year.

kiting

Manipulations that utilize temporarily overstated bank balances to conceal cash shortage or meet short-term cash needs.

lapping

Seems difficult to steal someone's payment when they pay electronically or via check, but if the bookkeeper has access to take a withdrawal from the company or transfer money to his/her own account, this scheme can still occur. It's about staying one step ahead. Applying one customer's payment to another customer's account. Often detected by a leave of absence!

Details of bank deposit slips with details of credits to customer accounts

The auditors suspect that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditors most likely would compare the:

General Ledger

To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except:

Observe the consistency of the employees use of cash registered and tapes

Which of the following procedures would the auditors most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet?

inaccurate recording of disbursement

a bookkeeper prepares a check to herself and records it as having been issued to a major supplier. this is an example of:

A. Omitting a check from the outstanding check list B. omitting a deposit from the deposits in transit C. hiding cells in a spreadsheet schedule D. a deliberate error in reconciliation addition answer: A,C,D

a cash shortage may be concealed by:

lockbox

a company can strengthen internal control of cash receipts by using an ____, which is a post office box controlled by a company's bank at which cash remittances from customer are received.

window dressing

action taken by the client shortly b4 the bal sheet daye to improve the fin pic presented in the fin. statements

disclosed

agreements to maintain compensating balances should be .... in the fin. statements

-Substantive procedures are designed to detect material misstatement. -They substantiate balances (not processes). -They are BOTH analytical and tests of details.

audit work/substantive procedures

consider inherent risk, including fraud risks, related to cash and obtain an understanding of internal control over cash

auditor objective in the audit of cash and cash transactions are to:

before and after balance sheet date

auditors can review bank accounts for kiting by preparing a sch of bank transfers for days:

Completing an internal control questionnaire and preparing a flowchart to describe internal control

auditors gain an understanding of internal controls over cash by:

summarized test of controls for cash transactions, assessment of risk for the financial statement assertions about cash, and a flowchart or written description of controls

auditors working papers for cash typically include:

mailroom employees

checks received through the mail should be opened by the :

should provide explanation for the expenditures and should maintain receipts to support the expenditures

employees that use bus credit cards for expenses on behalf of the company:

diff employee than the centrally located casher who receives cash

in a restaurant setting, control over cash sales is best handled when sales ticket is prepared by anL

2 or more emplyees

internal control over cash sales is strongest when___ participates in each transaction with a customer

the custodian of the fund reviews support from employees seeking reimbursements and another individual reviews the support for completeness and authenticity prior to reimbursement of the funds

internal control over petty cash funds is achieved when:

finance, treasurer

most of the processes relating to cash handling are responsibility of the ____department, which is under the direction of the ____

preform further audit procedures for tests of controls and substantive procedures and determine their planned assessed level of the risk of material misstatement for assertions about cash

once auditor gain an understanding of the clients internal control over cash receipts and disbursements, they will:

$ amount of the transaction, nature of the relationship, and description of the transaction

proper disclosure of related party transactions should include:

no authorization, accounting, or cash handling functions

reconciliation of monthly bank statements is impt to adequate internal control over receipts and disbursements. the best person to perform the reconciliation is the employee who has:

conceal a cash shortage and meet short-term cash needs

the act of kitting , or manipulating cash to appear in the balance of two or more bank accounts prior to the balance sheet date can:

21st century

the check clearing for __ __ act is an act that allows fin inst. to create and process electronic "substitute checks" in place o f customer written hard copy checks

kiting

-This occurs between two different banks. -Requires check float time (fewer checks nowadays) -Auditors can detect kiting by preparing a schedule of bank check transfers for a few days before and after balance sheet date.

Processes cash disbursements

Reconciliation of the bank account should not be performed by an individual who also:

kiting

Suppose you have $10 in Chase Bank but you write a check on the account for $500 and deposit it in PNC Bank. Before that deposit can be fully processed (and the shortage is detected), you go back and tell the teller at PNC Bank that you want to withdraw $400. The teller gives you $400 in cash, and you disappear before the check bounces.

Data Analytics

The key to data analytics is the elimination of Sampling. The goal is to analyze ALL of the transactions.

Bank Reconciliations

Used to identify: -Cash receipts and disbursements recorded in the accounting records, but not on the bank statement. -Cash deposits and disbursements recorded on the bank statement, but not on the accounting records. -Cash receipts and disbursements recorded at different amounts by the bank than in the accounting records.

as a separate line item

a bank deposit that is restricted in use should be included:

matching invoiced with receiving doc before disbursements are authorized

a company makes a cash disbursement to pay an invoice for goods that have not yet been received, this error that could have been prevented by:

voucher

a doc authorizing a cash disbursement, which usually provides space for employees to initial after they have preformed approval functions, is called an___

lapping

cash collected from customer A is withheld by cashier, and a subsequent collection from customer B is entered as a credit to Customer A's account. Customer B's account will not be shown as paid until the collection from Customer C is recorded as a credit to Customer B. The pattern of fraud is known as:

False

t/f in order to verify cutoff of cash receipts and disbursements at year-end, auditors must be present at the clients office to count undeposited cash receipts at the close of the business on the last day of the fiscal year.

false

t/f: bc the cash balance is generally low relative to other accounts, auditors spend a relatively smaller proportion of an audit hours to cash

true

t/f: general guidelines to good cash handling practices include separating cash handling from record keeping

General Ledger

the auditors prepare a list of all the client's cash accounts and related info. this info is traced and reconciled to the :

lack of segregation of duties

the internal control weakness that allowed a bookkeeper to embezzle cash receipts from customers and write off the related receivables is?

Data Analytics on Cash

-Identify possible duplicate payments by searching for cash disbursements of the same amount and to the same payee made close in time.  -Identify possible duplicate receipts by searching for cash receipts of the same amount and from the same customer made close in time.  -Identify possible improper or unexpected disbursements by searching for large disbursements in relation to the account being charged.  -Identify unauthorized payroll or expense reimbursement cash disbursements to employees, particularly those employees able to initiate or authorize transactions or to perform the record-keeping function for cash disbursements.  -Identify payments to related party transactions by searching for payments to or receipts from those parties.

General Guidelines for internal control over cash 1/2

1) Do not permit any one employee to handle a transaction from beginning to end. 2) Separate cash handling from recordkeeping. 3) Centralize receiving of cash to the extent practical. 4) Record cash receipts on a timely basis. 5) Encourage customers to obtain receipts and observe cash register totals.

General Guidelines for Internal Control Over Cash 2/2

6) Deposit cash receipts promptly. 7) Make all disbursements by check or electronic funds transfer, with the exception of small expenditures from petty cash. 8) Have monthly bank reconciliations prepared by employees not responsible for the issuance of checks or custody of cash. The completed reconciliation should be reviewed promptly by an appropriate official. 9) Monitor cash receipts and disbursements using data analytics software and by comparing recorded amounts to forecasted amounts.

stamped "paid" by the check signer

To provide assurance that each voucher is submitted and paid only once, the auditors most likely would examine a sample of paid vouchers and determine whether each voucher is:

Internal Control -Cash Receipts

-Cash sales *Involvement of two or more employees *Cash Registers *Electronic point of sales systems -Collections of receivables *Initial listing (or input) of details of cash receipts *Custody and depositing of cash receipts *Maintenance of customer account records *Reconciliation of customers' ledgers with control accounts *Mailing monthly statements to customers *Collection activity and past- *due accounts *Direct receipt of funds by financial institution *Electronic Funds Transfer

lapping

Then, the thief deposits a receipt from Customer C and indicates in the records that it came from Customer B, and so on. To avoid detection, the thief must continue to use a payment from one customer to credit the account of another. Otherwise, a customer who has paid his/her bill will be contacted by the company, due to what appears to be non-payment, and the scheme will be exposed.

recording fictitious cash receipts and early recognition of cash receipts.

potential misstatement related to cash receipts may include:

custodian and the bank

when petty cash funds are kept in the form of separate bank account, the bank should be instructed to only cash checks made payable to: