Audit Ch. 10

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In a bank transfer, which bank records first?

The receiving bank They receive the check deposit, record the deposit, then send the request for funds to the disbursing bank

Why is the potential for fraud high for cash and financial investments?

They are highly liquid in nature

How can lapping be detected?

Through comparison of the daily entries in the cash receipts journal with bank deposits Check for receipts deposited from one customer into a different customer's account

What is the most effective way to verify dividend income amounts?

Through reference to dividend record books

Review of investment committee minutes and reports - primary audit objectives

1. Completeness

Reconciliation of cash balances to general ledger - primary audit objectives

1. Existence 2. Accuracy

Cash includes...

1. General checking account 2. Payroll checking account 3. Petty cash 4. Savings accounts

Internal control over cash receipts - collection of receivables

1. Initial listing of cash receipts 2. Maintain customer account records 3. Reconcile customer ledgers with control accounts 4. Mail monthly statements to customers 5. Lockbox

Evaluation of method of accounting for investments - primary audit objectives

1. Valuation 2. Presentation

How should cash disbursements be made?

By check or electronic funds transfer

How can auditors verify the ending balance of investments?

By reconciling totals on overall summary schedule of investments with totals recorded in the general ledger

How can auditors verify the beginning balance of investments?

By referencing the prior year's audit working papers

Auditors should coordinate the audits of ______ and ______

Cash and marketable securities

How can auditors assure that cash receipts have been deposited correctly?

Compare the detail of the cash receipts listings to details of daily deposit slips

Lapping

Concealment of a cash shortage by delaying the recording of cash receipts

How often should cash receipts be deposited?

Daily

Recording of cash receipts

Details of cash receipts are entered into the computer in batches Cash receipts program creates a transactions file to update the general ledger and master AR file Computer creates control totals and exception reports to be followed up on manually

How does the use of a lockbox strengthen internal control?

Ensures complete separation of cash custody and record keeping

Internal control over employee reimbursements

Expense reports should be submitted with receipts and explanations Approved by supervisor and submitted to accounting department

Cash _______ should be separated from ________

Handling, record keeping

Control listing

List of all incoming cash receipts that shows... 1. Amount received from each customer 2. Identifies the customer by name or account number Forwarded to the controller, cashier, and customer account record keeper

Kiting

Manipulations that utilize temporary overstated bank balances to conceal cash shortages or meet short-term cash needs Relies upon existence of "float period" between deposit and clearing of bank, electronic processing has eliminated this

How is control exercised over the cashier?

Periodic reconciliations of control listings, cash receipts journal, and deposit slips to ensure payments received and credited were actually deposited

Lockbox

Post office box controlled by the company's bank Bank employee picks up cash received and credits customer account, then sends remittance advices to the company Used by businesses that receive a large volume of cash through the mail

Investigation of related party transactions - primary audit objectives

Presentation and disclosure

Proof of cash

Reconciles an account balance and cash transactions during a specified period Reconciles beginning balance, deposits, checks, and ending balances of cash account per bank and per books

Finance and account should work together to assure...

1. All cash was received, recorded accurately, and deposited promptly 2. Cash disbursements have been authorized and properly recorded 3. Cash balances are maintained at adequate levels

Audit implications of the Check 21 Act

1. Auditor must rely on the substitute check, not the original 2. Impossible for clients to kite checks

How can auditors determine that investments purchased and sold are recorded correctly?

1. By vouching transactions by reference to brokers advices and cash records 2. Reviewing transactions for 1-2 weeks after balance sheet date to ensure correct cutoff

What should auditors do in an inspection of securities?

1. Count securities 2. Verify securities are registered in company name 3. Record a description of securities and serial numbers 4. Compare serial numbers of securities held since last audit with prior year working papers

Analysis of bank transfers - primary audit objectives

1. Cutoff 2. Existence 3. Occurrence 4. Rights 5. Completeness

Standard confirmation form

Agreed to by AICPA, American Bankers Association and Bank Administration Institute Addresses only client's deposit and loan balances

Why is a voucher system a strong method of internal control?

Provides assurance that all disbursements are properly authorized and reviewed before a check is issued Voucher acts as an authorization sheet with space for initials of authorized employees Separates invoice verification/approval from cash disbursements

Check signing process

Should be done only by authorized officials Official should review supporting documents before signing the check and then perforate the documents to prevent double payment Official should mail check themselves (do not return to the accounting department)

Auditor verification of cash receipts cutoff

1. Count undeposited cash receipts at close of last day of year 2. Determine that deposits in transits at year-end appear as credits on bank statement on first day of new year

Verification of cash transaction cutoff - primary audit objectives

1. Cutoff 2. Existence 3. Occurrence 4. Rights 5. Completeness

Misstatements to look for in bank transfers

1. Date of recording disbursement and receipt per books are from different financial statement periods 2. Date check was recorded by the bank is from the financial statement period prior to books

What should the auditor look for in cutoff statements?

1. Date on which bank paid checks shown as outstanding at year-end 2. Watch for paid checks issued before balance sheet date but not listed as outstanding at year-end

Guidelines for internal control over cash

1. Do not permit one employee to handle a transaction from beginning to end 2. Separate cash handling from record keeping 3. Centralize receiving of cash 4. Record cash receipts on a timely basis 5. Encourage customers to obtain receipts and observe cash register totals 6. Deposit cash receipts daily 7. Make all disbursements by check or electronically 8. Prepare monthly bank reconciliations 9. Monitor cash receipts and disbursements

What should be done when a check is received through the mail?

1. Endorse check "for deposit only" in mailroom 2. Add check to control listing 3. Forward control listing to cashier, controller, and record keeper 4. Transfer checks to cashier to deposit that da

Advantages of disbursements by check

1. Evidence of receipt (via endorsement) 2. Centralizes disbursement authority in who can sign checks 3. Permanent record of disbursements 4. Less cash kept on hand

Bank cutoff statement - primary audit objectives

1. Existence 2. Occurrence 3. Accuracy 4. Cutoff 5. Rights

Confirmation of cash balances with bank - primary audit objectives

1. Existence 2. Occurrence 3. Accuracy 4. Cutoff 5. Rights

Count of cash on hand - primary audit objectives

1. Existence 2. Occurrence 3. Accuracy 4. Cutoff 5. Rights

Reconciliation of bank balances - primary audit objectives

1. Existence 2. Occurrence 3. Accuracy 4. Cutoff 5. Rights

Independent computations of revenue from securities - primary audit objectives

1. Existence 2. Rights 3. Occurrence 4. Completeness

Reconciliation of investment analyses to ledger - primary audit objectives

1. Existence and rights 2. Occurrence

Confirmation of securities and derivatives - primary audit objectives

1. Existence and rights 2. Occurrence and accuracy 3. Completeness 4. Cutoff 5. Valuation

Inspection of securities on hand - primary audit objectives

1. Existence and rights 2. Occurrence and accuracy 3. Completeness 4. Cutoff 5. Valuation

Verification of cutoff of investment transactions - primary audit objectives

1. Existence and rights 2. Occurrence and accuracy 3. Completeness 4. Cutoff 5. Valuation

Vouching of purchases and sales of investments - primary audit objectives

1. Existence and rights 2. Occurrence and accuracy 3. Completeness 4. Cutoff 5. Valuation

Asset assertions related to cash

1. Existence of recorded cash and occurrence of related transactions 2. Completeness of recorded cash 3. Cutoff and accuracy of cash transactions 4. Rights to recorded cash 5. Presentation and disclosure of cash

Bank confirmation forms provide evidence about...

1. Existence of recorded information 2. Completeness, in a limited sense (may lead to discovery of additional accounts not recorded)

What can result in an overstatement of cash?

1. Fictitious check included in cash on hand 2. Omission of outstanding check 3. Theft of cash

Controls over financial investments

1. Formal investment policies 2. Investment committee to review and approve investments 3. Separation of authorization, custody, and records of securities 4. Detailed records 5. Registration of securities in name of company 6. Periodic physical inspection 7. Determination of appropriate accounting

Potential cash disbursement misstatements

1. Inaccurate recording of a purchase or disbursement 2. Duplicate recording and payment of purchases 3. Unrecorded disbursements

Internal control weaknesses - incomplete recording of investments

1. Inadequate accounting/incompetent personnel 2. Inadequate monitoring by internal auditors

Internal control weaknesses - misstatement of recorded value of investments

1. Inadequate accounting/incompetent personnel 2. Unethical culture w/undue pressure to meet earnings targets

Internal control weaknesses - failure to record receipts from cash sales

1. Inadequate supervision of cashiers 2. Failure to encourage customers to obtain receipts 3. Inadequate controls for cash register and accounting records reconciliation 4. Inadequate bank reconciliations

Internal control weaknesses - unrecorded disbursements

1. Ineffective control over record keeping and access to cash

Internal control weaknesses - duplicate recording and payment of purchases

1. Ineffective controls over the input of invoices

Limitations of confirmation forms

1. Information is given as a matter of courtesy 2. Does not relieve the auditor from other inquiry or performance of duties 3. Electronic data sources may not contain all information 4. Information is not guaranteed to be accurate or current, should not rely upon information in confirmation

Examples of cash fraud

1. Interception of cash receipts before any record is made 2. Payment for materials not received 3. Duplicate payments 4. Overpayments to emp;oyees or payments to fictitious employees 5. Payments for personal expenditures

Internal control over cash receipts - cash sales

1. Involve two or more employees in a sale transaction 2. Use cash registers or electronic point-of-sale systems

Internal control weakness - fictitious cash receipts

1. Lack of segregation between access to cash and record keeping 2. No bank reconciliations

Internal control weaknesses - failure to record cash from collection of AR

1. Lack of segregation between access to cash receipts and AR record keeping 2. Inadequate reconciliation of subsidiary AR ledger and general ledger

Internal control weaknesses - unauthorized investment transactions

1. Lack of segregation between record keeping and custody of securities

Internal control weaknesses - inaccurate recording of purchases and disbursements

1. Lack of segregation between record keeping and preparing disbursements 2. Check signer does not review and cancel supporting documents 3. Ineffective controls for matching documents before authorization

Why do auditors spend a large proportion of total audit hours on cash?

1. Liabilities, revenues, expenses, and most other assets flow through cash 2. High liquidity gives greater temptation for misappropriation 3. Cash is a high risk account

Financial investments include...

1. Marketable stocks and bonds 2. Commercial papers 3. Mortgages and trust deeds 4. Cash surrender value of life insurance policies 5. Derivatives

Potential misstatements - financial investments

1. Misstatement of recorded value of investments 2. Unauthorized investment transactions 3. Incomplete recording of transactions

Cash equivalents includes...

1. Money market funds 2. Certificates of deposit 3. Savings certificates

Risks of material misstatement related to cash

1. Overstatement of cash 2. Cash balance is correct, but balance should be higher

Internal control weaknesses - early/late recognition of cash receipts

1. Poor ethical culture that encourages false financial presentation 2. Failure to list and deposit cash receipts on a timely basis

Substantive procedures for financial investments

1. Reconcile analyses of investments accounts to the general ledger 2. Inspect securities on hand 3. Review derivatives agreements 4. Confirm securities and derivatives 5. Vouch purchases and sales of financial investments 6. Verify client cutoff of investment transactions 7. Make independent computations of revenue from securities 8. Inspect documentation of management's intent to classify derivative transactions as hedging activities 9. Evaluate the method of accounting 10. Test valuation 11. Evaluate presentation and disclosure 12. Review investment committee minutes and reports 13. Perform analytical procedures

Substantive procedures for cash

1. Reconcile cash balances to general ledger 2. Send confirmation forms to banks 3. Prepare bank reconciliations 4. Obtain a cutoff bank statement 5. Count and list cash on hand 6. Verify client's cutoff of cash receipts and cash disbursements 7. Analyze bank transfers for last & first week of next year 8. Investigate unusual checks to related parties 9. Evaluate presentation and disclosure

Potential cash receipts misstatements

1. Recording fictitious cash receipts 2. Failure to record receipts from cash sales 3. Failure to record cash from collection of AR 4. Early/late recognition of cash receipts

Control features of electronic point-of-sales systems

1. Scans code for pricing 2. Verify credit status of customer 3. Update AR and inventory records 4. Provide special printouts for sales data

Internal control over cash disbursements

1. Segregation of duties 2. Pay by check or electronically 3. Pre-number checks 4. Match PO, receiving report, and invoice 5. Authorized check signer should review supporting documents & mail checks 6. Monthly bank reconciliation

Examples of tests of controls for cash

1. Test accounting records and reconciliations by reperformance 2. Compare cash receipts listing to cash receipts journal, AR postings, and deposit slips 3. Compare disbursements to AP postings, POs, receiving reports, invoices, and paid checks

What is the purpose of analytical procedures for financial investments?

1. To test recorded dividend and interest income amounts 2. To verify the amounts by independent computation

Examples of tests of controls for financial investments

1. Trace transactions for purchases and sales of investments 2. Review and test investment committee reports 3. Inspect internal auditor inspection and review reports 4. Inspect monthly reports on securities owned, purchased, and sold and amounts of revenue earned and budgeted

A proof of cash can be used to identify...

1. Transactions recorded in the accounting records, but not the bank statements 2. Transactions recorded in the bank statements, but not the accounting records 3. Transactions recorded at different amounts by the bank than in the accounting records

Audit of cash process

1. Use the understanding of the client and its environment to consider inherent risk (including fraud risk) related to cash 2. Obtain an understanding of internal control over cash 3. Assess the risks of material misstatement of cash and design further audit procedures 4. Perform tests of controls 5. Perform substantive procedures

Steps for audit of financial investments

1. Use the understanding of the client and its environment to consider inherent risks, including fraud risks, related to financial investments 2. Obtain an understanding of internal control over financial investments 3. Assess risks of material misstatement and design further audit procedures 4. Perform tests of controls 5. Perform further audit procedures

How should cash receipts and disbursements by monitored?

1. Using software to identify unusual transactions 2. Comparing recorded amounts to forecasted amounts

Inspection of documentation of management's intent to classify derivative transaction as hedges - primary audit objectives

1. Valuation 2. Presentation

Test of valuation of financial investments - primary audit objectives

1. Valuation 2. Presentation

Control features of cash registers

1. Visual display of sale amount 2. Printed receipt 3. Accumulation of total day's sales

Check 21 Act

Allows checks to be processed electronically Creates a "substitute check" that is the legal equivalent of the original check

Who should prepare monthly bank reconciliations?

An employee not responsible for the issuance of checks or custody fo cash

Cutoff bank statement

Statement covering a specific number of business days following the end of the fiscal year

When auditors make a cash count...

The custodian of the funds should be present Custodian should sign off at end to acknowledge counting and that funds were returned intact

Why do auditors analyze bank transfers?

To detect overstatements of cash balances from kiting

Why should auditors review and analyze derivative agreements?

To determine that all derivatives and properly recorded and valued

What is the purpose of reviewing investment committee minutes and reports?

To disclose unrecorded purchases and sales of securities

What is a cutoff statement used for?

To test the accuracy of year-end reconciliation of the company's bank accounts

How can auditors check to make sure cash disbursements are properly authorized?

Tracing from the cash disbursements journal back to source documents (vouchers, POs, receiving reports, invoices, paid checks)


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