CHAPTER 10 AUDIT NOTES

Standard form agreed to by: -____ - American Bankers Association - ____ Administration Institute

AICPA Bank

____ ____ include money market funds, certificates of deposit, savings certificates, and other similar types of deposits.

Cash equivalents

_____ are financial instruments that derive their value from other financial instruments, underlying assets or indexes.

Derivatives

Is confirming cash balances required? If so, why?

It is not required for cash but is for A/R To check existence of the amount of cash shown on the balance sheet

¨_____ schemes rely upon the existence of a "float period" in which transactions are not processed in real time; increased electronic processing has made _______ more difficult through reducing (or eliminating the float period).

Kiting

Can the auditor count cash behind closed doors? If not, who must be present?

No cannot be done behind closed doors, the count of cash on hand is of special importance in the audit of banks and other financial institutions.

Reconciliations of the accounts must be used to determine the actual amount of cash by considering: ¡______ checks ¡Deposits in ____ ¡Other items recorded by the bank, e.g., bank charges for services

Outstanding transit

1. ____ audit procedures 2. ____ cash balances. 3. Obtain a bank ____ 4. Obtain a ___ bank statement 5. Identify and investigate ____ cash transactions 6. Count and list ____ on hand. 7. ____ the client's cutoff of cash receipts and disbursements 8. Analyze bank transfers for the ____ week of the audit year and the first week of the following year. 9. Investigate payments to ____ parties 10. Evaluate proper financial statement presentation and ___ of cash.

Substantive Confirm reconciliation cutoff unusual cash Verify last related disclosure

____ Dressing: Action taken by the client shortly before the balance sheet date to improve the financial picture presented in the financial statements.

Window

Proof of Cash General Information ¨Reconciles the ________ and reconciles cash transactions during a specified period.

account balance

Investigate payments to related parties. What two goals are the auditor trying to accomplish? 1. To determine whether the transactions were properly ____ 2. Recorded and are adequately ___ in the financial statements

authorized disclosed

A_____ covering a specified number of business days (usually 7 to 10) after the client's balance sheet date. Auditors use this statement to determine that checks issued on or before the balance sheet date and paid during the cutoff period were listed as outstanding on the year-end bank reconciliation.

bank statement

¨Auditors can detect kiting by preparing a schedule of ______ for a few days before and after balance sheet date.

bank transfers

Test Valuation ¨FASB valuation methods for investments ¡Depends on the _____ ¡May use the _____ method for all investments

classification fair value

Identify the auditors' objectives in the audit of cash. Use the understanding of the _____ and its environment to consider inherent risks, including fraud risks, related to cash. Obtain an understanding of _____ over cash. Assess the risks of _____ of cash and design tests of controls and substantive procedures.

client internal control material misstatement

Check 21 Act ¨Checks may be processed ____

electronically

Assess the risks of material misstatement of cash and design tests of controls and substantive procedures that: a.Substantiate the _____ of recorded cash and occurrence of the related transactions b.Determine the ____ of cash transactions c.Establish the ____ of recorded cash d.Verify the _____ and accuracy of cash transactions e.Determine that the client has ___ to recorded cash f.Determine that the presentation and _____ of cash, including restricted funds, are appropriate

existence accuracy completeness cutoff rights disclosure

The auditors should be concerned with derivatives that are used to _____ various financial and operational risks or for speculation.

hedge

____ refers to manipulations that utilize temporarily overstated bank balances to conceal cash shortage or meet short-term cash needs

kiting

- What types of accounts generally comprise "cash"? Include general, ______, petty cash, and less frequently saving accounts

payroll

¨FASB hierarchy for market value of investments Level 1—reference to market ____ Level 2—reference to markets for ____ instruments Level 3—use of a ____ model (such as the Black Scholes option pricing model)

prices similar valuation

2.. Revise the risk of material misstatement based on the results of tests of controls. Why might the auditor revise this risk? - When auditors have completed described in proceeding sections, they should _____ the level of control risk for each financial statement assertion regarding cash.

reassess

1. Perform further audit procedures - Test of Controls. What are some examples of tests of controls? - Test the accounting records and ____ by re performance. - Compare the details of a sample of _____ listings to the cash receipts journal, accounts receivable postings, and authenticated deposit slips. - Compare the details of a sample of recorded disbursements in the cash payments journal to account payable postings, purchase orders, receiving reports, invoices, and paid checks. If significant weaknesses are discovered data analytics may be used to test transactions

reconciliations cash receipts

What is the concern with overstated cash? A _____ may have been concealed merely by the insertion of a fictious check in the cash on hand at year-end, or by the omission of an outstanding check from year-end bank reconciliation

shortage

Cash typically has a _____ account balance, but auditors devote more hours than justified by the balance because: o _____, revenues, expenses, and most other assets flow through cash o Most liquid asset so ___ temptation for misappropriation o ____ risk account

small Liabilities greater High

Why is auditing these types of instruments complex? Require ___ skill or knowledge in performing audit risks such as identifying controls ar service organizations, etc. Often considered a CAM (_____) that must be communicated in audit report of public company.

specialized critical audit matter

Electronic processing creates a ___ check

substitute

Audit implications ---Need to rely on ______check for evidence of check ---_______ for clients to kite checks (manipulate bank balances to conceal cash shortage)

substitute Impossible

As indicated previously, the______ Act makes kitting of checks very difficult because check clearing is so fast.

the Check 21 Act

Proof of Cash General Information Used to identify: ---Cash receipts and disbursements recorded in the accounting records, but not on the _________. ---Cash deposits and disbursements recorded on the bank statement, but not on the________. ---Cash receipts and disbursements recorded at ____amounts by the bank than in the accounting records.

the bank statement accounting records different

§Cash sales -Involvement of _____ employees -Cash ____ -Electronic point of sales systems §Collections of receivables - Electronic Funds ____ - Custody and depositing of cash ____

two or more Registers Transfer receipts

- What is a "____"? To trace a transaction or a few transactions through each step of the system to determine that transactions actually are being processed in the manner indicated by the flowchart.

walk-through

o In small business, the auditors may prepare a ____ _____ of controls based on questioning of owners and employees and upon firsthand observation. o For larger companies, a ____ or internal control questionnaire is usually employed to describe internal control

written description flowchart