Audit and Assurance Chapter 10

Common Cash Accounts

- Checking - Cash Management - Petty Cash Accounts

trend analysis of accounts and ratios the auditor might consider for cash accounts.

- Compare monthly cash balances with past years and budgets - Identify unexpected spikes or lows in cash during the year - Compute trends in interest returns on investments - Analyze cash balances, and changes therein, in relation to new or retiring debt obligations - Compare cash ending account balances with those of preceding years - Compute typical short-term liquidity ratios - Compare cash flow to sales and profitability

Common Fraud Schemes Relating to Investments

- Securities are purchased, but those purchases are not authorized. - Securities are purchased, but are not recorded as purchased. Or securities are recorded as purchased, but they are not actually purchased. - Securities are sold, but are not recorded as sold. Or securities are recorded as sold, but they are not actually sold. - Investment income (e.g., dividends or interest) is stolen. - Investments are purposely valued inaccurately, that is, by making inaccurate fair value judgments. - Investment classifications are purposely inaccurate.

Segregation of Duties

- does not change as processing systems become more automated and integrated. Automation can enhance control, yet there is still a risk of errors or fraud occurring on a larger scale

A bank confirmation contains which of the following two parts?

1. A part that seeks information on the client's deposit balances, the existence of loans, due dates of the loans, interest rates, dates through which interest has been paid, and collateral for loans outstanding. 2. A part that contains a listing of the last checks issued near year-end. 3. A part that seeks information about any loan guarantees. 4. A part that lists all transfers between the company's bank accounts for a short period of time before and after year-end. a. 1 & 2. b. 1 & 3. c. 2 & 3. d. 2 & 4 e. 3 & 4 b

Authorization of Transactions

1. Authorization privileges should be assigned to individuals based on unique activities associated with the individual and position. - should follow the principles of need to know and right to know. - Authorizations should be reviewed periodically by senior management. 2. Authentication procedures should assure that only authorized personnel execute transactions. 3. Any changes to existing bank accounts or the opening of a new bank account must be authorized and reviewed by senior management. 4. Monitoring should be established so that a detailed daily review of transactions occurs and is compared with cash budgets, authorization limits by individuals, and riskiness of transactions.

Control Risk Analysis Questionnaire: Marketable Securities

1. Does the company have written policies and guidelines regarding investments in marketable securities? Are the policies approved by the board of directors? What process is used to authorize investments in marketable securities? 2. Does the company have a clear policy as to whether marketable securities are properly classified as trading securities, available-for-sale securities, or held-to-maturity securities? Is there evidence that the company follows the policy? 3. If management has changed the classification of securities during the year from either trading securities or available-for-sale securities to held-to-maturity securities, are the amounts significant? Were they reviewed by the audit committee? Do the audit committee and the board concur with the change? 4. If a liquid market does not exist for the marketable securities, how does management estimate the value of the securities that need to be marked to current market value? 5. Does the company provide for effective segregation of duties among individuals responsible for making investment decisions and those responsible for the custody of securities? 6. Does the internal audit department conduct regular audits of the controls over marketable securities? If yes, review recent reports.

Inherent Risk Analysis Questionnaire: Marketable Securities

1. Does the company regularly invest in marketable securities? How material are the balances in marketable securities accounts? 2. Has management changed the classification of securities during the year from either trading securities or available-for-sale securities to held-to-maturity securities? If yes, what is the reason for the change? 3. Is there a ready market for the securities?

Relevant Financial Statement Assertions relevant to Cash

1. Existence/occurrence - cash balance exist at balance sheet date 2. Completeness - Cash balances include all cash transactions that have taken place during the period 3. Rights and obligations - The company has title to the cash accounts as of the balance sheet date - cash might be pledged as collateral; the company must disclose relevant information about the collateral arrangement. - risk related to ownership of cash is low. 4. Valuation or allocation - recorded balances reflect the true underlying economic value of those assets. - This assertion usually has a low level of inherent risk, unless the client has cash holdings in foreign currency in a country experiencing political instability. 5. Presentation and disclosure - Cash is properly classified on the balance sheet and disclosed in the notes to the financial statements. Because of the high level of inherent risk often associated with cash, the auditor primarily focuses on the existence and completeness assertions

The five management assertions relevant to marketable securities are:

1. Existence/occurrence —The marketable securities exist at the balance sheet date. 2. Completeness —The marketable securities balances include all securities transactions that have taken place during the period. 3. Rights and obligations —The company has title to marketable securities accounts as of the balance sheet date. 4. Valuation or allocation —The recorded balances reflect the true underlying economic value of those assets and are reported in accordance with the applicable reporting framework. 5. Presentation and disclosure —Marketable securities are properly classified on the balance sheet and disclosed in the notes to the financial statements. The valuation assertion is usually the most relevant for auditing marketable securities because of the difficulties sometimes experienced when securities are thinly traded and management reluctance in writing down the value of securities.

The investments in securities are classified as:

1. Held-to-maturity securities 2. Trading securities 3. Available-for-sale securities There are important financial reporting and audit implications for the classification chosen by the company. Thus, the auditor has a major judgmental challenge in: - Corroborating management's intent in classifying the assets, including gathering information about management's trades in the investments, the importance of market value to management compensation - Determining fair market value

Identifying Control Risks

1. Obtain understanding of internal controls for both integrated audits and financial statement only audits using: ●A walkthrough of the process ●Inquiry ●Observation ●Review of the client's documentation 2. Consider both entity-wide controls and transaction controls at the account and assertion levels ●Control environment ●Risk assessment ●Information and communication ●Monitoring controls 3. Focus on significant control activities related to cash accounts

audit workpaper

1. The client prepares a schedule of all marketable securities it owns at year-end. The schedule includes the accrued interest and dividends associated with each security for the period of time held. The auditor is testing both the balance sheet and the related income accounts at the same time. 2. If the risk of material misstatement is low, the auditor will test only a small sample of the items. If risk is high, the auditor may verify all the material items on the worksheet. 3. The document shows three items related to the value of the security: cost, year-end market value, and carrying value for debt. 4. Disposals and resulting gains/losses are shown for all accounts during the year. 5. The auditor verifies the cost or sales price of the assets by examining broker's advices evidencing either the purchase or sale of the security. If control risk is low, the verification can be performed on a sample of the transactions. 6. The schedule is an abbreviated worksheet. For most audits, the auditor will have to determine whether securities are properly classified either as intent to hold to maturity or trading. That determination must be corroborated by, and consistent with, management's actions. The appropriate classification determines the accounting valuation. 7. For most investments, the auditor determines market value by referring to the year-end closing price in the Wall Street Journal or by collecting this data electronically on the audit firm's own database. 8. The auditor recomputes income on a selected basis for interest, dividends, and realized and unrealized gains and losses. 9. The auditor foots the schedule to determine the mechanical accuracy and the correct valuation of the account. 10. The audit tests address all of the audit assertions except presentation and disclosure. That assertion is verified directly with management and documented separately. Document the conclusion regarding the fairness of presentation of the account balance as adjusted.

Common Fraud Schemes Relating to Cash Receipts

1. The employee makes a sale but does not record it and steals the cash - known as skimming 2. An employee receives a check and deposits it, but does not record the sale; then the employee writes a check out to himself and does not record the disbursement. 3. The employee collects a customer payment, steals the cash, and writes off the accounts receivable as uncollectible. 4. The employee steals a payment from Customer X. To cover the theft, the employee applies a payment from Customer Y to Customer X's account. Before Customer Y has time to notice that its account has not been appropriately credited, the employee applies a payment from Customer Z to Customer Y's account - known as lapping

common schemes relating to cash payments

1. The employee purchases merchandise and records the sale at an unauthorized discounted amount. 2. The employee steals cash and conceals it by recording a fictitious discount. 3. The employee writes a check to a fictitious vendor and deposits the check into an account that he or she controls that has been set up in the name of the fictitious vendor.

Obtaining Cutoff Bank Statements

A bank statement for a period of time after yearend (usually seven to ten days); sent directly to the auditor, who uses it to verify reconciling items on the client's year-end bank reconciliation. - If the auditor assesses the risk of such misstatements to be high, the auditor will request a cutoff bank statement directly from the bank.

lockbox

A cash management arrangement with a bank whereby an organization's customers send payments directly to a post office box number accessible to the client's bank; the bank opens the cash remittances and directly deposits the money in the client's account. In some cases, the organization's bank receives receipts directly through a lockbox or electronic funds transfer (EFT), and then directly deposits the receipts into the client's account.

Kiting

A fraudulent cash scheme to overstate cash assets at year-end by showing the same cash in two different bank accounts using an interbank transfer. Division A: - Transfers $1,000,000 to Division B near the end of the year but records the transaction in the following year. - Transfer does not clear the bank in the current year. - Transfer does not decrease the year-end cash balance because it has not been recorded in the current year. Division B: - Receives $1,000,000 before year-end and records the deposit in the current year. - Deposit may or may not be deposited by year-end. If not, the deposit will be shown as a deposit in transit in the division's bank reconciliation. - Transfer increases the year-end cash balance by the amount of the transfer. The net effect is to overstate cash on the consolidated financial statements by the amount of the transfer.

interbank transfer schedule

An effective and efficient way to test for the existence of kiting - lists all transfers between the company's bank accounts for a short period before and after year-end - all transfers are accounted for to determine that they are recorded in the correct period and the client is not overstating the year-end cash account

Considering the Results of Tests of Controls

Auditor analyzes the results of the tests of controls to determine additional appropriate procedures ●Control deficiencies identified - Assessing those deficiencies to determine their severity - Modifying preliminary control risk assessment - Documenting implications of control deficiencies ●No control deficiencies identified - Determining that preliminary assessment of control risk as low is appropriate - Determining the extent that controls can provide evidence on correctness of account balances - Determining planned substantive audit procedures

Documenting Controls

Auditors need to document their understanding of internal controls for: - Integrated audits - Financial statement only audits ●Questionnaire can be used to: - Guide auditor in documenting understanding of internal controls - Capture information about specific controls - Identifies the specific individual responsible for performing each procedure ●Significance of a negative answer in the questionnaire - Represents a potential internal control deficiency - Alerts auditor to consider the effect on the initial assessment of control risk

Skimming most likely results in a violation of which of the following management assertions?

Completeness

Computerized Control Totals and Edit Tests

Computerized controls should assure that all items are uniquely identified and that an adequate audit trail exists for transactions - A unique identifier assigned to each item - Control totals to assure the completeness of processing - Edit tests to identify unusual or incorrect items (reasonableness tests, field checks, self-checking digits on account numbers, and alphanumeric tests)

Restrictive Endorsements

Customers should make their checks payable to the client and restrictively endorsed for deposit by the client when received. - helps prevent modifications and theft of customer payments

Documenting Substantive Procedures

Documentation requirements for cash accounts might include: ●Copies of bank reconciliations inspected or reperformed ●Copies of bank confirmations ●Documentation of oral confirmations, if applicable ●Copies of bank cutoff statements ●Copies of bank transfer schedules ●Evidence of any restrictions on the use of cash balances or bank compensating balances

Relationships for Cash Accounts

Examples of reasonable expected relationships for cash accounts - No unusual large cash transactions - Operating cash flow consistent with sales and net income - Operating cash flow not significantly different from the prior year - Investment income consistent with the level of and returns expected from the investments Examples of relationships might suggest a heightened risk of fraud in cash - Consistent profits over several years, but cash inflows are declining - Unexpected reductions in accounts receivable collections, or the timeliness of collections - Unexpected declines in the petty cash account

Because a primary concern is that cash will be stolen and thus understated, the auditor is not usually concerned about overstatements of cash.

F

Because of the level of inherent risk associated with cash accounts, auditors are required to test the controls over cash accounts

F

Controls for completeness of cash are important because they help to provide reasonable assurance that the cash exists.

F

Planning analytical procedures for cash balances are highly effective because of the generally stable relationship with past cash levels and the fact that cash is a managed account.

F

Short selling enables managers to get away with perpetrating fraud undetected and undeterred.

F

Skimming occurs when an employee purchases merchandise and records the sale at an unauthorized discounted price

F

The volume of activity in cash accounts makes cash accounts less susceptible to error than most other accounts.

F

A typical bank statement prepared at an interim agreed-upon date and sent directly to the auditor is a bank transfer statement.

F (cutoff bank statement)

A fake cash problem relates to management's cash valuation assertion.

F (existence)

Because cash balances are usually relatively low at year-end, auditing standards encourage auditors to send bank confirmations on a sample basis.

F (interim bank transfer schedule)

Audit Opinion Formulation Process for Marketable Securities

In auditing marketable securities, the auditor will perform ●Risk assessment procedures ●Tests of controls ●Substantive procedures

Overview of the Audit Opinion Formulation Process for Cash Accounts

In auditing the cash accounts, the auditor will perform ●Risk assessment procedures ●Tests of controls ●Substantive procedures

Disclosures for Cash Accounts

Include ending balances on the face of the Balance Sheet, and descriptive statements from management in the footnotes ●Cash and cash equivalents ●Marketable securities

Periodic Internal Audits

Internal audit departments are effective deterrents when they periodically conduct detailed audits of cash controls and cash management. Internal auditors may also review the development of new systems to determine whether adequate controls have been built into the new systems.

marketable securities

Investments in securities with a maturity date greater than three months at the date of purchase and other securities for which there is more than an insignificant risk of change in value due to interest rate, quoted price, or penalty on withdrawal

Which of the following terms best defines this scenario? The employee steals a payment from Customer X. To cover the theft, the employee applies a payment from Customer Y to Customer X's account. Before Customer Y has time to notice that its account has not been appropriately credited, the employee applies a payment from Customer Z to Customer Y's account.

Lapping

Which assertion is relevant to whether the company owns the cash accounts as of the balance sheet date?

Rights and obligations.

Management Assertions and Substantive Procedures for Cash Accounts: Existence

Substantive Tests of Details 1. Request bank confirmations to ensure that the reported cash balance actually exists. 2.Inspect and re-perform the client's bank reconciliations to ensure that the year-end cash balance is correct. 3.Use online resources to ensure that the bank reported by the client is a real bank, i.e., overstating cash by creating fictitious bank account statements.

Management Assertions and Substantive Procedures for Cash Accounts: Presentation and Discloser

Substantive Tests of Details: - Determine that any restrictions to cash are appropriately disclosed in the notes to the financial statements.

Management Assertions and Substantive Procedures for Cash Accounts: Valuation

Substantive Tests of Details: - Obtain bank cutoff statements to ensure that the client has not held open the cash receipts book to record the next period's sales collections as current-period revenue and cash received (i.e., overstating cash and revenue).

Management Assertions and Substantive Procedures for Cash Accounts: Rights

Substantive Tests of Details: Examine bank statements and ensure that reported bank balances are actually owned by the client.

Management Assertions and Substantive Procedures for Cash Accounts: Completeness

Substantive Tests of Details: Obtain bank cutoff statements to ensure that the client has not mailed checks to vendors but neglected to record the cash disbursements in the current period (i.e., overstating cash and understated liabilities).

An example of a monitoring control in cash would include a review of cash budgets and a comparison of them with actual cash balances, with appropriate follow-up.

T

If the auditor observes that the company reports consistent profits over several years while cash inflows are decreasing, the auditor should likely assess a heightened risk of fraud in cash.

T

In assessing fraud risk related to cash, auditors engage in brainstorming to consider incentives, opportunities to commit fraud, and rationalization about risks relating to cash.

T

The electronic transfer of cash and the automated controls over cash are such that if errors are built into computer programs, they could be repeated on a large volume of transactions.

T

The relative percentage of substantive analytics that an auditor will use as evidence in the audit of cash will be somewhat limited regardless of the riskiness of the client.

T

When auditing cash, the auditor will perform a relatively larger percentage of tests of details for a high-risk client compared to a low-risk client.

T

Performing Substantive Fraud-Related Procedures for Cash Accounts

The auditor might use the following fraud-related audit procedures to respond to fraud risks: - Confirm with financial institutions those individuals that are authorized to access cash accounts - Scrutinize checks that are payable to cash - Scrutinize checks with unusual vendor names

Obtaining Bank Confirmations

The auditor usually sends a standard bank confirmation to each bank with which the company has transacted business during the year. - procedure is most relevant to the existence assertion. - The paper-based process auditors use to confirm the client's account balances with a bank is a manual process that can be inefficient and open to confirmation fraud. The confirmation, whether paper or electronic, has two parts - first part seeks information on the client's deposit balances, the existence of loans, due dates of the loans, interest rates, dates through which interest has been paid, and collateral for all loans outstanding with the bank at year-end. - second part of the bank confirmation seeks information about any loan guarantees

Documenting Substantive Procedures: Marketable Securities

The auditor will include the following types of documentation related to substantive procedures for marketable securities: ●Schedule of marketable securities ●Documentation of any confirmation of securities ●Documentation of marketable securities transactions that were scrutinized ●Memo containing rationalization for judgments made about management's valuation of securities ●Reports of any outside valuation experts ●Documentation of calculation of any potential impairments

Cash Accounts: Performing Substantive Tests of Details

Typical substantive tests of details for cash accounts include: -Inspecting or reperforming bank reconciliations - Obtaining bank confirmations - Obtaining bank cutoff statements - Preparing interbank transfer schedules

Which assertion is relevant to whether the cash balances reflect the true underlying economic value of those assets

Valuation or allocation

Which mix of evidence would be most appropriate for the following scenario? This is a client where the auditor has assessed the risk of material misstatement related to the existence and completeness of cash at high. This client has incentives to overstate cash in order to meet debt covenants. Further, the client has relatively weak controls to prevent theft of cash.

a. 100% tests of details. b. 70% tests of details, 10% analytics, 20% tests of controls. c. 50% tests of details, 10% analytics, 40% tests of controls. d. 20% tests of details, 40% analytics, 40% tests of controls. a

Which mix of evidence would be most appropriate for the following scenario? This is a client where the auditor has assessed the risk of material misstatement related to the existence and completeness of cash as low, and believes that the client has implemented effective controls in this area.

a. 100% tests of details. b. 70% tests of details, 10% analytics, 20% tests of controls. c. 50% tests of details, 10% analytics, 40% tests of controls. d. 20% tests of details, 40% analytics, 40% tests of controls. c

Which of the following is a common example of trend analysis of accounts and ratios that the auditor might consider for cash accounts?

a. Compare monthly cash balances with past years and budgets. b. Identify unexpected spikes or lows in cash during the year. c. Compute trends in interest returns on investments. d. Two of the above (a-c). e. All of the above (a-c). e

Which of the following represents a reasonable test of controls for cash receipts?

a. Document internal controls over cash by completing the internal control questionnaire or by flowcharting the process. b. Segregation of duties between those handling cash and those recording cash transactions. c. Obtain a bank confirmation. d. Obtain a bank cutoff statement. e. All of the above. b

Which of the following questions would be relevant for an inherent risk analysis related to cash?

a. Does the company have significant cash flow problems in meeting its current obligations on a timely basis? b. Are cash transactions properly authorized? c. Are bank reconciliations performed on a timely basis by personnel independent of processing? d. Does the internal audit department conduct timely reviews of the cash management and cash-handling process? e. All of the above. a

Affirmative answers to which of the following questions would lead the auditor to assess fraud risk at a higher level for cash?

a. Is an individual with access to cash or its recording experiencing financial or personal distress? b. Is an individual with access to cash or its recording being compensated at an amount that he or she might consider low? c. Is the company in potential violation of its debt covenants? d. Two of the above (a-c) e. All of the above (a-c). e

Which of the following represents a control related to cash that an auditor might test?

a. Reviews of reconciliations of reported cash receipts with remittances prepared by independent parties. b. Reviews of cash budgets and comparison of them with actual cash balances. c. Reviews of discrepancies in cash balances. d. Two of the above (a-c). e. All of the above (a-c). e

Which of the following is not a type of common control over cash?

a. Segregation of duties b. Restrictive endorsements of customer checks c. Bank reconciliations by employees who handle cash d. Prenumbered cash receipt documents and turnaround documents e. Two of the above (a-d) c

Which of the following statements regarding reperformance of bank reconciliations is true?

a. The auditor's reperformance of a reconciliation of the client's bank accounts provides evidence as to the accuracy of the year-end cash balance. b. The process reconciles the balance per the bank statements with the balance per the books. c. Reperformance of the bank reconciliation is ineffective in detecting major errors, such as those that might be covered up by omitting or underfooting outstanding checks. d. Two of the above (a-c) are true. e. All of the above (a-c) are true. d

The first step in performing planning analytical procedures is to develop an expectation of the account balance. Which of the following does not typically represent a likely expected relationship for cash accounts?

a. The company reports consistent profits over several years, but operating cash flows are declining. b. No unusual large cash or other liquid asset transactions are found. c. Operating cash flow is not significantly different from that of the prior year. d. Investment income is consistent with the level of and returns expected from the investments. e. All of the above represent likely expected relationships. a

Inherent risk for cash is usually assessed as high for which of the following reasons?

a. The volume of transactions flowing through cash accounts throughout the year makes the account more susceptible to error. b. The cash account is more susceptible to fraud because cash is liquid and easily transferable. c. The electronic transfer of cash and the automated controls over cash are such that if errors are built into computer programs, they will be repeated on a large volume of transactions. d. Cash can be easily manipulated. e. All of the above. e

Identifying Fraud Risks

auditors engage in brainstorming to consider incentives, opportunities to commit fraud, and rationalization relating to cash. Fraud risks relating to cash relate most primarily to misrepresentation and theft. ●Incentives - whether an individual with access to cash or its recording is experiencing financial or personal distress - whether the company might be close to violating its debt covenants - whether the company has sufficient cash flow to support continuing operations. ●Opportunities - Does the company conduct background checks and credit checks on employees with access to cash? - Are these checks completed on a routine basis thereafter? - Can employees easily convert the company's assets to their own use? - Is cash physically available to employees? ●Rationalization

marketable security

can be either an equity or debt security that is held as a temporary investment - also include short-term cash management securities, such as U.S. Treasury bills and certificates of deposit (CDs) - can include commercial paper, which include short-term unsecured promissory notes issued by companies at rates close to prime lending rates (i.e., the interest rate that commercial banks charge their most credit-worthy customers).

Independent Bank Reconciliations

client should perform two types of reconciliations related to cash: 1. Reconciliation of items received with items recorded (control totals) 2. Periodic reconciliation of the bank accounts - From a financial reporting risk perspective, this is the single most important control over the existence of cash.

Skimming and the Completeness Assertion

fraud involving theft of cash where the employee does not record a transaction, and then steals the cash. restaurant and bar business, shrinkage due to thefts of inventory and thefts of cash are a significant source of losses - The customer orders a drink for $4 and gives the bartender $20 in cash. - The bartender hits the No Sale button on the cash register to open the drawer. The bartender deposits the $20 and gives the customer the correct change of $16 - The cash register now has $4 in it that should not be there according to the accounting records. - The next customer orders a drink for $7 and gives the bartender $20 in cash. This time, the bartender records the sale, thereby opening the register. The bartender deposits the $20 and gives the customer the correct change of $13, but the bartender also takes $4 out and puts it in his or her tip jar

Cash transactions

generally routine, and the accounting for these transactions involves minimal judgment and subjectivity - However, cash is an inherently risky asset because it may be used for unauthorized purposes, posted to the wrong customer's account, or not recorded on a timely basis

Cash and Cash Equivalents

highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of change in value due to interest rate, quoted price, or penalty on withdrawal - debt security - time deposits - certificates of deposit - money market accounts

Prenumbered Documents and Turnaround Documents

important in establishing the completeness of a population Another option is to use turnaround documents that customers return with their cash payment. A clerk can quickly review the turnaround document and compare the amount indicated paid with the actual cash remittance. - contains other information useful for further processing, such as account number, invoice number, date billed, and date received

money laundering

involves creating the appearance that large amounts of cash that an organization obtains from criminal activity such as drug trafficking or terrorist activities originate from a legitimate, noncriminal business source. - Currency transaction reporting is mandatory for all transactions above $10,000, so money launderers strategically report transactions just under $10,000, a tactic known as smurfing , or by dividing the amount into multiple transactions, a tactic known as split payments .

Embezzlement at a Casket and Burial Product Company: A Case of Inadequate Segregation of Duties

large-scale, long-lasting embezzlement by Cynthia Mills, who was a cashier and treasury specialist at Matthews International, a company that makes caskets and other burial products. - first 14 years she converted checks that customers had written to the company into cash, falsifying bank statements to cover the thefts. - then changed the scheme by creating a fake company, Designs by Cindy: She initiated wire transfers from Matthews International, and continued to falsify the bank statements. Pink collar crimes are those that involve women who commit financial crimes. - Mills was able to exploit the fact that she had the power to both execute and record transactions. - in its 2016 audit report, Ernst & Young LLP issued an unqualified opinion on internal controls. The prior year, PricewaterhouseCoopers LLP issued an unqualified opinion on internal controls. - Likely it was because the dollar value of the embezzlement was $13 million (an admittedly large amount), but in relation to the company's assets and sales, each less than one-tenth of one percent, the auditors likely deemed the internal control failures leading to the fraud as immaterial.

Fake cash problem

the organization has recorded fictitious additions to cash to validate fictitious additions to revenues; - the existence assertion is violated for both cash and revenue accounts. Muddy Waters issued a statement alerting investors that it had taken a significant short selling position (i.e., in China Huishan Dairy Holdings (hereafter 'Huishan'), asserting that the company's operations were a complete fraud and that its shares were worthless

Good cash management includes

●Balancing returns and risks on idle cash balances ●Moving excess cash into and out of short-term savings accounts to generate extra returns.

General checking account

●Cash transactions for regular cash receipts and disbursements ●Lockbox or electronic funds transfer (EFT)

Obtaining Evidence about Internal Control Operating Effectiveness for Marketable Securities

●Common tests of controls for marketable securities - Review policies for authorization to purchase, sell, and manage marketable securities - Inquire of the board of directors about the board's oversight of the marketable securities process and examine related documentation - Examine documentation of authorization for selected purchases and sales of marketable securities during the year - Review the minutes of the board meetings for reference to investment policies and associated oversight ●Considering the results of tests of controls

Implications of Ineffective Controls

●Controls related to the existence assertion - Should provide reasonable assurance that the cash balances included on the financial statements exist - Cash is not materially overstated ●Controls related to completeness - Provide reasonable assurance that all valid cash transactions are recorded

Responding to Identified Risks of Material Misstatement

●Determine the appropriate audit procedures to perform - Audit procedures should be proportional to the assessed risks - Areas of higher risk receiving more audit attention and effort ●Responding to identified risks typically involves developing an audit approach that contains - Substantive procedures - Tests of controls (when applicable)

Performing Planning Analytical Procedures for Marketable Securities

●Develop expectations about the level of amounts in ending balances of marketable securities accounts based on purchase or sales activity reported by management during the year ●Develop expectations about the relationship between: - Balances in marketable securities accounts - Rates anticipated to be earned - Interest and dividend revenues ●Review changes in: - Balances - Risk composition - Classification types of marketable securities in relation to stated investment policies and plans

Controls for Cash Management Techniques

●Electronic funds transfers - EFT agreements with suppliers, customers and banks - Reconciliation procedures ●Cash management agreements with financial institutions - Control given to financial institutions - Risk assessment process

Obtaining Evidence about Internal Control Operating Effectiveness for Cash

●For integrated audits - The auditor will test operating effectiveness of important controls throughout the year with heightened focus on controls as of the client's year-end ●If the auditor wants to rely on controls for the financial statement audit - The auditor will test the operating effectiveness of those controls throughout the year.

Performing Planning Analytical Procedures

●Helps identify areas of potential misstatements when planning the audit - Planning analytical procedures can be relatively imprecise - Analytical procedures for cash balances are not very effective because of the absence of a stable relationship with past cash levels and the fact that cash is a managed account. ●Cash is examined in relation to: - Operational data - Budgetary forecasts ●Requires awareness of importance of cash balances to debt covenants

Obtaining Substantive Evidence about Cash Accounts, Disclosures, and Assertions

●In performing substantive procedures, the auditor wants: - Reasonable assurance that the client's cash transactions are in accordance with GAAP - Substantive procedures performed for all relevant assertions related to significant cash accounts, disclosures, and assertions ●The auditor needs to: - Consider types of substantive procedures for cash accounts that should be performed - Make sure that the engagement team performs these procedures

Controls for Petty Cash

●Policies and procedures related to petty cash funds ●Common controls - Limiting access to petty cash - Requiring receipts for petty cash disbursements, - Reconciling the petty cash fund before replenishing it - Conducting periodic surprise audits of petty cash funds

Inherent and fraud risks related to marketable securities

●Risk of sudden market declines ●Manipulation of the classification of securities ●Manipulation of the valuation of fair market value

Control risks related to marketable securities

●Risk of theft of securities ●Lack of policies over purchase or sale of securities ●Lack of monitoring of changes in securities balances ●Lack of policies over valuation or classification of securities ●Lack of segregation of duties ●Investment decisions ●Custody of securities ●Lack of involvement or oversight by internal audit

Typical Controls Over Cash

●Segregation of duties ●Restrictive endorsements of customer checks ●Independent bank reconciliations by employees who do not handle cash ●Computerized control totals and edit checks ●Authorization of transactions ●Prenumbered documents and turnaround documents ●Periodic internal audits ●Competent and well-trained employees

Auditing Marketable Securities

●Significant accounts ●Disclosures ●Relevant assertions 1. Existence/occurrence 2. Completeness 3. Rights and obligations 4. Valuation or allocation 5. Presentation and disclosure

Cash Accounts: Performing Substantive Analytical Procedures

●Substantive analytics for cash accounts - Typically not very effective ●Focus is on substantive tests of details ●The minimal substantive analytics that an auditor might perform includes identifying significant differences between: - Management's cash budget (prepared at beginning of year) - Recorded year-end balance

Selecting Controls to Test and Performing Tests of Controls

●The auditor selects controls that are important to the auditor's conclusion about whether the organization's controls adequately address the assessed risk of material misstatement in the cash accounts. ●The auditor will select both entity-wide and transaction controls for testing. ●Typical tests of transaction controls include: - Inquiry of personnel performing the control - Observation of the control being performed - Inspection of documentation confirming that the control has been performed - Reperformance of the control by the individual testing the control.

Obtaining Substantive Evidence about Marketable Securities

●The planning analytical procedures discussed previously as part of risk assessment procedures would also be appropriate as a substantive analytical procedure, if conducted using the appropriate level of precision. ●However, it is likely that the auditor will focus more audit effort on substantive tests of details.

Petty cash account

●Used to disburse funds to employees who are authorized to make various purchases on behalf of the organization ●Sufficient amount of money to pay for routine expenses ●Small amount of money ●Risk of fraud

Identifying Inherent Risks pf Cash Transactions

●Volume of activity - The volume of transactions flowing through the account during the year makes the account susceptible to error. ●Liquidity - The cash account is susceptible to theft because cash is liquid and easily transferable ●Automated systems - The electronic transfer of cash and the automated controls over cash are such that if errors are built into computer programs, they will be repeated on a large volume of transactions. ●Debt covenants - Debt covenants are often tied to cash balances or to maintaining minimum levels of working capital. Debt covenants specify restrictions on the organization to protect the lender. Typical covenants restrict cash balances, specify the maintenance of minimum working capital, and may restrict the company's ability to pay dividends. ●Misrepresentation and outright theft - Cash related frauds at Koss Corporation, Peregrine Financial Group, and China Huishan Dairy Holdings, cash can be stolen by an individual with power over the account balances if there exists a lack of oversight.