Audit Chapter 10

objectives of major substantive procedures for cash transactions and balances

-Obtain analyses of cash balances and reconcile them to the general ledger - Existence and accuracy -Confirm cash balances with financial institutions. Obtain reconciliations of bank balances and consider reconciling bank activity. Obtain bank cutoff statement. Count cash on hand - E&O, accuracy, cutoff, rights -Verify the client's cutoff of cash transactions. Analyze bank transfer occurring year end - cutoff, E&O, rights, completeness -Investigate payments to related parties. Evaluate financial statement presentation and disclosure - P&D

internal control over cash transactions - The functions of the finance department and the accounting department should be integrated in a manner that provides assurance that:

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.

voided checks

a check that is not negotiable (null and void) that usually results from an error in preparing the check. It should be defaced to eliminate any possibility of further use and filed in the regular sequence of paid checks

potential misstatements - cash receipts - failure to record cash from collection of accounts receivable

fraud: a cashier embezzles cash payments by customers on receivables without recording the receipts in the customers' accounts (lapping) - lack of segregation of duties between personnel who have access to cash receipts and those who make entries in A/R records; error: bookkeeper accidentally fails to record a payment on a receivable - inadequate reconciliations of subsidiary records of A/R

potential misstatements - cash disbursements - inaccurate recording of a purchase or disbursement

fraud: bookkeeper prepares a check to himself and records it as having been issued to a major supplier - inadequate segregation of duties of record keeping and preparing cash disbursements; error: a disbursement is made to pay an invoice for goods that have not been received - ineffective controls for matching invoices with receiving documents before disbursements are authorized

internal control over employee reimbursements

Expense reports with receipts and explanations for expenditures - approved by employee's supervisor and submitted to accounting department for processing

potential misstatements - cash disbursements - unrecorded disbursements

fraud: an employee writes and cashes an unrecorded check for the identical amount - ineffective control over record keeping for and access to cash

internal control over cash receipts

-Control over cash sales is strongest when two or more employees (usually a salesclerk and a cashier) participate in each transactions with a customer -Control listing of incoming cash receipts shows the amount received from each customer and identifies the customer by name or account number -Control is exercised over the cashier by periodic reconciliation of the operations control copies of the mailroom control listings with the cash receipts journal and the details of the validated deposit slips received from the bank -Internal control is strengthened by the fact that the financial institution has no access to the company's accounting records

electronic point-of-sale systems

-Dishonesty may be discouraged by proper use of cash register or electronic point-of-sale systems. The protective features of cash registers include visual display of the amount of the sale in full view of the customer, a printed receipt, which the customer is urged to take with the merchandise and accumulation of the total of the day's sales -Besides providing strong control over cash sales, electronic point-of-sale systems often may be programmed to perform numerous other control functions like verify the credit status of charge account customers, update accounts receivable and perpetual inventory records and provide special printouts accumulating sales data by product line, salesperson, department and type of sale.

guidelines for achieving internal control over cash

1.Do not permit any one employee to handle a transaction from beginning to end. 2.Separate cash handling (custody) from record keeping. 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. 6.Deposit cash receipts daily. 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 making cash payments or custody of cash. The completed reconciliation should be reviewed promptly by an appropriate official. 9.Monitor cash receipts and disbursements by using software to identify unusual transactions, and comparing recorded amounts to budgeted amounts.

audit of cash

A.Use the understanding of the client and its environment to consider inherent risks, including fraud risks, related to cash. B.Obtain an understanding of internal control over cash. C.Assess the risks of material misstatement and design further audit procedures. D.Perform further audit procedures—tests of controls. 1.Examples of tests of controls: a.Test the accounting records and reconciliations by reperformance. b.Compare the details of a sample of cash receipts listings to the cash receipts journal, accounts receivable postings, and authenticated deposit slips. c.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. 2.If necessary, revise the risk of material misstatement based on the results of tests of controls. E.Perform further audit procedures—substantive procedures for cash transactions and balances. 1.Obtain analyses of cash balances and reconcile them to the general ledger. 2.Send standard confirmation forms to financial institutions to verify amounts on deposit. 3.Obtain or prepare reconciliations of bank (financial institution) accounts as of the balance sheet date and consider the need to reconcile bank activity for additional months. 4.Obtain a cutoff bank statement containing transactions of at least seven business days subsequent to the balance sheet date. 5.Count and list cash on hand. 6.Verify the client's cutoff of cash receipts and cash disbursements. 7.Analyze bank transfers for the last week of the audit year and the first week of the following year. 8.Investigate any checks representing large or unusual payments to related parties. 9.Evaluate proper financial statement presentation and disclosure of cash.

potential misstatements - cash receipts - failure to record receipts from cash sales

fraud: a cashier fails to ring up and record cash sales and embezzles the cash - inadequate supervision of cashiers; error: a bookkeeper accidentally omits the recording of the receipts from one cash register for the day - inadequate controls for reconciling cash register tapes and accounting records

potential misstatements - cash disbursements - duplicate recording and payment of purchased

fraud: a purchase is recorded when an invoice is received from a vendor and recorded again when a duplicate invoice is sent by the vendor - ineffective controls over the input of invoices that allow invoices from the same vendor with the same invoice number to be processed more than once

potential misstatements - cash receipts - early (late) recognition of cash receipts - "cutoff problems"

fraud: holding the cash receipts journal open to record next year's cash receipts as having occurred in this year - ineffective BOD, audit committee or internal audit function; error: recording cash receipts based on bad information about date of receipt - ineffective BOD, audit committee or internal audit function

potential misstatements - cash receipts - recording fictitious cash receipts

fraud: overstating cash receipts on the books by transferring cash between bank accounts without appropriate recording of the transfer to cover up an embezzlement of cash - lack of segregation of duties of the functions of access to cash and record keeping

auditor's objectives in the audit of cash

•Use the understanding of the client and its environment to consider inherent risks, including fraud risks, related to cash. •Obtain an understanding of internal control over cash. •Assess the risks of material misstatement of cash and design tests of controls and substantive procedures that: a.Substantiate the existence of recorded cash and the occurrence of cash transactions. b.Determine the accuracy of cash transactions. c.Establish the completeness of recorded cash. d.Verify the cutoff of cash transactions. e.Determine that the client has rights to recorded cash. f.Determine that the presentation and disclosure of cash, including restricted funds (such as compensating balances and bond sinking funds), are appropriate.