Auditing Cash 1 1 1

Cash Cash represents currency on hand and cash on deposit in bank accounts including certificates of deposit, time deposits, and savings accounts. Virtually all accounting transactions pass through the cash account at some point.

Types of Cash Accounts General cash account Imprest accounts Payroll accounts Petty cash accounts Branch accounts

Audit Objectives for Cash Consider inherent risks of material misstatement, including fraud risks. Consider internal control over cash transactions Substantiate the existence of recorded cash Establish the completeness of recorded cash Determine that the client has rights to recorded cash Determine whether the presentation and disclosure of cash is appropriate. Compensating balances Bond sinking funds Establish the accuracy of cash transactions Verify the proper cutoff of cash transactions

Primary Risks for Errors and Fraud Related to Cash Ending cash balance is overstated Omission of outstanding check from year-end reconciliation Fictitious check in cash on hand at year end Ending cash balance has been improperly reduced Do client’s records reflect all cash transactions Were all cash payments properly authorized and made for legitimate business purpose

General Internal Control Over Cash Design of controls should provide assurance that: All cash that should have been received was in fact received, recorded accurately and deposited promptly. Cash disbursements have been made only for authorized purposes and have been properly recorded. Cash balances are maintained at adequate, but not excessive, levels.

Internal Control over Cash Receipts Cash sales Involvement of two or more employees Cash Registers Electronic point of sales systems Collections of receivables Initial listing 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 Lockbox system 3 2 2 2

Potential Misstatements for Cash Receipts Recording fictitious cash receipts Proper segregation of duties Bank reconciliations Failure to record receipts from cash sales Use of cash registers, POS systems, and encouragement of customers to obtain receipts Failure to record cash from collection of accounts receivables Reconciliation of subsidiary A/R ledger to GL control account Early (late) recognition of cash receipts List and deposit cash receipts on a timely basis Ethical environment created by top management 3 3 3

Internal Control over Cash Disbursements Proper segregation of duties Payment by check or electronic funds transfer Match of purchase order and receiving documents with vendor’s invoice Review of supporting documents by authorized check signer Cancel of supporting documents Authorized check signer should mail checks 4 4

Potential Misstatements for Cash Disbursements Inaccurate recording of a purchase or disbursement Proper segregation of duties Proper matching of voucher documents Adequate chart of accounts and controls over posting procedures Duplicate recording and payment of purchases Proper review and cancellation of supporting documents by check signer Unrecorded disbursements 5 5

Audit Program for Cash Consider internal control over cash Obtain an understanding of internal control. Assess control risk and design additional tests of controls for cash. Perform additional tests of controls for those controls necessary to support the planned level of control risk Test records and reconciliations by reperformance Compare a sample from detailed cash receipts listing to CRJ, A/R postings and bank deposit slips. Compare a sample of recorded disbursements from CDJ to A/P postings, P/Os, receiving reports, and paid checks. Reassess control risk and modify substantive tests for cash.

Substantive Tests for Cash Balances B. Substantive Tests Audit Objectives Obtain analyses of cash balances and reconcile them to the G/L. Clerical Accuracy Send confirmation forms to financial institutions. Obtain bank reconciliations and consider reconciling bank activity. Obtain bank cutoff statement. Count cash on hand (concurrently with investments if possible). Existence and rights Verify the client’s cutoff of cash transactions. Analyze bank transfers around year-end. Completeness Investigate payments to related parties. Evaluate financial statement presentation and disclosure. Presentation and disclosure 6 7 7