Types of Cash Accounts Imprest Payroll Account Branch Bank Account General Cash Account Imprest Payroll Account Branch Bank Account Imprest Petty Cash Fund Cash Equivalents

Relationship of General Cash to Other Cash Accounts Branch Bank Account Cash Equivalents Imprest Payroll Imprest Petty Cash Fund General

Relationships of Cash in the Sales and Collection Cycle Cash in Bank Accounts Receivable Gross Sales Cash sales receipts Cash Discounts Taken

Relationships of Cash in the Acquisition and Payment Cycle Cash in Bank Accounts Payable Payment

Relationships of Cash in Payroll and Personnel Cycle Cash in Bank Accrued Wages, Salaries, Bonuses, and Commissions Withheld Income Taxes and Other Deductions Payment Accrued Payroll Tax Expense

Relationships of Cash in Capital Acquisition And Repayment Cycle Cash in Bank Capital Stock – Common Paid-in Capital in Excess of Par – Common Redemption of stock Issue of stock Dividends Payable Payment of dividends

Sources of Audit Evidence for Audit of Cash Cash Receipts Journal Cash Disbursements Journal Bank Reconciliations Cancelled Checks Bank Statements Cutoff Statement from Bank

Objectives for the Audit of Cash Consider inherent risks related to cash, including fraud risks Consider internal control over cash transactions Substantiate existence of recorded cash Establish completeness of recorded cash Determine client has rights to recorded cash Establish clerical accuracy of cash schedules Determine presentation and disclosure of cash, including restricted funds, are appropriate 5 6 6

Internal Control Cash Account Separation of incompatible duties Receipts deposited daily and intact Restrictive endorsements on checks received Independent reconciliation of cash records including bank statement Computerized Control Totals and edit tests Authorization of transactions Use of prenumbered documents Periodic internal audits Competent, well-trained employees Respected access to assets and accounting records

Guidelines for Internal Control Deposit cash receipts daily. Make all disbursements by check or electronic funds transfer, with the exception of small expenditures from petty cash. Have monthly bank reconciliations prepared by employees not responsible for the issuance of checks or custody of cash. The completed reconciliation should be reviewed promptly by an appropriate official. Monitor cash receipts and disbursements by comparing recorded amounts to forecasted amounts

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 Direct receipt of funds by financial institution 3 2 2 2

Processing Cash Receipts 6-13

Internal Control--Cash Disbursements Segregation of duties Payment by check or electronic funds transfer Pre-numbered check 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 Monthly bank reconciliation 4 4

Substantive Tests for Cash Balances Obtain analyses of cash balances and reconcile to general ledger Send standard confirmation forms to financial institutions Obtain reconciliations of bank balances and consider reconciling bank activity Obtain bank cutoff statement Count cash on hand Verify the client’s cutoff of cash transactions Analyze bank transfers occurring around year-end Investigate payments to related parties Evaluate financial statement presentation and disclosure 6 7 7

Standard Confirmation

Bank Cutoff Statement Normal bank statement for the first few weeks after year-end Sent directly to the auditor Includes canceled deposit slips and checks Allows auditor to verify existence and amount of deposits in transit and outstanding checks on the bank reconciliation

How to Read a Cancelled Check

Check 21 Act Checks may be processed electronically Electronic processing creates a substitute check – an electronic image of check Legal equivalent of original check for all purposes Audit implications Need to rely on substitute check for evidence of check Impossible for clients to kite checks (manipulate bank balances to conceal cash shortage)

Bank Reconciliation Adjusted Balance Balance per bank CONFIRM (Standard Bank Confirmation) directly with bank Agree to CUTOFF BANK STATEMENT Add Deposits-in-transit TRACE to cash receipts journal VOUCH to CUTOFF BANK STATEMENT Subtract Outstanding Checks VOUCH to cash disbursements journal TRACE checks cleared from cutoff bank statement Add/Subtract Debit/Credit Memos Inspect bank credit/debit memo Adjusted Balance Balance per Books FOOT Reconciliation TRACE to trial balance

Proof of Cash

Kiting Manipulations that utilize temporarily overstated bank balances to conceal cash shortage or meet short-term cash needs Auditors can detect kiting by preparing a schedule of bank transfers for a few days before and after balance sheet date Misstatements Date of recording per transfer per the books are from different financial statement periods Date the check was recorded by the bank is from financial statement period prior to books

Tests of Interbank Transfers Accuracy of the information on the interbank transfer schedule should be verified. Interbank transfers must be recorded in both the receiving and disbursing banks. Date of the recording of the disbursements and receipts for each transfer must be in the same fiscal year.

Tests of Interbank Transfers Disbursements on the interbank transfer schedule should be correctly included in or excluded from year-end bank reconciliation as outstanding checks. Receipts on the interbank transfer schedule should be correctly included in or excluded from year-end bank reconciliations as deposits in transit.

Check Kiting … a fraud that occurs by reporting cash simultaneously in two different bank accounts

Illustration of Lapping

Petty Cash Petty cash is a unique account since it is often immaterial in amount, yet verified on many audits. Account is verified primarily because of the potential for defalcation and the client’s expectation of an audit Review even when the amount is immaterial.

Audit of Imprest Bank Accounts y c h e k f o r D p t . T s u J n Typically, the only reconciling items are outstanding checks.