©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Audit of Cash Balances Chapter 23

Learning Objective 1 Show the relationship of cash in the bank to the various transaction cycles.

Relationships of Cash in the Bank and Transaction Cycles Cash in Bank Capital Stock – Common Paid-in Capital in Excess of Par – Common Issue of stock Issue of stock Dividends Payable Payment of dividends Capital Acquisition and Repayment Cycle

Relationships of Cash in the Bank and Transaction Cycles Cash in Bank Accounts Payable – paying off inventory/PPE Payment Acquisition and Payment Cycle

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

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

Cash in the Bank and Transaction Cycles Failure to bill a customer (Sales ToT, I/C-completeness) Billing a customer at a lower price than called for by company policy (Sales ToT, I/C – accuracy) A defalcation of cash by interception of cash receipts from customers before they are recorded (cash completeness), with the account charged off as a bad debt (Sales and collection I/Cs – segregation of duties, authorization of A/R write-offs, statements) Misstatements (understatements) which may NOT be discovered as part of the audit of the bank reconciliation

Cash in the Bank and Transaction Cycles Misstatements (overstatements) which ARE normally discovered as a part of the tests of a bank reconciliation. Failure to include a check (in o/s listing) that has not cleared the bank, even though it has been recorded in the 12/31 cash disbursements journal (trace checks (reductions) in cut-off statement to o/s check listing). Cash received by the client subsequent to the balance sheet date but recorded as cash receipts (dep in transit) in the current year (trace dep. in transit to post-12/31 cash remittance documentation).

Cash in the Bank and Transaction Cycles Deposits recorded as cash receipts near the end of the year, deposited in the bank in the same month (in December), and included in the bank reconciliation as a deposit in transit OR pocketed cash in DIT. (trace dep. in transit to cutoff (January) bank statement). Note: The main concern for cash is existence/cutoff for deposits in transit and completeness/cutoff for o/s checks: over-stating cash balance (example: Parmalat). Other objectives generally covered in ToT for Sales and Collection cycle (see slide 7 and p. 463 for examples).

Learning Objective 2 Identify the major types of cash accounts maintained by business entities.

 General cash accounts  Imprest payroll account  Branch bank accounts  Imprest petty cash fund  Cash equivalents Types of Cash Accounts

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

Learning Objective 3 Design and perform audit tests of the general cash account.

Methodology for Designing Tests of Balances – Cash In the Bank Identify client business risks affecting cash in bank. Cash strapped? Set tolerable misstatement and assess inherent risk (usually low) for cash in bank. Assess control risk (varies) for cash in bank.

Methodology for Designing Tests of Balances – Cash In the Bank Design and perform tests of controls and substantive tests of transactions: several cycles p. 461 Design and perform analytical procedures for cash in bank Not often done – more test of details

Methodology for Designing Tests of Balances – Cash In the Bank Design tests of details of cash in bank balance to satisfy balance-related audit objectives. Audit procedures Sample size Items to select Timing

Acct. 101 – General account Balance per bank, 12/31(confirm????)$63,275 Add deposit in transit 12/31 11,250 $74,525 Less outstanding check (8,000) Balance per bank, adjusted$66,525 Audit Schedule for a Bank Reconciliation ScheduleA-2 Date Prepared byCO1/10/08 Reviewed byPZ1/18/08

Audit Tests Confirm Balance per Bank. Deposits in Transit – sample from listing – trace sample from listing to cutoff of Jan. bank statement plus trace to cash remittance doc (pre-12/31?). Existence/Cutoff test. O/S Checks – sample (search) from reductions on cutoff or Jan. bank statement, obtain check – if pre-12/31 – trace to O/S check listing. If post 12-31, is it properly excluded? Completeness/Cutoff test.

Balance per books, 12/31 $66,647 Add:Note receivable collected by the bank 1,325 Interest income 265 $68,237 Less: Payment of electric bill 1,500 NSF check 200 Service charge 12 Balance per books, adjusted $ 66,525 Audit Schedule for a Bank Reconciliation

Audit Tests Trace all reconciling items to December bank statement. Review December statement for items missed. Trace all adjustments for Balance for Books to general ledger. Make sure final balance per accounting = $ 66,525

Receipt of a bank confirmation Receipt of a cutoff bank statement or January bank statement Tests of the bank reconciliation Existence, Accuracy, and Completeness

Learning Objective 4 Recognize when to extend audit tests of the general cash account to test further for material fraud.

The accuracy of the information on the interbank transfer schedule should be verified. See Note: anything missing/completeness??? The interbank transfers must be recorded in both the receiving and disbursing banks (5 and 8). Trace to Dec and Jan bank statements The date of the recording of the disbursements and receipts (dr. and cr. to cash) for each transfer must be inthe same fiscal year (4 and 7). Tests of Interbank Transfers – Fig 23-7 p. 748

Disbursements on the interbank transfer schedule should be correctly included in or excluded from year-end bank reconciliation as outstanding checks (4 and 5). Tests of Interbank Transfers – Fig 23-7 p. 748 Receipts on the interbank transfer schedule should be correctly included in or excluded from year-end bank reconciliations as deposits in transit (7 and 8). Key: Detect double counting of cash – see Fig 23-7 p What if check # 8029 was not on o/s checks list?

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley End of Chapter 23