Chapter 6 Audit of Cash Accounting 4081Chapter 6

Accounting 408Chapter 62 1.Substantive Tests – General Concepts Audits are performed by dividing the f/s into smaller segments or components Transaction cycles Groups of repetitive transactions Examples Revenue Cycle relating to sales, shipping, receivables, and collections Acquisition Cycle referring to purchases, payables, and payments Production Cycle relating to manufacturing products and storage Also, payroll, investing, financing

Assertions, Objectives, Evidence and Procedures Accounting 408Chapter 63

Accounting 408Chapter 64 1.Substantive Tests – General Concepts Combining CR assessments accounts affected by a single transaction cycle accounts affected by more than one transaction cycle

Accounting 408Chapter 65

Accounting 408Chapter 66 1.Substantive Tests – General Concepts (con’t) Approaches for substantive tests tests of details of balances tests of details of transactions overstatement errors understatement errors Designing substantive tests nature timing extent

Accounting 408Chapter 67

Accounting 408Chapter 68 1.Substantive Tests – General Concepts (con’t) Types of substantive tests tests of details of transactions of balances effectiveness depends on type of test used and sample size substantive analytical procedures usually less effective than tests of details usually lower in cost can enhance effectiveness by more reliable procedure (e.g., comparing ratios to industry average instead of just comparing account balance to prior year account balance, regression analysis) more reliable expectations, (more predictable relationships) (e.g., obtained from independent sources, independence level of internal sources) effectiveness of internal control (i.e., source data is more reliable) less effective procedure if data used is subject to management discretion (e.g., maintenance expense, advertising expense)

Accounting 408Chapter Cash - Internal Control Internal control over cash receipts general rules for handling cash separate functions: receiving cash, depositing cash, recording the transactions, reconciling controls over cash sales, payments received through the mail documents and records: remittance advice, cash receipts list, daily cash summary, deposit slip

Accounting 408Chapter Cash - Internal Control Internal control over cash disbursements steps: pay from approved voucher, control check signing, mail payment, cancel voucher, record cash payment documents and records: paid voucher file, cash disbursements journal

2. Cash - Internal Control Cash key control activities Information processing voucher packet (Purchase requisition, purchase order, receiving report, invoice) matched prior to cash disbursement authorization deposits reconciled to amounts credited to accounts receivable ledger bank reconciliation Physical controls over the security of assets deposit cash and checks daily and intact lock box account dual custody over cash unused checks secured check imprinting machine Segregation of duties separate authorization, custody, recording, reconciliation Reconciliations Accounting 40811Chapter 6

Accounting 408Chapter Cash - Substantive Tests Cash Bank confirmation Cutoff bank statement Bank reconciliation Four-column proof of cash Interbank transfer schedule Cash cutoff tests Count cash on hand

Exhibit 6.8 Bank Confirmation Accounting 40813Chapter 6

Proof of Cash Accounting 40814Chapter 6

Accounting 408Chapter Cash - Substantive Tests Cash Existence and Occurrence confirmation, cutoff tests, cash count, reconciliation Rights and Obligations confirmation, cash count, reconciliation Completeness analytical procedures, confirmation, cutoff tests, cash count

Accounting 408Chapter Cash - Substantive Tests Cash Valuation little problem, confirmation, cash count Presentation and Disclosure compare statement presentation to GAAP compensating balances, overdrafts, lines of credit, loan guarantees

Chapter 617 Review Questions for Discussion Chapter Accounting