1. 20 - 1 Copyright  2003 Pearson Education Canada Inc. CHAPTER 20 Audit of Cash Balances

2. 20 - 2 Copyright  2003 Pearson Education Canada Inc. What are the auditor’s primary concerns with regard to cash?

3. 20 - 3 Copyright  2003 Pearson Education Canada Inc. What are the auditor’s primary concerns with regard to cash? - existence

4. 20 - 4 Copyright  2003 Pearson Education Canada Inc. What are the auditor’s primary concerns with regard to cash? - existence - completeness

5. 20 - 5 Copyright  2003 Pearson Education Canada Inc. What are the auditor’s primary concerns with regard to cash? - existence - completeness - physical control

6. 20 - 6 Copyright  2003 Pearson Education Canada Inc. What are the auditor’s primary concerns with regard to cash? - existence - completeness - physical control - presentation and disclosure

7. 20 - 7 Copyright  2003 Pearson Education Canada Inc. Cash Audit Procedures perform analytical procedures to test the reasonableness of cash balances

8. 20 - 8 Copyright  2003 Pearson Education Canada Inc. Cash Audit Procedures Enquire of management regarding any cash requirements or restrictions from debt agreements.

9. 20 - 9 Copyright  2003 Pearson Education Canada Inc. What is kiting?

10. 20 - 10 Copyright  2003 Pearson Education Canada Inc. What is kiting? Kiting is an irregularity whereby an overstatement of cash is cre- ated by a cash transfer between bank accounts.

11. 20 - 11 Copyright  2003 Pearson Education Canada Inc. What is kiting? Kiting is an irregularity whereby an overstatement of cash is cre- ated by a cash transfer between bank accounts. The deposit is recorded in cash receipts but the disbursement is not re- corded in cash disbursements.

12. 20 - 12 Copyright  2003 Pearson Education Canada Inc. Kiting example On 12/31, Ace’s bookkeeper writes a $5,000 cheque on the National Bank and deposits the cheque in the Canadian Bank account. NationalCanadian 12/31 Ace Co. 5000 National

13. 20 - 13 Copyright  2003 Pearson Education Canada Inc. cash receipts journal description _ $$ _ Dec. 31, 2004 Misc. revenue 5000 cash payments journal description _ $$ _ Dec.31, 2004 - no activity - Kiting example On 12/31, Ace’s bookkeeper writes a $5,000 cheque on the National Bank and deposits the cheque in the Canadian Bank account. The bookkeeper records the deposit in the cash receipts journal but does not record the cheque in the cash payments journal. He also fails to list the cheque as outstanding on the National Bank reconciliation.

14. 20 - 14 Copyright  2003 Pearson Education Canada Inc. Kiting example On 12/31, Ace’s bookkeeper writes a $5,000 cheque on the National Bank and deposits the cheque in the Canadian Bank account. National Canadian National will not be aware of the cheque until notification from Canadian, probably during the first few days of January.

15. 20 - 15 Copyright  2003 Pearson Education Canada Inc. Kiting example On 12/31, Ace’s bookkeeper writes a $5,000 cheque on the National Bank and deposits the cheque in the Canadian Bank account. National Canadian National will not be aware of the cheque until notification from Canadian, probably during the first few days of January. As a result of the deposit, Canadian will increase Ace’s account on 12/31.

16. 20 - 16 Copyright  2003 Pearson Education Canada Inc. Canadian On 12/31, Ace’s bookkeeper writes a $5,000 cheque on the National Bank and deposits the cheque in the Canadian Bank account. National National will not be aware of the cheque until notification from Canadian, probably during the first few days of January. As a result of the deposit, Canadian will increase Ace’s account on 12/31. As a consequence, the bank records will reflect a $5,000 cash overstatement for a few days until the cheque clears. December bank statements will also support this overstatement.

17. 20 - 17 Copyright  2003 Pearson Education Canada Inc. From an internal control perspective, why does kiting occur?

18. 20 - 18 Copyright  2003 Pearson Education Canada Inc. inadequate segregation of duties between accounting and cash custody From an internal control perspective, why does kiting occur?

19. 20 - 19 Copyright  2003 Pearson Education Canada Inc. What effect is changing technology having on the likelihood of kiting?

20. 20 - 20 Copyright  2003 Pearson Education Canada Inc. What effect is changing technology having on the likelihood of kiting? Kiting is becoming less likely because the “float” is shrinking; i.e., cheques clear banks faster than in the past.

21. 20 - 21 Copyright  2003 Pearson Education Canada Inc. What audit procedures may detect kiting?

22. 20 - 22 Copyright  2003 Pearson Education Canada Inc. What audit procedures may detect kiting? tests related to the cutoff bank statement and schedule of bank transfers

23. 20 - 23 Copyright  2003 Pearson Education Canada Inc. Cash Audit Procedures Obtain a bank cutoff statement directly from the bank. ?

24. 20 - 24 Copyright  2003 Pearson Education Canada Inc. Cash Audit Procedures Obtain a bank cutoff statement directly from the bank. A bank cutoff statement is prepared ten business days after the balance sheet date.

25. 20 - 25 Copyright  2003 Pearson Education Canada Inc. Cash Audit Procedures Obtain a bank cutoff statement directly from the bank. A bank cutoff statement is prepared ten business days after the balance sheet date. Most items that were outstand- ing at year-end have cleared when the cutoff statement is prepared (cheques, deposits).

26. 20 - 26 Copyright  2003 Pearson Education Canada Inc. Cash Audit Procedures Obtain a bank cutoff statement directly from the bank. Trace all cheques, deposits, and other cash changes from the cutoff statement to cash receipts and disbursements records, paying particular attention to dates and amounts.

27. 20 - 27 Copyright  2003 Pearson Education Canada Inc. Cash Audit Procedures Prepare a schedule of bank transfers showing all transfers between the client’s bank accounts during the last week of the audit period and the first week of the subsequent period.

28. 20 - 28 Copyright  2003 Pearson Education Canada Inc. Cash Audit Procedures Prepare a schedule of bank transfers showing all transfers between the client’s bank accounts during the last week of the audit period and the first week of the subsequent period. The schedule should be prepared using cash receipts and payments journals, year-end reconciliation, year-end bank state- ment, and cutoff bank statement.

29. 20 - 29 Copyright  2003 Pearson Education Canada Inc. Cash Audit Procedures Obtain or prepare a year-end bank reconciliation or proof of cash for each client bank account.

30. 20 - 30 Copyright  2003 Pearson Education Canada Inc. Cash Audit Procedures Obtain or prepare a year-end bank reconciliation or proof of cash for each client bank account. What is a proof of cash?

31. 20 - 31 Copyright  2003 Pearson Education Canada Inc. Cash Audit Procedures Obtain or prepare a year-end bank reconciliation or proof of cash for each client bank account. A proof of cash is a working paper prepared by the auditor to reconcile the bank’s record of the client’s beginning balance, cash deposits, cleared cheques, and ending balance for the period with the client’s records.

32. 20 - 32 Copyright  2003 Pearson Education Canada Inc. Cash Audit Procedures Obtain or prepare a year-end bank reconciliation or proof of cash for each client bank account. Trace amounts to the schedule of bank transfers, cash receipts and payments journals, year-end reconcilia- tion, year-end bank statement, and cutoff bank statement.

33. 20 - 33 Copyright  2003 Pearson Education Canada Inc. What will a bank reconciliation help the auditor determine?

34. 20 - 34 Copyright  2003 Pearson Education Canada Inc. What will a bank reconciliation help the auditor determine? - whether all client cash receipts have been deposited cash receipts journal description _ $$ _ Dec. 31, 2004 Misc. revenue 5000 Canadian

35. 20 - 35 Copyright  2003 Pearson Education Canada Inc. What will a bank reconciliation help the auditor determine? - whether all bank deposits have been recorded in client cash receipts records cash receipts journal description _ $$ _ Dec. 31, 2004 Misc. revenue 5000 Canadian

36. 20 - 36 Copyright  2003 Pearson Education Canada Inc. What will a bank reconciliation help the auditor determine? - whether all client cash pay- ments have been paid by the bank cash payments journal description _ $$ _ Dec. 31, 2004 Misc. expense 5000 Canadian

37. 20 - 37 Copyright  2003 Pearson Education Canada Inc. What will a bank reconciliation help the auditor determine? cash payments journal description _ $$ _ Dec. 31, 2004 Misc. expense 5000 Canadian - whether all bank payments have been recorded in client cash payments records

38. 20 - 38 Copyright  2003 Pearson Education Canada Inc. What will not be detected by a bank reconciliation?

39. 20 - 39 Copyright  2003 Pearson Education Canada Inc. What will not be detected by a bank reconciliation? - unrecorded cheques that have not cleared the bank (possible kiting)

40. 20 - 40 Copyright  2003 Pearson Education Canada Inc. What will not be detected by a bank reconciliation? - unrecorded cheques that have not cleared the bank (possible kiting) - unrecorded deposits that have not cleared the bank

41. 20 - 41 Copyright  2003 Pearson Education Canada Inc. What will not be detected by a bank reconciliation? - unrecorded cheques that have not cleared the bank (possible kiting) - unrecorded deposits that have not cleared the bank - cheques written for incorrect amounts

42. 20 - 42 Copyright  2003 Pearson Education Canada Inc. Cash Audit Procedures Confirm all cash balances held by third parties, such as banks and other financial institutions. BANK

43. 20 - 43 Copyright  2003 Pearson Education Canada Inc. Cash Audit Procedures Confirm all cash balances held by third parties, such as banks and other financial institutions. possibly through use of the standard bank confirmation

44. 20 - 44 Copyright  2003 Pearson Education Canada Inc. Cash Audit Procedures Count all cash on hand at the client’s premises. If cash is located in multiple places, count cash simultaneously to avoid double counting.

45. 20 - 45 Copyright  2003 Pearson Education Canada Inc. Cash Audit Procedures Review cutoff of cash receipts and disbursements.

46. 20 - 46 Copyright  2003 Pearson Education Canada Inc. Cash Audit Procedures Account for the numeric sequence of cancelled cheques. Investigate missing cheques. Ace Company 6462 Ace Company 6461 Ace Company 6459 Ace Company 6458 Ace Company 6457 ? NATIONAL BANK

47. 20 - 47 Copyright  2003 Pearson Education Canada Inc. Cash Audit Procedures Review monthly client-prepared bank reconciliations.

48. 20 - 48 Copyright  2003 Pearson Education Canada Inc. Cash Audit Procedures Investigate any cheques made out to cash or bearer. Ace Company 6458 CASH NATIONAL BANK

49. 20 - 49 Copyright  2003 Pearson Education Canada Inc. Cash Audit Procedures Investigate any cheques that were returned by the bank because the client account had insufficient funds. Ace Company 6458 NSF NATIONAL BANK

50. 20 - 50 Copyright  2003 Pearson Education Canada Inc. Cash Audit Procedures Review and recalculate translations of foreign currencies.

51. 20 - 51 Copyright  2003 Pearson Education Canada Inc. Trace a sample of entries from cash receipts journal to a/r subsidiary ledger Cash Audit Procedures cash receipts journal description _ $$ _ May 23, 2004 ABC Vending 23,000 ___a/r subsidiary customer _ $$ _ ABC Vending 78,660 5/ 23/04 payment 23,000 balance 55,660

52. 20 - 52 Copyright  2003 Pearson Education Canada Inc. Trace a sample of entries from cash receipts journal to a/r subsidiary ledger to bank statements cash receipts journal description _ $$ _ May 23, 2004 ABC Vending 23,000 Bank Statement 5/31/04 Deposits: 5/23 $23,000 Cash Audit Procedures ___a/r subsidiary customer _ $$ _ ABC Vending 78,660 5 /23/04 payment 23,000 balance 55,660

53. 20 - 53 Copyright  2003 Pearson Education Canada Inc. Trace a sample of entries from cash receipts journal to a/r subsidiary ledger to bank statements to deposit slips. cash receipts journal description _ $$ _ May 23, 2004 ABC Vending 23,000 Bank Statement 5/31/04 Deposits: 5/23 $23,000 Cash Audit Procedures Deposit Slip 5/23/04 23,000 ___a/r subsidiary customer _ $$ _ ABC Vending 78,660 5 /23/04 payment 23,000 balance 55,660

54. 20 - 54 Copyright  2003 Pearson Education Canada Inc. Trace a sample of entries from cash payments journal to a/p subsidiary ledger Cash Audit Procedures cash payments journal description _ $$ _ January 23, 2004 a/p payment to MGB Corp. 4,300 a/p subsidiary vendor _ $$ _ MGB Corp 8,780 1 /23/04 payment 4,300 balance 4,480

55. 20 - 55 Copyright  2003 Pearson Education Canada Inc. Trace a sample of entries from cash payments journal to a/p subsidiary ledger to bank statement cash payments journal description _ $$ _ January 23, 2004 a/p payment to MGB Corp. 4300 Bank Statement 1/31/04 Deposits: Payments: 1/26 $4300 Cash Audit Procedures a/p subsidiary vendor _ $$ _ MGB Corp 8,780 1/23/04 payment 4,300 balance 4,480

56. 20 - 56 Copyright  2003 Pearson Education Canada Inc. Trace a sample of entries from cash payments journal to a/p subsidiary ledger to bank statement to cancelled cheques. cash payments journal description _ $$ _ January 23, 2004 a/p payment to MGB Corp. 4300 Bank Statement 1/31/04 Deposits: Payments: 1/26 $4300 Cash Audit Procedures Ace Company 4512 MGB Corp. 1/23/04 4300 a/p subsidiary vendor _ $$ _ MGB Corp 8,780 1/23/04 paymen t 4,300 balance 4,480 NATIONAL BANK