2. 23 - 1 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Audit of Cash Balances Chapter 23

3. 23 - 2 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 1 Show the relationship of cash in the bank to the various transaction cycles.

4. 23 - 3 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Relationships of Cash in the Bank and Transaction Cycles Cash in Bank Capital Stock – Common Paid-in Capital in Excess of Par – Common Redemption of stock Redemption Issue of stock stock Dividends Payable Payment of dividends Capital Acquisition And Repayment Cycle

5. 23 - 4 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Relationships of Cash in the Bank and Transaction Cycles Acquisition and Payment Cycle Cash in Bank Accounts Payable Payment

6. 23 - 5 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Relationships of Cash in the Bank and Transaction Cycles Sales and Collection Cycle Cash in Bank Accounts Receivable Gross Sales Cashsales Cashreceipts Cash Discounts Taken

7. 23 - 6 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Relationships of Cash in the Bank and Transaction Cycles Payroll and Personnel Cycle Cash in Bank Accrued Wages, Salaries, Bonuses, and Commissions Withheld Income Taxes and Other Deductions Payment Payment Accrued Payroll Tax Expense Payment

8. 23 - 7 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Cash in the Bank and Transaction Cycles Failure to bill a customer Failure to bill a customer Billing a customer at a lower price than Billing a customer at a lower price than called for by company policy called for by company policy A defalcation of cash by interception of A defalcation of cash by interception of cash receipts from customers before cash receipts from customers before they are recorded, with the account they are recorded, with the account charged off as a bad debt charged off as a bad debt Misstatements which may not be discovered as a part of the audit of the bank reconciliation:

9. 23 - 8 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Cash in the Bank and Transaction Cycles Duplicate payment of a vendor’s invoice Duplicate payment of a vendor’s invoice Improper payments of officers’ personal Improper payments of officers’ personal expenditures expenditures Payment for raw materials that were not Payment for raw materials that were not received received Payment to an employee for more hours Payment to an employee for more hours worked worked Payment of interest to a related party for Payment of interest to a related party for an amount in excess of the going rate an amount in excess of the going rate

10. 23 - 9 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Cash in the Bank and Transaction Cycles Misstatements which are normally discovered as a part of the tests of a bank reconciliation. Failure to include a check that has not Failure to include a check that has not cleared the bank, even though it has been cleared the bank, even though it has been recorded in the cash disbursements journal recorded in the cash disbursements journal Cash received by the client subsequent to Cash received by the client subsequent to the balance sheet date but recorded as the balance sheet date but recorded as cash receiptsin the current year cash receiptsin the current year

11. 23 - 10 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Cash in the Bank and Transaction Cycles Deposits recorded as cash receipts near Deposits recorded as cash receipts near the end ofthe year, deposited in the bank the end ofthe year, deposited in the bank in the same month, and included in the bank in the same month, and included in the bank reconciliation as adeposit in transit reconciliation as adeposit in transit Payments on notes payable debited directly Payments on notes payable debited directly to thebank balance by the bank but not to thebank balance by the bank but not entered in the client’s records entered in the client’s records

12. 23 - 11 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Cash in the Bank and Transaction Cycles Deposits received by the bank on behalf Deposits received by the bank on behalf of thecompany from credit card agencies of thecompany from credit card agencies and other vendors making payments and other vendors making payments electronically, but not recorded in electronically, but not recorded in the client’s records. the client’s records.

13. 23 - 12 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 2 Identify the major types of cash accounts maintained by business entities.

14. 23 - 13 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder  General cash account  Imprest payroll account  Branch bank account  Imprest petty cash fund  Cash equivalents Types of Cash Accounts

15. 23 - 14 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Relationship of General Cash to Other Cash Accounts Branch Bank AccountCashEquivalents Imprest Payroll Account Imprest Petty Cash Fund GeneralCash

16. 23 - 15 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 3 Design and perform audit tests of the general cash account.

17. 23 - 16 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Identify client business risks affecting cash in bank. Methodology for Designing Tests of Details of Balances for A/R Phase I Set tolerable misstatement and assess inherent risk for cash in bank. Assess control risk for cash in bank.

18. 23 - 17 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Methodology for Designing Tests of Details of Balances for A/R Design and perform tests of controls and substantive tests of transactions for several cycles. Phase II

19. 23 - 18 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Methodology for Designing Tests of Details of Balances for A/R Design and perform analytical procedures for cash in bank balance. Phase III Timing Items to selectSamplesizeAuditprocedures Design tests of details of cash in bank balance to satisfy balance-related audit objectives.

20. 23 - 19 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Audit Schedule for a Bank Reconciliation Clawson Industries Bank Reconciliation 12/31/05 Schedule A2 Date Prepared by Client DED 1/10/05 Approved by SW1/18/05 Account 101 – General account, First National Bank Balance per bank$109,713 Add:Deposits in transit 21,117 Deduct: Outstanding checks– 87,462 Other reconciling items: Bank error – 15,200 Balance per bank, adjusted$ 28,168 Balance per books before adjustments$ 32,584 Adjustments:Unrecorded bank service charge 216 NSF4,200 – 4,416 Balance per books, adjusted$ 28,168

21. 23 - 20 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Balance-Related Objectives: General Cash in the Bank Detail tie-in CutoffPresentation and disclosure ExistenceCompletenessAccuracy

22. 23 - 21 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Receipt of a bank confirmation Receipt of a cutoff bank statement Tests of the bank reconciliation Existence, Accuracy, and Completeness

23. 23 - 22 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Types of Audit Tests Used for General Cash in Bank Cash in Bank Ending balance TOC-T + TOC-B + STOT + AP + TDB = Sufficient competent evidence per GAAS Audited by TOC-T, STOT, and AP Beginning balance Cash receipts Cash disbursements Audited by TOC-T, STOT, and AP Audited by TOC-B, AP, and TDB

24. 23 - 23 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 4 Recognize when to extend audit tests of the general cash account to test further for material fraud.

25. 23 - 24 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Extended Tests of the Bank Reconciliation When the auditor believes that the year-end bank reconciliation may be intentionally misstated, it is appropriate to perform extended tests of the year-end bank reconciliation. In addition to these tests, the auditor must also carry out procedures subsequent to the end of the year with the use of the bank cutoff statement.

26. 23 - 25 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder All recorded cash receipts were deposited. All recorded cash receipts were deposited. All deposits in the bank were recorded in All deposits in the bank were recorded in the accounting records. All recorded cash disbursements were All recorded cash disbursements were paid by the bank. All amounts that were paid by the bank All amounts that were paid by the bank were recorded. Proof of Cash

27. 23 - 26 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder – the balance on the bank statement with the general ledger balance at the the general ledger balance at the beginning of the proof-of-cash period beginning of the proof-of-cash period – cash receipts deposited per the bank with the cash receipts journal for a given period the cash receipts journal for a given period Proof of Cash

28. 23 - 27 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder – cancelled checks clearing the bank with the cash disbursement journal for a the cash disbursement journal for a given period given period – the balance on the bank statement with the general ledger balance at the end the general ledger balance at the end of the proof-of-cash period of the proof-of-cash period Proof of Cash

29. 23 - 28 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder The accuracy of the information on the interbank transfer schedule should be verified. The interbank transfers must be recorded in both the receiving and disbursing banks. The date of the recording of the disbursements and receipts for each transfer must be in the same fiscal year. Tests of Interbank Transfers

30. 23 - 29 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Disbursements on the interbank transfer schedule should be correctly included in or excluded from year-end bank reconciliation as outstanding checks. Tests of Interbank Transfers Receipts on the interbank transfer schedule should be correctly included in or excluded from year-end bank reconciliations as deposits in transit.

31. 23 - 30 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 5 Design and perform audit tests of the imprest payroll bank account.

32. 23 - 31 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Typically, the only reconciling items are outstanding checks. Audit of the Imprest Payroll Bank Account

33. 23 - 32 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 6 Design and perform audit tests of imprest petty cash.

34. 23 - 33 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Petty cash is a unique account because it is often immaterial in amount, yet it is verified on many audits. The 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. Petty Cash

35. 23 - 34 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Audit tests for petty cash Internal controls over petty cash Audit of Imprest Petty Cash

36. 23 - 35 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder End of Chapter 23