1. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-1 Chapter Sixteen Auditing Financing Process: Cash and Investments Chapter Sixteen Auditing Financing Process: Cash and Investments

2. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-2 Cash and the Effect of Other Business Processes “Cash” reported in the financial statements represents currency on hand and cash on deposit in bank accounts, including certificates of deposit, time deposits and savings accounts. “Cash equivalents” are frequently combined with cash for presentation in the financial statements. Definition: Short-term, highly liquid investments that are readily convertible to known amounts of cash or which are subject to an insignificant risk of changes in value. Examples: Treasury bills, commercial paper, and money market funds.

3. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-3 Cash and the Effect of Other Business Processes

4. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-4 Types of Bank Accounts In order to maximize its cash position, an entity implements procedures for accelerating the collection of cash receipts and properly delaying the payment of cash disbursements. General Cash Account Imprest Cash Accounts Branch Accounts Types of Bank Accounts

5. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-5 Substantive Analytical Procedures— Cash This limited use of substantive analytical procedures is normally offset by (1) extensive tests of controls and/or substantive tests of transactions for cash receipts and disbursements or (2) extensive tests of the entity’s bank reconciliations. Because of the residual nature of the cash account, the auditor’s use of substantive analytical procedures for auditing cash is limited to... comparisons with prior years’ cash balances. comparisons with budgeted amounts.

6. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-6 Substantive Tests of Details of Transactions and Balances

7. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-7

8. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-8 The Effects of Controls The reliability of the client’s controls over cash affects the nature and extent of the auditor’s tests of details. Controls for Cash Receipts Controls for Cash Disbursement s Completion of Monthly Bank Reconciliation

9. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-9 Balance-Related Assertions

10. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-10 Auditing the General Cash Account Copy of Bank Reconciliation Bank Confirmation Cutoff Bank Statement To audit a cash account, the auditor should obtain these items.

11. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-11 Bank Reconciliation Working Paper

12. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-12 Cutoff Bank Statement Date of Last Bank Reconciliation 7 to 10 Days A cutoff bank statement normally covers the 7- to 10-day period after the date on which the bank account is reconciled. Any reconciling item should have cleared the client’s bank account during the 7- to 10-day period.

13. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-13 Tests of the Bank Reconciliation The auditor uses the following audit procedures to test the bank reconciliation: 1.Test the mathematical accuracy and agree the balance per the books to the general ledger. 2.Agree the bank balance on the reconciliation with the balance shown on the bank confirmation. 3.Trace the deposits in transit on the bank reconciliation to the cutoff bank statement. 4.Compare the outstanding cheques on the bank reconciliation with the cancelled cheques in the cutoff bank statement for proper payee, amount and endorsement. 5.Agree any charges included on the bank statement to the bank reconciliation. 6.Agree the adjusted book balance to the cash account lead schedule.

14. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-14 Fraud-Related Audit Procedures Extended Bank Reconciliation Procedures Proof of Cash Tests for Kiting

15. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-15 Proof of Cash

16. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-16 Tests for Kiting

17. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-17 Auditing a Payroll or Branch Imprest Account The audit of any imprest cash account such as payroll or a branch account follows the same basic audit steps discussed under the audit of the general cash account.

18. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-18 Obtain an Understanding of Internal Control Identify types of potential misstatements Design tests of controls Consider factors that affect the risk of material misstatement Design substantive procedures The auditor should obtain an understanding of each of the five components of internal control in order to plan the audit. This knowledge is used to:

19. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-19 Auditing Petty Cash Usually not material. Potential for defalcation. Seldom perform substantive tests. Document controls.

20. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-20 Disclosure Issues for Cash

21. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-21 Disclosure Issues for Cash

22. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-22 Disclosure Issues for Cash

23. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-23 Investments Common StockPreferred Stock Debt SecuritiesHybrid Securities

24. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-24 Control Risk Assessment—Investments Occurrence and Authorization Completeness Accuracy and Classification Here are some of the more important assertions for investments.

25. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-25 Segregation of Duties

26. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-26 Substantive Procedures for Testing Investments

27. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-27

28. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 16-28 End of Chapter 16