Chapter 6 Audit of Cash Accounting 408 Chapter 6

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 Accounting 408 Chapter 6

Assertions, Objectives, Evidence and Procedures Little Match Company Accounting 408 Chapter 6

Substantive Tests – General Concepts Combining CR assessments accounts affected by a single transaction cycle accounts affected by more than one transaction cycle Accounting 408 Chapter 6

Accounting 408 Chapter 6

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 408 Chapter 6

Accounting 408 Chapter 6

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, using nonfinancial data) 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 408 Chapter 6

2. 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 408 Chapter 6

2. 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 Accounting 408 Chapter 6

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 408 Chapter 6

3. Cash - Substantive Tests Bank confirmation – paper or electronic Cutoff bank statement Bank reconciliation Four-column proof of cash Interbank transfer schedule Cash cutoff tests Count cash on hand Accounting 408 Chapter 6

Exhibit 6.8 Bank Confirmation Accounting 408 Chapter 6

Proof of Cash Accounting 408 Chapter 6

3. Cash - Substantive Tests 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 408 Chapter 6

3. Cash - Substantive Tests Valuation little problem, confirmation, cash count Presentation and Disclosure compare statement presentation to GAAP compensating balances, overdrafts, lines of credit, loan guarantees Accounting 408 Chapter 6

Review Questions for Discussion Chapter 6 6.12 6.13 6.15 6.16 6.17 6.20 Accounting 408 Chapter 6

Purchase Transactions ICs Purchase requisition – requesting department Purchase order – purchasing department Goods received – receiving dock disclose quantities or not? All documents to accounting department – accounts payable department Receive purchase invoice from vendor Accounting 408 Chapter 6

Cash Payments ICs Accounting department (accounts payable) match all documents (purchase requisition, purchase order, receiving reports, purchase invoice) prepare check and transmit to treasurer’s office with documentation Treasurer’s office sign check/enter electronic payment do not return check to accounting department make payment on due date Accounting 408 Chapter 6

Sales Transactions ICs Receive customer order Credit check Ship goods – shipping dock create shipping documentation All documents to accounting department – accounts receivable department Prepare sales invoice Book sale Accounting 408 Chapter 6

Cash Receipts ICs Received by mail Cash sales >1 person open immediately prepare remittance list cash (checks) to treasurer’s office for deposit prepare deposit slip and reconcile to remittance list take to bank compare bank receipt to deposit slip and remittance list remittance list and remittance advice to accounting department post to sub-ledger account and general ledger and reconcile amounts compare total to bank deposit Cash sales deposit intact at least daily safeguard cash on hand Accounting 408 Chapter 6