AUDIT OF CASH

AUDIT OF CASH (1) TYPES OF CASH ACCOUNTS (p.681-682) - General Cash Account - Impress Payroll Account - Branch Bank Account - Impress Petty Cash Fund - Cash Equivalent

METHODOLOGY FOR DESIGNING TEST OF DETAILS OF BALANCES FOR CASH IN THE BANK Identify client business risk affecting cash in bank Phase l Set tolerable misstatement and assess inherent Risk for cash in bank. Phase l Assess control risk for cash in bank Phase l Design and perform tests of control and substantive Tests of transactions for several cycles* Phase ll Design and perform analytical procedures For cash in the bank Phase lll Design tests of details of cash in bank Balance to satisfy balance-related Audit objectives Audit procedures Sample size Phase lll Items to select Timing

BALANCE RELATED AUDIT OBJECTIVES AND TEST OF DETAILS OF BALANCES FOR GENERAL CASH IN THE BANK Common tests of details of balances procedures comments Cash in the bank as stated on the reconciliation foots correctly and agrees with the general ledger (detail tie-in) Foot the outstanding check list and deposits in transit. Prove the bank reconciliation as to additions and subtractions, including all reconciling items. Trace the book. These tests are done entirely on the bank reconciliation, with no reference to documents or other record except the general ledger. Cash in the bank as stated on the reconciliation exists (existences). Existing cash in the bank is recorded (completeness), Cash in the bank as stated on the reconciliation is accurate (accuracy) Receipts and tests of a bank confirmation. Receipts and test of a cutoff bank statement. Test of the bank reconciliations Extended test of the bank reconciliation. Proof of cash. Test of kitting These are the three most important objectives for cash in the bank. The procedures are combines because of their close interdependence. The last three procedures should be done only when there are internal control weaknesses.

Cash receipts and cash disbursements transactions are recorded in the proper period (cutoff) Counts the cash on the hand on the last day of the year and subsequently trace to deposits in transit and the cash receipts journal. Trace deposits in transit to subsequent period bank statement (cutoff bank statement) Cash disbursements: Record the last check number used on the last day of the year and subsequently trace to the outstanding checks and the cash disbursements journal. Trace outstanding checks to subsequent period bank statement When cash receipt received after year- end are included in the journal, a better cash position than actually exists is shown. It is called “holding open” the cash receipts journal. Holding open the cash disbursements journal reduces accounts payable and usually overstates the current ratio. The first procedures listed for receipts and disbursements cutoff tests requires the auditor’s presence on the client’s premises at the end of the last day of the year.

Cash in the bank is properly presented and disclosed (presentation and disclosure). Examine minutes, loan agreements, and obtain confirmation for restrictions on the use of cash and compensating balances. Review financial statements to make sure Material savings accounts and certificates of deposit are disclosed separately from cash in the bank, Cash restricted to certain uses and compensating balances are adequately disclosed Bank overdrafts are included as current liabilities An example of a restriction on the use of cash is cash deposited with trustee for the payment of mortgage interest and taxes on the proceeds of a construction mortgage. A compensating balance is the client’s agreement with a bank to maintain a specified minimum in its checking account.

TEST OF INTERBANK TRANSFER If the client has more than one bank account, the auditor should complete an analysis of interbank transfer for one or two weeks before and after year end. The purpose of this test is to detect errors or fraud involving year and checks in transit between bank Kitting : a type of fraud used to conceal bank overdraft or cash misappropriations , as well as to obtain interest-free loans , maybe detected by analyzing interbank transfer

TEST OF INTERBANK TRANSFER 2. Embezzlers occasionally cover a defalcation of cash by a practice known as kiting Kiting occurs when a company draws a check on one bank for deposit in another bank but does not record the transaction, or records only a part of the transaction before year end Test for kiting : Bank Transfer Schedule (BTS) eg. Fig 23-8, p.694

Several thing that should be audited on the inter-bank transfer schedule The accuracy of the information on the inter BTS should be verified The auditor should compare the disbursement and receipt information on the schedule to the cash disbursement and cash receipts records to make sure that is accurate. - Similarly, the dates on the schedule for transfers that were received and disbursed should be compare with the bank statements. The inter-bank transfer must be recorded in both the receiving & disbursing banks - E.g. there was RM2,000 transfer from Bank Y to Bank Z but only the disbursement was recorded, this is evidence of an attempt to conceal a cash theft.

The date of the recording of the disbursements & receipts for each transfer must be in the same fiscal year -If a cash receipt was recorded in the current fiscal year and the disbursement in the subsequent fiscal year – may be an attempt to cover cash shortage Disbursements on the inter-bank transfer schedule should be correctly included in or excluded from year end bank reconciliations as outstanding checks - Understating outstanding checks on the bank reconciliation indicates the possibility of kitting. Receipts on the inter-bank transfer schedule should be correctly included in or excluded from year end bank reconciliations as deposit in transit Overstating deposit in transit on the bank reconciliation indicates the possibility of kitting.

CUT OFF BANK STATEMENTS – p.684 What is a cut-off Bank Statement ?? * Is a partial- period bank statement and the related cancelled checks, duplicate deposit slips, and other documents included in bank statements, mailed by the bank directly to the auditors; Purpose : Verify the reconciling items on the client’s y/end bank reconciliation with evidence that is inaccessible to the client. The auditor may request the client’s bank to send directly to the auditor the statement for 7 to 10 days subsequent to the BS date.

TEST OF THE BANK RECONCILIATION Purpose : To determine whether client has prepared the BR & to verify whether clients recorded bank b/c as per actual cash in the bank except for deposits in transit, outstanding cheques & other reconciling items. Auditor can obtain the information for conducting the test from the cut off bank statement. Refer to p.687

VERIFYING BANK CONFIRMATION 1.Obtain bank letter for all bank accounts open at any time during the year as well as any liabilities related to the bank (loans, assets under custody) 2. Obtain / prepare Bank Reconciliation for all a/c & verify : Check bank b/c to BS & bank letter Check CB b/c to nominal ledger Check casting of the reconciliation Obtain explanations & substantiate all adjustments on the bank reconciliation Vouch a sample of transactions from the CB to BS 3. Check to ensure all matters dealt with in the bank have been referred to the relevant schedules

SUBSTANTIVE AUDIT PROCEDURES FOR CASH IN HAND Count all material cash b/c, record details & reconcile: Count cash in the presence of a member of the client’s staff & ask him to confirm the amount counted Ensure all cash is received at the same time to avoid substitutions Prepare a list of IOUs and obtain confirmation from the individuals Discuss with mgmt any staff with IOUs to ensure that they are properly authorized Agree b/c to the nominal ledger Obtain explanations of all material differences Obtain certificates for all cash b/c not counted