Audit of Cash Prepared by :- Nurulain binti Asri Nur Athirah binti Abd Hadi Nur Atiqah Syafiqa binti Rosli Tuan Noorfarahanim binti Tuan Ibrahim Prepared for :- Nor Azam bin Yaacob

What are the auditor’s primary concerns with regard to cash? existence completeness physical control presentation and disclosure

perform analytical procedures to test the reasonableness Cash Audit Procedures perform analytical procedures to test the reasonableness of cash balances

Cash Audit Procedures Enquire of management regarding any cash requirements or restrictions from debt agreements.

What is kiting? Kiting is an irregularity whereby an overstatement of cash is created by a cash transfer between bank accounts. The deposit is recorded in cash receipts but the disbursement is not re- corded in cash disbursements.

Kiting example National Pelangi On 31/12, Asia’s bookkeeper writes a $5,000 cheque on the National Bank and deposits the cheque in the Pelangi Bank account. National Pelangi Asia Co. 12/31 Asia Co. 5000 National

Kiting example 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. cash receipts journal description _ $$ _ Dec. 31, 2004 Misc. revenue 5000 cash payments journal Dec.31, 2004 - no activity -

Kiting example National will not be aware of National the cheque until notification from Pelangi, probably during the first few days of January. Pelangi As a result of the deposit, Pelangi will increase Asia’s account on 31/12. 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.

From an internal control perspective, why does kiting occur? inadequate segregation of duties between accounting and cash custody

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.

What audit procedures may detect kiting? tests related to the cutoff bank statement and schedule of bank transfers

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).

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. Prepare a schedule of bank transfers showing all transfers between the client’s bank accounts during the lastweek of the audit period and the first week of the subsequent period.

Cash Audit Procedures The schedule should be prepared using cash receipts and payments journals, year-end reconciliation, year-end bank state- ment, and cutoff bank statement. Obtain or prepare a year-end bank reconciliation or proof of cash for each client bank account.

Cash Audit Procedures 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.

Cash Audit Procedures 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.

What will a bank reconciliation help the auditor determine? whether all client cash receipts have been deposited whether all bank deposits have been recorded in client cash receipts records whether all client cash payments have been paid by the bank

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

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

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.

Review cutoff of cash receipts and disbursements. Cash Audit Procedures Review cutoff of cash receipts and disbursements.

Review monthly client-prepared bank reconciliations. Cash Audit Procedures Review monthly client-prepared bank reconciliations.

Investigate any cheques made out to cash or bearer. Cash Audit Procedures Investigate any cheques made out to cash or bearer. Asia Company 6458 CASH NATIONAL BANK

NSF Cash Audit Procedures Investigate any cheques that were returned by the bank because the client account had insufficient funds. Asia Company 6458 NSF NATIONAL BANK

Cash Audit Procedures Trace a sample of entries from cash receipts journal to a/r subsidiary ledger ___a/r subsidiary customer _ $$ _ ABC Vending 78,660 5/23/04 payment 23,000 balance 55,660 cash receipts journal description _ $$ _ May 23, 2004 ABC Vending 23,000

Cash Audit Procedures Trace a sample of entries from cash receipts journal to a/r subsidiary ledger to bank statements ___a/r subsidiary customer _ $$ _ ABC Vending 78,660 5/23/04 payment 23,000 balance 55,660 cash receipts journal description _ $$ _ May 23, 2004 ABC Vending 23,000 Bank Statement 5/31/04 Deposits: 5/23 $23,000

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

Cash Audit Procedures Trace a sample of entries from cash payments journal to a/p subsidiary ledger 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

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

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

Audit of Imprest Petty Cash Petty cash is a unique account because it is often immaterial in amount The account is verified because of the potential for defalcation and the client's expectation of auditor consideration when the amount is immaterial

Audit of Imprest Petty Cash Internal control over petty cash Audit tests for petty cash

Internal Control over Petty Cash The use of an impress fund that is the responsible of one individual Petty cash funds should be kept separate from all other activities There should be limits on the amount of any expenditure from petty cash funds The type of expenditure that can be made from petty cash transactions should be well defined by company policy

Internal Control over Petty Cash When a disbursement is made from petty cash, then require a responsible official's approval on a pre-numbered petty cash form The total of the actual cash and checks in the fund plus the total unreimbursed petty cash forms should equal the total amount of the petty cash fund stated in the general ledger Periodically, surprise counts and a reconciliation of the petty cash fund should be made by the internal auditor or other responsible official

When the petty cash balance runs low, a check payable to the petty cash custodian should be written on the general cash account for the reimbursement of petty cash The check should be for exact amount of the pre- numbered vouchers that are submitted as evidence of actual expenditures These vouchers should be verified by the account payable clerk and cancelled to prevent their reuse

Audit Tests for Petty Cash Determine the client's procedures for handling the fund by discussing internal controls with the custodian and examining the documentation of a few transactions Obtaining an understanding of internal control, identify internal controls and weaknesses It is often desirable use a flowchart and an internal control questionnaire, primarily for documentation in subsequent audits

The common procedures are to count the petty cash balance and to carry detailed tests of one or two reimbursement transactions The primary procedures should include footing the petty cash vouchers supporting the amount of the reimbursement, accounting for a sequence of petty cash vouchers, examining the petty cash vouchers for authorization and cancellation, and examining the attached documentation for reasonableness Typical supporting documentation includes cash register tapes, invoices, and receipts Petty cash tests can ordinarily be performed at any time during the year If the balance in the petty cash fund is considered material, it should be counted at the end of the year Unreimbursed expenditures should be examined as a part of the count to determine whether the amount of unrecorded expenses is material