1. Dr. Donald K. McConnell Jr.
Audit of Cash Balances
Dr. Donald K. McConnell Jr.
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2. A Typical Bank Reconciliation in Auditor Format
Page 23-1 in packet
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3. Ways That a Bank Reconciliation Can Be Manipulated to Cover a Cash Shortage
Overstate balance per bank
Overstate deposits in transit
Include a fictitious deposit in transit
Omitted outstanding check(s)
Understate the amount of a listed outstanding check
Include a fictitious bank debt memo (e.g. an NSF check)
Reconciliation does not foot
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4. How Does a Company Reduce the Risk of Manipulated Bank Reconciliations?
Reconciliations should be done by persons with no cash recording or (especially) cash custody functions
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5. Controls over the Bank Reconciliation Process
Bank statement must go to reconciler unopened!
Coverage of necessary controls (pg. 691 in text)
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6. Four Column Cash Trace (Proof of Cash)
An optional test done on a test month (if at all) at interim
Typically only done when:
Very high cash control risk
Where cash fraud is suspected
Purpose to verify:
Cash inflows for month can be tied to bank deposits
Cash outflows for month can be tied to bank charges
Example work paper (pg. 699 text)
A personal audit experience
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7. Audit of Petty Cash Not often done anymore. Why?
Small fund size makes fraud self-limiting
How it is done
Client employee must be present when you have access to any client assets!
Same with inventory observation, but don’t let them know what you are counting!
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8. Year End Considerations in Audit of Cash
Examine or confirm negotiable securities as of year end. Why?
Year end cash receipt and disbursement cut off tests
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9. Cash Receipts Cut off
Verify year-end deposits in transit are clearing on a timely basis
When should a deposit clear the bank if actually made on 12/31?
A personal audit experience
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10. Cash Disbursements Cut off
Auditor observes/records last check number issued at year-end
Improper disbursements cut off more prone to affect current ratio than improper receipts cut off
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11. Most Fundamental Year End Substantive Test: Audit of Client Bank Reconciliations
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12. Audit of Year-end Bank Reconciliations
One of first things you’ll do as a new auditor
A universal practitioner complaint: new auditors have trouble preparing/auditing bank reconciliations!
Audit concerns:
Do reconciling items exist? [e.g., a fictitious deposit in transit]
Are reconciling items complete? [e.g., omitted outstanding check(s)]
Are reconciling items properly valued?
Were transaction cutoffs accurate?
Cutoff bank statement obtained to verify the above
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13. Cutoff Bank Statement: Fundamental to Auditing Bank Reconciliations
What is a cutoff bank statement?
Visualize your monthly bank statement: it’s exactly the same, but typically for less than a month!
Cutoff confirmation request sent to bank (example packet pg )
Generally request bank statement for first two weeks following year end be mailed directly to auditor
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14. Auditing the Clients Year-end Bank Reconciliation(s)
Obtain a copy of client prepared year-end bank reconciliation(s)
Cutoff bank statement details used to verify existence, completeness, valuations, cutoffs of reconciling items
Obtain AICPA standard cash confirmation request , unless Au conditions exist
Example in packet (pg )
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15. Other Cutoff Bank Statement Considerations
Auditors increasingly using unopened client January bank statement(s)
In lieu of cut off bank statement
Because of cost considerations
What if bank mails cutoff bank statement to client?
Must “prove” the compromised bank statement (p. 692 text)
A personal audit experience
Have client sign off acknowledging return of cutoff bank statement!
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16. Standard AICPA Cash Confirmation Request
Always obtained unless combined IR and CR are low for cash existence assertion (AU )
To confirm only two issues:
Bank account balances
Bank loans
Bank not obligated to search for other bank balances or loans
Cash confirmation therefore existence or occurrence assertion oriented
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17. Standard AICPA Cash Confirmation Request (con.)
Example in text page 695 is a characteristic blank form confirmation
Other banking relationships must be confirmed on a separate confirmation letter. Examples:
Lines of Cr., contingent liabilities
Compensating balance arrangements
A personal audit experience
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18. Why Do Many Auditors “Over Audit” Cash?
Cash is highly vulnerable to manipulation, theft, and is often poorly controlled in small businesses
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19. How Can Substantive Cash Testing Be Restricted When Combined IR and CR are Low?
One of my larger clients had over 100 bank accounts!
If many bank accounts, mail AICPA cash confirmation requests:
On all active bank accounts, unless AU conditions exist
On a sample of the remaining “PR Purposes” bank accounts
Trace samples of checks dated in December clearing cutoff bank statement to year end outstanding check list
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20. A Primary Substantive Test: Schedule of Interbank/ Intercompany CashTransfers
To detect kiting schemes
Kiting requires multiple bank accounts
Two forms of kiting schemes exist:
Bank transfer affected to cover a cash shortage (bank float allows)
Bank transfer booked to create fictitious cash
What is the book entry for a cash transfer?
Exemplary work paper (packet pg. 23-2)
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21. Schedule of Interbank/ Intercompany CashTransfers (con.)
Practically speaking, clients actively making cash transfers would not have more than one or two cash transfers at year end.
Generally done, regardless of system of internal controls
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22. Schedule of Interbank/ Intercompany CashTransfers (con.)
Would bank cash transfer test be necessary for wire transfers?
What is the issue?
bank float ordinarily eliminated.
Yes
The test is still necessary because:
International wire transfers don’t clear “bang-bang” [there is typically float]
Did you ever have an lost in cyberspace?
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