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Types of Cash Accounts Imprest Payroll Account Branch Bank Account
General Cash Account Imprest Payroll Account Branch Bank Account Imprest Petty Cash Fund Cash Equivalents
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Relationship of General Cash to Other Cash Accounts
Branch Bank Account Cash Equivalents Imprest Payroll Imprest Petty Cash Fund General
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Relationships of Cash in the Sales and Collection Cycle
Cash in Bank Accounts Receivable Gross Sales Cash sales receipts Cash Discounts Taken
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Relationships of Cash in the Acquisition and Payment Cycle
Cash in Bank Accounts Payable Payment
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Relationships of Cash in Payroll and Personnel Cycle
Cash in Bank Accrued Wages, Salaries, Bonuses, and Commissions Withheld Income Taxes and Other Deductions Payment Accrued Payroll Tax Expense
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Relationships of Cash in Capital Acquisition And Repayment Cycle
Cash in Bank Capital Stock – Common Paid-in Capital in Excess of Par – Common Redemption of stock Issue of stock Dividends Payable Payment of dividends
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Sources of Audit Evidence for Audit of Cash
Cash Receipts Journal Cash Disbursements Journal Bank Reconciliations Cancelled Checks Bank Statements Cutoff Statement from Bank
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Objectives for the Audit of Cash
Consider inherent risks related to cash, including fraud risks Consider internal control over cash transactions Substantiate existence of recorded cash Establish completeness of recorded cash Determine client has rights to recorded cash Establish clerical accuracy of cash schedules Determine presentation and disclosure of cash, including restricted funds, are appropriate 5 6 6
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Internal Control Cash Account
Separation of incompatible duties Receipts deposited daily and intact Restrictive endorsements on checks received Independent reconciliation of cash records including bank statement Computerized Control Totals and edit tests Authorization of transactions Use of prenumbered documents Periodic internal audits Competent, well-trained employees Respected access to assets and accounting records
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Guidelines for Internal Control
Deposit cash receipts daily. Make all disbursements by check or electronic funds transfer, with the exception of small expenditures from petty cash. Have monthly bank reconciliations prepared by employees not responsible for the issuance of checks or custody of cash. The completed reconciliation should be reviewed promptly by an appropriate official. Monitor cash receipts and disbursements by comparing recorded amounts to forecasted amounts
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Internal Control Over Cash Receipts
Cash Sales Involvement of two or more employees Cash Registers Electronic point of sales systems Collections of Receivables Initial listing of cash receipts Custody and depositing of cash receipts Maintenance of customer account records Reconciliation of customers’ ledgers with control accounts Mailing monthly statements to customers Collection activity and past-due accounts Direct receipt of funds by financial institution 3 2 2 2
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Processing Cash Receipts
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Internal Control--Cash Disbursements
Segregation of duties Payment by check or electronic funds transfer Pre-numbered check Match of purchase order and receiving documents with vendor’s invoice Review of supporting documents by authorized check signer Cancel of supporting documents Authorized check signer should mail checks Monthly bank reconciliation 4 4
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Substantive Tests for Cash Balances
Obtain analyses of cash balances and reconcile to general ledger Send standard confirmation forms to financial institutions Obtain reconciliations of bank balances and consider reconciling bank activity Obtain bank cutoff statement Count cash on hand Verify the client’s cutoff of cash transactions Analyze bank transfers occurring around year-end Investigate payments to related parties Evaluate financial statement presentation and disclosure 6 7 7
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Standard Confirmation
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Bank Cutoff Statement Normal bank statement for the first few weeks after year-end Sent directly to the auditor Includes canceled deposit slips and checks Allows auditor to verify existence and amount of deposits in transit and outstanding checks on the bank reconciliation
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How to Read a Cancelled Check
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Check 21 Act Checks may be processed electronically
Electronic processing creates a substitute check – an electronic image of check Legal equivalent of original check for all purposes Audit implications Need to rely on substitute check for evidence of check Impossible for clients to kite checks (manipulate bank balances to conceal cash shortage)
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Bank Reconciliation Adjusted Balance Balance per bank
CONFIRM (Standard Bank Confirmation) directly with bank Agree to CUTOFF BANK STATEMENT Add Deposits-in-transit TRACE to cash receipts journal VOUCH to CUTOFF BANK STATEMENT Subtract Outstanding Checks VOUCH to cash disbursements journal TRACE checks cleared from cutoff bank statement Add/Subtract Debit/Credit Memos Inspect bank credit/debit memo Adjusted Balance Balance per Books FOOT Reconciliation TRACE to trial balance
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Proof of Cash
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Kiting Manipulations that utilize temporarily overstated bank balances to conceal cash shortage or meet short-term cash needs Auditors can detect kiting by preparing a schedule of bank transfers for a few days before and after balance sheet date Misstatements Date of recording per transfer per the books are from different financial statement periods Date the check was recorded by the bank is from financial statement period prior to books
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Tests of Interbank Transfers
Accuracy of the information on the interbank transfer schedule should be verified. Interbank transfers must be recorded in both the receiving and disbursing banks. Date of the recording of the disbursements and receipts for each transfer must be in the same fiscal year.
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Tests of Interbank Transfers
Disbursements on the interbank transfer schedule should be correctly included in or excluded from year-end bank reconciliation as outstanding checks. Receipts on the interbank transfer schedule should be correctly included in or excluded from year-end bank reconciliations as deposits in transit.
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Check Kiting … a fraud that occurs by reporting cash simultaneously in two different bank accounts
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Illustration of Lapping
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Petty Cash Petty cash is a unique account since it is often
immaterial in amount, yet verified on many audits. Account is verified primarily because of the potential for defalcation and the client’s expectation of an audit Review even when the amount is immaterial.
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Audit of Imprest Bank Accounts
y c h e k f o r D p t . T s u J n Typically, the only reconciling items are outstanding checks.
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