2 Liabilities and Equity Balance SheetAssetsCashInvestmentsReceivablesPrepaidsInventoryPP and EOther assets - intangiblesLiabilities and EquityAccounts payableAccrued liabilitiesDebtCommon stockRetained earnings
3 Cash and the Effect of Other Business Processes LO# 1Cash and the Effect of Other Business Processes“Cash” reported in the financial statements represents currency on hand and cash on deposit in bank accounts, including certificates of deposit, time deposits, and savings accounts.“Cash equivalents” are frequently combined with cash for presentation in the financial statements.Definition: Short-term, highly liquid investments that are readily convertible to cash or so near their maturity that there is little risk of change in their value.Examples: Treasury bills; commercial paper; and money market funds.
4 Cash and the Effect of Other Business Processes LO# 1Cash and the Effect of Other Business Processes
5 Types of Bank Accounts Types of Bank Accounts LO# 2Types of Bank AccountsGeneral Cash AccountImpress Cash AccountsBranch AccountsTypes of Bank AccountsIn order to maximize its cash position, an entity implements procedures for accelerating the collection of cash receipts and properly delaying the payment of cash disbursements.
6 Substantive Analytical Procedures—Cash LO# 3 & 4Because of the residual nature of the cash account, the auditor’s use of substantive analytical procedures for auditing cash is limited to . . .comparisons with prior years’ cash balances.comparisons with budgeted amounts.This limited use of substantive analytical procedures is normally offset by (1) extensive tests of controls and/or substantive tests of transactions for cash receipts and disbursements or (2) extensive tests of the entity’s bank reconciliations.
7 Substantive Tests of Details of Transactions and Balances LO# 3 & 4Substantive Tests of Details of Transactions and Balances
8 The Effects of Controls LO# , 4, & 5The Effects of ControlsControls for Cash ReceiptsControls for Cash DisbursementsThe reliability of the client’s controls over cash affects the nature and extent of the auditor’s tests of details.Completion of Monthly Bank Reconciliation
10 Auditing the General Cash Account LO# 5Auditing the General Cash AccountCopy of Bank ReconciliationTo audit a cash account, the auditor should obtain these items.Standard Bank ConfirmationCutoff Bank Statement
11 Bank Reconciliation Working Paper LO# 5Bank Reconciliation Working Paper
12 Standard Bank Confirmation Form LO# 5Standard Bank Confirmation Form
13 Date of Last Bank Reconciliation LO# 5Cutoff Bank StatementDate of Last Bank Reconciliation7 to 10 DaysA cutoff bank statement normally covers the 7- to 10-day period after the date on which the bank account is reconciled.Any reconciling item should have cleared the client’s bank account during the 7- to 10-day period.
14 Tests of the Bank Reconciliation LO# 5Tests of the Bank ReconciliationThe auditor uses the following audit procedures to test the bank reconciliation:Test the mathematical accuracy and agree the balance per the books to the general ledger.Agree the bank balance on the reconciliation with the balance shown on the standard bank confirmation.Trace the deposits in transit on the bank reconciliation to the cutoff bank statement.Compare the outstanding checks on the bank reconciliation with the canceled checks in the cutoff bank statement for proper payee, amount and endorsement.Agree any charges included on the bank statement to the bank reconciliation.Agree the adjusted book balance to the cash account lead schedule.
15 Auditing a Payroll or Branch Impress Account The audit of any impress cash account such as payroll or a branch account follows the same basic audit steps discussed under the audit of the general cash account.
16 Potential for defalcation. Seldom perform substantive tests. LO# 5Auditing Petty CashUsually not material.Potential for defalcation.Seldom perform substantive tests.Document controls.
20 Fraud-Related Audit Procedures LO# 6Fraud-Related Audit ProceduresExtended Bank Reconciliation ProceduresProof of CashTests for Kiting
21 Extended Bank Reconciliation Procedures LO# 6Extended Bank Reconciliation ProceduresIn some instances, the year-end bank reconciliation can be used to cover cash defalcations. This is usually accomplished by manipulating the reconciling items in the bank reconciliation. For example, suppose a client employee was able to steal $5,000 from the client. The client’s cash balance at the bank would then be $5,000 less than reported on the client’s books. The employee could “hide” the $5,000 shortage in the bank reconciliation by including a fictitious deposit in transit.
26 Control Risk Assessment—Investments LO# 8Control Risk Assessment—InvestmentsHere are some of the more important assertions for investments.Occurrence and AuthorizationCompletenessAccuracy and Classification
28 Substantive Procedures for Testing Investments LO# 10Substantive Procedures for Testing Investments
29 Tests of Details—Investments ExistenceAuditing Standards state that the auditor should perform one of the following procedures when gathering evidence for existence:Physical examinationConfirmation with the issuerConfirmation with the custodianConfirmation of unsettled transactions with the broker-dealerConfirmation with the counterpartyReading executed agreements
30 Tests of Details—Investments Valuation and AllocationThe auditor must also determine if there has been any permanent decline in the value of an investment security. Auditing and accounting standards provide guidance for determining whether a decline in value below amortized cost is other than temporary.
31 Tests of Details—Investments Valuation and AllocationHere are some factors that may indicate a non-temporary impairment of investment value:Fair value is significantly below costDecline in fair value is attributable to specific adverse conditionsManagement does not possess both the intent and ability to hold the investment long enough to allow for recovery in fair valueA debt security has been downgraded by a rating agencyThe financial condition of the issuer has deterioratedPermanently Impaired = Write down to new carrying amount
32 Tests of Details—Investments Disclosure AssertionsMarketable securities need to be properly classified as held-to-maturity, trading, and available-for-sale.Held-to-maturity securities and individual available-for-sale securities should be classified as current or non-current assets based on whether management expects to convert them to cash within 12 monthsAll trading securities should be classified as current assets