Topic 15: Fieldwork ? Audit of Cash Balances

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Topic 15 Fieldwork ? Audit of Cash Balances

• Auditing
• Arens Ch. 23
• James J. McKinney
• jmckinney_at_rhsmith.umd.edu

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Audit Topics
Through All Audit Phases
Topic 1 Overview Topic 2 Accounting Information
System Topic 18 Legal Liability
Fraud Detection IT Auditing Other
Engagements NOT AUDITING!
Planning
Fieldwork
Audit Completion
Topic 15 Cash
(these topics affect fieldwork and completion) Top
ic 3 Cycles Topic 4 Management Assertions
and Audit Objectives Topic 5
Evidence Topic 6 Materiality Topic 7 Audit
Risk Topic 8 Test Types and
Audit Plan
Topic 9 Sampling in Tests of
Controls and Substantive Tests
of Transactions Topic 10 Tests of Controls Topic
11 Sampling in Tests of Details
of Balances Topic 12 Sales and Collections
Cycle Topic 13 Inventory and Warehousing
Cycle Topic 14 Acquisition and Payment
Cycle Topic 15 Cash
Topic 16 Audit Completion Topic 17 Reporting
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Overview of a Financial Statement Audit
Audit Work Papers
Planning
Fieldwork
Audit Completion

• Perform
• Pre-Acceptance Client Review
• Understand Business
• Business Risk
• Initial Analytical Procedures
• Engagement Letter
• Preliminarily Determine and Assess
• Controls
• Materiality
• Audit Risk
• Risk of Material Misstatement
• Detection Risk
• Determine audit procedures based on
  previous assessments and
• Management Assertions
• Audit Objectives
• Evidence Availability, Persuasiveness, and Cost
• Prepare
• Audit Plan
• Audit Program

Test of Controls and Reassessment of Control Risk

• Substantive Testing
• Substantive Tests of Transactions
• Analytical Procedures
• Tests of Details of Balances

• Complete the Audit
• Contingent Liabilities
• Subsequent Events
• Reassess
• Risk
• Materiality
• Evidence
• Final Analytical Procedures
• Management Representation Letter
• Issue
• Audit Report on Financial Statements
• Audit Report on Internal Controls (issuers)
• Management Letters (SAS 115)

not usually analytical procedures
Opening Balances
Sampling
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Learning Objectives

• Understand Cycle Overview
• Understand how to utilize the bank
  reconciliation, cut-off statement, and cash
  confirmation
• Recognize the use of the Interbank Transfer
  Schedule
• Understand basics of Proof of Cash

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Relationship of General Cash to Other Cash
Accounts
Branch Bank Account
Imprest Payroll Account
General Cash
Cash Equivalents
Imprest Petty Cash Fund
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Learning Objectives

• Understand Cycle Overview
• Understand how to utilize the bank
  reconciliation, cut-off statement, and cash
  confirmation
• Recognize the use of the Interbank Transfer
  Schedule
• Understand basics of Proof of Cash

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Bank Reconciliation, Cut-off Statement
Confirmation
EXTERNAL
CLIENT
CASH CONFIRM Confirm balance as of 12/31/1X
BANK RECONCILIATION _at_12/31/1X (usually
PBC) Balance per Bank Deposits in Transit
(Overstatement) - Checks Outstanding (Understateme
nt) _________________ G/L Cash Balance (Adj.
Bal.per bank which equals Adj. Bal. per
books)
Bank Statement 12/1/1X - 12/31/1X
Vouch
Cut-off Bank Statement (sent directly to auditor
from bank) 1/1/1Y - 1/15/1Y
G/L Cash Bal. (what were auditing)
Trace
Returned Checks
Note 1X is the year audited. 1Y is the year
subsequent.
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Bank Reconciliations
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• Misstatements which are normally discovered as a
  part of the tests of a bank reconciliation
• Failure to include a check that has not cleared
  the bank, even though it has been recorded in the
  cash disbursements journal
• Cash received by the client subsequent to the
  balance sheet date but recorded as cash receipts
  in the current year
• Deposits recorded as cash receipts near the end
  of the year, deposited in the bank in the same
  month, and included in the bank reconciliation
  as a deposit in transit
• Payments on notes payable debited directly to the
  bank balance by the bank but not entered in the
  clients records
• Deposits received by the bank on behalf of the
  company from credit card agencies and other
  vendors making payments electronically, but not
  recorded in the clients records
• Misstatements which may not be discovered as a
  part of the audit of the bank reconciliation
• Failure to bill a customer
• Billing a customer at a lower price than called
  for by company policy
• A defalcation of cash by interception of cash
  receipts from customers before they are recorded,
  with the account charged off as a bad debt
• Duplicate payment of a vendors invoice
• Improper payments of officers personal
  expenditures
• Payment for raw materials that were not received
• Payment to an employee for more hours worked
• Payment of interest to a related party for an
  amount in excess of the going rate

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Learning Objectives

• Understand Cycle Overview
• Understand how to utilize the bank
  reconciliation, cut-off statement, and cash
  confirmation
• Recognize the use of the Interbank Transfer
  Schedule
• Understand basics of Proof of Cash

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• Tests of Interbank Transfers
• The accuracy of the information on the interbank
  transfer schedule should be verified.
• The interbank transfers must be recorded in both
  the receiving and disbursing banks.
• The date of the recording of the disbursements
  and receipts for each transfer must be in the
  same fiscal year.
• 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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Learning Objectives

• Understand Cycle Overview
• Understand how to utilize the bank
  reconciliation, cut-off statement, and cash
  confirmation
• Recognize the use of the Interbank Transfer
  Schedule
• Understand basics of Proof of Cash

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• Proof of Cash
• All recorded cash receipts were deposited.
• All deposits in the bank were recorded in the
  accounting records.
• All recorded cash disbursements were paid by the
  bank.
• All amounts that were paid by the bank were
  recorded.
• Includes a reconciliation of
• the balance on the bank statement with the
  general ledger balance at the beginning of the
  proof-of-cash period
• cash receipts deposited per the bank with the
  cash receipts journal for a given period
• cancelled checks clearing the bank with the cash
  disbursement journal for a given period
• the balance on the bank statement with the
  general ledger balance at the end of the
  proof-of-cash period

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• Additional Material

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