Cash and Marketable Securities

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Types of Cash Accounts
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
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Relationships of Cash in the Sales and
Collection Cycle
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Relationships of Cash in the Acquisition and
Payment Cycle
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Relationships of Cash in Payroll and Personnel
Cycle
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Relationships of Cash in Capital Acquisition And
Repayment Cycle
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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

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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

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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 vendors invoice
• Review of supporting documents by authorized
  check signer
• Cancel of supporting documents
• Authorized check signer should mail checks
• Monthly bank reconciliation

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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 clients cutoff of cash transactions
• Analyze bank transfers occurring around year-end
• Investigate payments to related parties
• Evaluate financial statement presentation and
  disclosure

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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

• 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
• Add/Subtract Debit/Credit Memos
• Adjusted Balance
• FOOT Reconciliation

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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 clients
expectation of an audit Review even when the
amount is immaterial.
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Audit of Imprest Bank Accounts
Typically, the only reconciling items are
outstanding checks.