Audit Of Cash Balances - Muhariefeffendi's Website

Audit of Cash BalancesChapter 23 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley5-5

Learning Objective 1Show the relationship of cash in thebank to the various transaction cycles. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley23 - 2

Relationships of Cash in theBank and Transaction CyclesCapital Acquisition and Repayment Cycle:Capital Stock – CommonRedemption Issue ofof stockstockDividends PayablePayment ofdividendsPaid-in Capital in Excessof Par – CommonRedemption Issue ofof stockstock 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/BeasleyCash in Bank23 - 3

Cash in the Bank andTransaction CyclesMisstatements which may not be discoveredas a part of the audit of the bank reconciliation: Failure to bill a customer An embezzlement of cashreceipts from customers 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley23 - 4

Cash in the Bank andTransaction CyclesMisstatements (continued): Duplicate paymentsImproper payments of personal expensesPayment for raw materials not receivedPayment to employee for hours not workedPayment of excessive interest to relatedparty 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley23 - 5

Cash in the Bank andTransaction CyclesMisstatements which are normally discoveredas a part of the tests of a bank reconciliation: Failure to include a check on the outstandingcheck list Cash received by the client recorded in thewrong period 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley23 - 6

Cash in the Bank andTransaction CyclesMisstatements which are normally discoveredas a part of the tests of a bank reconciliation: Deposits recorded near year end,deposited in the bank in the same month,and included in the bank reconciliationas a deposit in transit Payments on notes payable debited directlyto the bank balance but not entered in theclient’s records 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley23 - 7

Learning Objective 2Identify the major types of cash accountsmaintained by business entities. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley23 - 8

Types of Cash Accounts General cash account Imprest accounts Branch bank account Imprest petty cash fund Cash equivalents 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley23 - 9

Relationship of General Cash toOther Cash AccountsBranch BankAccountImprest PayrollAccountGeneralCashCashEquivalents 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/BeasleyImprest PettyCash Fund23 - 10

Learning Objective 3Design and perform audit tests of thegeneral cash account. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley23 - 11

Methodology for Designing Testsof Balances for Cash in the BankIdentify client businessrisks affecting cashin bankPhase ISet tolerable misstatementand assess inherentPhase Irisk for cash in bankAssess controlrisk forseveral cycles 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/BeasleyPhase I23 - 12

Methodology for Designing Testsof Balances for Cash in the BankDesign and performtests of controls andsubstantive tests of Phase IItransactions forseveral cycles 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley23 - 13

Methodology for Designing Testsof Balances for Cash in the BankDesign and performanalytical procedures Phase IIIfor cash in bankDesign tests ofdetails of cash inbank to satisfybalance-relatedaudit objectivesAudit proceduresSample sizeItems to selectPhase IIITiming 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley23 - 14

Audit Schedule for a BankReconciliationDateClawson Industries Schedule A-2Bank Reconciliation Prepared by Client DED 1/10/10by BankSW1/18/10Account 101 –12/31/09General account, ApprovedFirst NationalBalance per bankAdd: Deposits in transitDeduct: Outstanding checksOther reconciling items: Bank errorBalance per bank, adjustedBalance per books before adjustmentsAdjustments: Unrecorded bank service charge 216NSF4,200Balance per books, adjusted 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 109,71321,117– 87,462– 15,200 28,168 32,584– 4,4168,16823 - 15

Balance-related Audit ObjectivesDetail ompleteness 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/BeasleyCutoffAccuracy23 - 16

BankStatement 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley23 - 17

Types of Audit Tests Used forGeneral Cash in BankCash in BankBeginning balanceCash receiptsCash disbursementsAudited byTOC-T, STOT, and APAudited byTOC-T, STOT, and APEnding balanceAudited byTOC-B, AP, and TDBTOC-T TOC-B STOT AP TDB Sufficient appropriate evidence 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley23 - 18

Learning Objective 4Recognize when to extend audit tests of thegeneral cash account to test further formaterial fraud. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley23 - 19

Fraud-oriented ProceduresThe auditor must extend the proceduresin the audit of year-end cash to determinethe possibility of a material fraud. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley23 - 20

Extended Tests of the BankReconciliationWhen the auditor believes that theyear-end bank reconciliation may beintentionally misstated, it isappropriate to perform extendedtests of the year-end bankreconciliation. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley23 - 21

Proof of Cash All recorded cash receipts were deposited All deposits in the bank were recorded inthe accounting records All recorded cash disbursements werepaid by the bank All amounts that were paid by the bankwere recorded 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley23 - 22

Proof of Cash Schedule 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley23 - 23

Proof of CashIncludes the following reconciliation tasks:1. The balance on the bank statement withthe general ledger balance at thebeginning of the proof-of-cash period2. Cash receipts deposited per the bank withthe cash receipts journal for a given period 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley23 - 24

Proof of CashIncludes the following reconciliation tasks:3. Cancelled checks clearing the bank withthose recorded in the cash disbursementsjournal for a given period4. The balance on the bank statement with thegeneral ledger balance at the end of theproof-of-cash period 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley23 - 25

Interbank Transfer Schedule 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley23 - 26

Interbank TransfersThe accuracy of the information on theinterbank transfer schedule should be verified.The interbank transfers must be recorded inboth the receiving and disbursing banks.The date of the recording of the disbursementsand receipts for each transfer must be inthe same fiscal year. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley23 - 27

Interbank TransfersDisbursements on the interbank transferschedule should be correctly included in orexcluded from year-end bank reconciliationas outstanding checks.Receipts on the interbank transfer scheduleshould be correctly included in or excludedfrom year-end bank reconciliations asdeposits in transit. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley23 - 28

Learning Objective 5Design and perform audit tests of theimprest payroll bank account. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley23 - 29

Audit of the Imprest PayrollBank AccountTypically, the only reconcilingitems are outstanding checks. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley23 - 30

Learning Objective 6Design and perform audit tests of imprestpetty cash. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley23 - 31

Petty CashPetty cash is a unique account becauseit is often immaterial in amount, yet it isverified on many audits.The account is verified primarily becauseof the potential for embezzlement and theclient’s expectation of an audit revieweven when the amount is immaterial. 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley23 - 32

End of Chapter 23 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley5-5

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 23 - 27 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 th