audit of cash balnaces

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20 - 1Copyrigh t 2003 Pearson Education Canada I nc.

CHAPTER 20

Audit of Cash

Balances


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What are the auditors primaryconcerns with regard to cash?


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- existence


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- existence

- completeness


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- existence- completeness

- physical control


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- existence

- completeness- physical control- presentation and

disclosure


7/5620 - 7Copyrigh t 2003 Pearson Education Canada I nc.

Cash Audit Procedures

performanalytical

proceduresto test the

reasonablenessof cash

balances



Cash Audit ProceduresEnquire of management regarding any

cash requirements or restrictions fromdebt agreements.



What is kiting?



What is kiting?Kiting is an irregularity wherebyan overstatement of cash is cre-ated by a cash transfer between

bank accounts.



What is kiting?Kiting is an irregularity wherebyan overstatement of cash is cre-

ated by a cash transfer betweenbank accounts.

The deposit isrecorded in cash receipts butthe disbursement is not re-

corded in cash disbursements.



Kiting example

On 12/31, Aces bookkeeper writes a $5,000 chequeon the National Bank and deposits the chequein the Canadian Bank account.

National Canadian12/31Ace Co.

Ace Co.5000

National



cash receipts journaldescription _ $$ _Dec. 31, 2004

Misc. revenue 5000

cash payments journaldescription _ $$ _Dec.31, 2004- no activity -

Kiting exampleOn 12/31, Aces bookkeeper writes a $5,000 cheque

on the National Bank and deposits the chequein the Canadian Bank account.The bookkeeper records the deposit in the cashreceipts journal but does not record the cheque

in the cash payments journal.He also fails to list the cheque as outstanding on theNational Bank reconciliation.



Kiting example


National

Canadian

National will not be aware ofthe cheque until notification fromCanadian, probably during thefirst few days of January.



Kiting example


National

Canadian

National will not be aware ofthe cheque until notification fromCanadian, probably during thefirst few days of January.

As a result of the deposit,Canadian will increase Aces

account on 12/31.



Canadian


National National will not be aware ofthe cheque until notification fromCanadian, probably during thefirst few days of January.

As a result of the deposit, Canadianwill increase Aces account on 12/31.

As a consequence, the bank records will reflect a$5,000 cash overstatement for a few days until thecheque clears. December bank statements will also

support this overstatement.



From an internal controlperspective, why does kiting

occur?

F i l l



inadequate

segregation ofduties betweenaccounting and

cash custody

From an internal controlperspective, why does kiting

occur?

Wh t ff t i h i



What effect is changingtechnology having on the

likelihood of kiting?

Wh t ff t i h i



What effect is changingtechnology having on the

likelihood of kiting?Kiting is becoming

less likely becausethe float isshrinking; i.e.,

cheques clear banksfaster than in the

past.

Wh t dit d



What audit proceduresmay detect kiting?

Wh t dit d


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What audit proceduresmay detect kiting?

tests related to

the cutoff bankstatement and

schedule ofbank transfers

C h A dit P d


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Cash Audit ProceduresObtain a bank cutoff statement directly

from the bank.

?

C h A dit P d


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from the bank.

A bank cutoffstatement is prepared

ten business days after thebalance sheet date.

C h A dit P d


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from the bank.

A bank cutoff

statement is preparedten business days after the

balance sheet date.Most items that were outstand-

ing at year-end have clearedwhen the cutoff statement

is prepared (cheques, deposits).

C h A dit P d


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Obtain a bank cutoff statement directlyfrom the bank.

Trace all cheques, deposits, and othercash changes from the cutoff statementto cash receipts and disbursementsrecords, paying particular attention todates and amounts.

C h A dit P d


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Prepare a schedule of bank transfersshowing all transfers between the

clients bank accounts during the lastweek of the audit period and the firstweek of the subsequent period.

C h A dit P d


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Cash Audit ProceduresPrepare a schedule of bank transfers

showing all transfers between theclients bank accounts during the lastweek of the audit period and the first

week of the subsequent period.

The schedule should

be prepared using cash receiptsand payments journals, year-end

reconciliation, year-end bank state-ment, and cutoff bank statement.


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Obtain or prepare a year-end bankreconciliation or proof of cash foreach client bank account.


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What

is a proofof cash?


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A proof ofcash is a working

paper prepared by the auditor toreconcile the banks record of theclients beginning balance, cashdeposits, cleared cheques, and

ending balance for the period with

the clients records.

C h A dit P d


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Cash Audit ProceduresObtain or prepare a year-end bank

reconciliation or proof of cash foreach client bank account.

Trace amounts tothe schedule of bank transfers,cash receipts and payments

journals, year-end reconcilia-tion, year-end bank statement,

and cutoff bank statement.


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Wh t ill b k ili ti h l th


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What will a bank reconciliation help theauditor determine?

- whether all client cash receiptshave been deposited

cash receipts journaldescription _ $$ _

Dec. 31, 2004Misc. revenue 5000

Canadian



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- whether all bank deposits havebeen recorded in client cash

receipts records

cash receipts journal

description _ $$ _Dec. 31, 2004

Misc. revenue 5000

Canadian


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cash payments journal

description _ $$ _Dec. 31, 2004

Misc. expense 5000

Canadian

- whether all bank payments havebeen recorded in client cash

payments records


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What will not be detected by abank reconciliation?


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What will not be detected by a

bank reconciliation?- unrecorded cheques that have notcleared the bank (possible kiting)


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Confirm all cashbalances held by

third parties, such as

banks and other financialinstitutions.

BANK



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Cash Audit ProceduresConfirm all cash balances heldby third parties, such as banksand other financial institutions.

possibly through

use of the standardbank confirmation



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Cash Audit ProceduresCount all cash on hand at the clients

premises. If cash is located in multipleplaces, count cash simultaneously toavoid double counting.



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Review cutoff

of cash receiptsand

disbursements.



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Cash Audit ProceduresAccount for the numeric sequence of

cancelled cheques. Investigate missingcheques. Ace Company 6462

Ace Company 6461

Ace Company 6459

Ace Company 6458

Ace Company 6457

?

N TION L B NK



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Review monthly

client-preparedbank

reconciliations.



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Investigate any chequesmade out to cash or bearer.

Ace Company 6458

CASH

N TION L B NK



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Cash Audit ProceduresInvestigate any cheques that were

returned by the bank because the clientaccount had insufficient funds.

Ace Company 6458

N TION L B NK



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Cash Audit ProceduresReview and recalculate translations

of foreign currencies.



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Trace a sample of entries from cash receipts journalto a/r subsidiary ledger


cash receipts journaldescription _ $$ _

May 23, 2004ABC Vending 23,000

___a/r subsidiarycustomer _ $$ _

ABC Vending 78,6605/23/04 payment 23,000

balance 55,660



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Trace a sample of entries from cash receipts journal

to a/r subsidiary ledger to bank statements


description _ $$ _May 23, 2004ABC Vending 23,000

Bank Statement

5/31/04Deposits:

5/23 $23,000


___a/r subsidiary

customer _ $$ _ABC Vending 78,6605/23/04 payment 23,000balance 55,660



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Trace a sample of entries from cash receipts journalto a/r subsidiary ledger to bank statementsto

deposit slips.


description _ $$ _May 23, 2004ABC Vending 23,000

Bank Statement

5/31/04Deposits:

5/23 $23,000


DepositSlip

5/23/04

23,000

___a/r subsidiary

customer _ $$ _ABC Vending 78,6605/23/04 payment 23,000balance 55,660



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Trace a sample of entries from cash paymentsjournal to a/p subsidiary ledger


cash payments journaldescription _ $$ _January 23, 2004a/p payment toMGB Corp. 4,300

a/p subsidiaryvendor _ $$ _

MGB Corp 8,7801/23/04 payment 4,300balance 4,480



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Trace a sample of entries from cash payments

journal to a/p subsidiary ledger to bank statement


description _ $$ _January 23, 2004a/p payment toMGB Corp. 4300

Bank Statement

1/31/04Deposits:

Payments:

1/26 $4300


a/p subsidiary

vendor _ $$ _MGB Corp 8,7801/23/04payment 4,300balance 4,480



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Trace a sample of entries from cash payments

journal to a/p subsidiary ledger to bank statement tocancelled cheques.


description _ $$ _January 23, 2004a/p payment toMGB Corp. 4300

Bank Statement

1/31/04Deposits:

Payments:


Ace Company 4512

MGB Corp.1/23/04

4300

a/p subsidiary

vendor _ $$ _MGB Corp 8,7801/23/04payment 4,300balance 4,480

N TION L B NK

audit of cash balnaces

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