audit of cash and revenues and accounts receivable

ACC 411 Module Seven 1

Cash is the most liquid asset and also the most enticing to thieves. Therefore cash has inherently high risk associated with it. Under audit, however, it is a very low risk. Cash carries high risk because of its very nature of already being cash. The thief does not have to sell a stolen item to get cash—it already is cash. The audit of cash does include the reconciliation to the bank statement. Because the auditor can compare the document (bank statement), there is third-party, outside confirmation of the existence and value at the close of the accounting period. The auditor will request a cut-off statement be delivered directly to the auditor because with computers using programs such as Photoshop the client could easily create a statement to provide the auditor with fraudulent documentation. Auditors will re-perform the bank reconciliation to determine the actual cash balance at the end of the period under audit. The primary control over cash is segregation of duties. When cash is received in the mail the mailroom clerk should open it. The clerk is required to endorse each check for deposit. A listing of checks received is prepared in multiple copies. The checks are then delivered to the cashier, who is responsible for making the deposit ticket and making the deposit to the bank. Remittance advices and the listing of checks received are delivered to the accounts receivable department for posting to the customer accounts. An additional copy is delivered to the controller to allow for verification that the amounts received are posted to the cash and accounts receivable accounts. The audit of cash is primarily accomplished by the re-performance of the bank reconciliation. The bank cut-off statement is delivered directly to the auditor. Cash disbursements are examined and compared to company policy on the authority to sign checks. Deposits are examined to detect lapping and kiting. Lapping is the process of an employee stealing a check from one customer and using the payment of another customer to cover the shortfall. The amount stolen rolls from one customer to another until the scheme is detected. Kiting is accomplished by writing a check on one cash account to deposit into another cash account and then taking money from the second account. The intent is to take advantage of the time it takes for the checks to clear. With the inception of the new Century 21 Check clearing system this is far more difficult. The Century 21 system clears checks overnight if not immediately. This makes check kiting nearly impossible. One highly effective control over cash receipts is the use of a lock-box system. Remittance addresses on invoices to customers have a post office box that is owned by the bank. The customer mails the check to the bank lock-box; the bank opens the mail and immediately deposits the checks into the client’s checking account. Documentation such as the remittance advices is then mailed to the client. This completely eliminates the ability of a mail clerk or other client employee from having access to the cash receipts. The audit client

Module Seven: Auditing Cash and Accounts Receivable

ACC 411 Module Seven 2

has access to received cash at least one day sooner. A calculation of the amount of interest the client may earn over time is significant if the cash is being deposited immediately. Revenue recognition states that revenue is recorded when the product or service has been delivered to and accepted by the client and subsequent receipt of payment can be reasonably assured. This is the link between the sales cycle and the cash receipts cycle for cut-off. Auditors are primarily concerned with the timing of the recording of sales and the subsequent receipt of cash. The assigned reading will make clear the link between sales, accounts receivable, and cash receipts. Credit approval is of great concern to auditors. In many companies the credit application is received via email or fax and simply filed. The concept here is that the prospective customer would not give bad references. However, those references may be fraudulent. There should be notes on the credit application that the references were validated. Auditors examining accounts receivable and sale are concerned with the overstatement of both accounts. This relates primarily to the cut-off assertion. Accounting records being left open after year-end are inherently subject to this type of error. Auditors will examine all sales and cash receipts for the last five days of the year and the first five days of the new year to determine that all activity is in the correct period. The bulk of information about cash and financial investments, accounts receivable, notes receivable, and revenue will be located in your textbook. A video by Map It Accountancy will reinforce your reading by using a visual representation of how the different parts of accounts receivable relate to each other. Check your understanding of the underlying principles of these concepts with the self-check quiz and then write a short paper, which will be due at the end of the module.

ACC 411 Module Seven 3

References Whittington, O. R., & Pany, K. (2012). Principles of auditing and other assurance services (18th ed.). Boston,

MA: McGraw-Hill Irwin.