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Chapter12SlidesOnly.pdf
Auditing- A Practical Approach
Chapter 12: AUDITING CASH, and INVESTMENTS
FMGT 4310
Auditing 2
12-1
Chapter 12 Learning Objectives
1. Identify the audit objectives applicable to cash
2. Discuss considerations relevant to determining
the audit strategy for cash
3. Design and execute an audit program for cash
balances
4. Describe special considerations when auditing
cash balances, including lapping, petty cash
funds, and imprest bank accounts
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Chapter 12 Learning Objectives
5. Identify the audit objectives applicable to
investments
6. Discuss considerations relevant to determining
the audit strategy for investments
7. Design and execute an audit program for
investments
8. Explain the special considerations applicable to
the audit of investments in subsidiaries,
associates and joint ventures 12-3
Audit Objectives
Key Issues • Cash
– EXISTS – Is OWNED – Properly Disclosed
E, R, P/D
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Types of Cash Accounts
• General cash account
• Imprest payroll account
• Branch bank account
• Imprest petty cash fund
• Cash equivalents (term deposits)
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Types of cash accounts
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Relationship between cash and transaction cycles
• Is there such a thing as a “cash cycle”?
No
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Relationship between cash and transaction cycles
• the General Cash account is considered significant in almost all audits, even when the ending balance is immaterial
Why?
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Relationship between cash and transaction cycles
• Is it necessary to specifically audit cash transactions?
No Sales cycle Purchases cycle
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Payments and Receipts
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Assess materiality and IR
Methodology- Designing Test of Details
Assess CR
Design/perform Control tests
Design/perform Analytics
Design Tests of Detail: •Audit procedures •Sample size •Items to select •Timing
Identify at risk assertions
FOR EACH ASSERTION:
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INHERENT Risk of misstatement or fraud
• How does cash differ from other asset accounts?
• Why is there generally more risk?
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Audit of the general cash account
1. Assess controls over the related transaction cycles
2. Assess controls over the preparation of independent bank reconciliations
3. Test key controls to be relied upon
4. Analytical procedures may be reduced if the year end bank reconciliation is audited 100%
5. Design and conduct audit procedures of year end cash balances
General Cash Account Internal Controls
• Controls over the transaction cycles:
• Appropriate controls over the receipts of cash (sales and other receipts) and,
• Appropriate controls over disbursements (payments to suppliers, employees and others)
SALES CYCLE
PURCHASES CYCLE
Audit of other transaction cycles can discover errors associated with cash
• Examples of such errors include:
• Failure to bill a customer
• Billing customer at an incorrect price
• Duplicate payment of a vendor’s invoice
• Payment for raw materials not received
What transaction cycles do these errors relate to?
General Cash Account Internal Controls
• Controls over the balance: • Independent bank reconciliations
• Timely completion
• Bank statements should be forwarded unopened to the independent reconciler
• Review of the completed reconciliation by a responsible person
What is a bank reconciliation?
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• Bank debit memo that should have been charged to a different customer.
• A cheque written out for $100 more than the amount on the vendor’s invoice.
• Cash recorded as a deposit in the GL bank account, but stolen before it is deposited in the bank.
Which of the following errors will be uncovered by a bank reconciliation?
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Auditing Strategy
Substantively verify General Cash – Audit the bank reconciliation – Trace to subsequent bank
statement – Agree the GL bank balance to
the bank confirmation – Cash count
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Auditing Strategy
What will auditors do with the subsequent bank statement?
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What is a bank Confirmation?
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Client authorization
Loans
Deposits
Copyright John Wiley & Sons Canada, Ltd. 12-25
Copyright John Wiley & Sons Canada, Ltd. 12-26
Bank confirmation
Auditor controls the sending of the bank confirmation and has it directly returned to the auditor’s office
Why?
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Auditing Strategy
How do we audit the bank reconciliation?
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Cash count
WCGW?
Procedures?
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Fraud-Oriented Procedures
• Proof of cash
• Tests for lapping
• Tests for kiting
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Audit of Payroll Cash Account
Easy to perform if
• an imprest account is used, and • the bank reconciliation is current
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Petty Cash
• Balance is frequently immaterial, however may be audited because of
• Susceptibility to defalcation
• Client expectations
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Internal Controls Over Petty Cash
• Responsibility of a single individual
• Funds should be kept separate from other activities
• Properly documented and authorized
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Audit Objectives
Key Issues • Investments
– EXIST – OWNED – Properly Valued and Disclosed
E, R, V, P/D
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Investments
• Purpose? 1) Surplus funds 2) LT relationship
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Investments
• Stocks (equity) dividends
• Bonds (debt) interest
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Investments Internal Controls
Control environment: • Authority Treasurer
• Information systems • Internal audit
Investments Internal Controls
Clear policies for • purchase/sale approval • handling of $$ • accounting • physical security
Auditing Strategy
Low transaction volume Substantively verify Investments
• verify opening balances • vouch sales/purchases • vouch income • count securities
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Auditing Strategy
Consolidation?
12-42Copyright John Wiley & Sons Canada, Ltd.
