Chapter 16

Auditing the Financing/Investing Process: Cash and Investments

McGraw-Hill/Irwin

2008 The McGraw-Hill Companies, All Rights Reserved

LO# 1

Cash and the Effect of Other Business Processes

Cash reported in the financial statements represents currency on hand and cash on deposit in bank accounts, including certificates of deposit, time deposits, and savings accounts.
Cash equivalents are frequently combined with cash for presentation in the financial statements. Definition: Short-term, highly liquid investments that are readily convertible to cash or so near their maturity that there is little risk of change in their value. Examples: Treasury bills; commercial paper; and money market funds.
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Cash and the Effect of Other Business Processes

LO# 1

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LO# 2

Types of Bank Accounts

Types of Bank Accounts

General Cash Account

Imprest Cash Accounts

Branch Accounts

In order to maximize its cash position, an entity implements procedures for accelerating the collection of cash receipts and properly delaying the payment of cash disbursements.
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Substantive Analytical ProceduresCash

Because of the residual nature of the cash account, the auditors use of substantive analytical procedures for auditing cash is limited to . . .

LO# 3 &4

comparisons with prior years cash balances.

comparisons with budgeted amounts.

This limited use of substantive analytical procedures is normally offset by (1) extensive tests of controls and/or substantive tests of transactions for cash receipts and disbursements or (2) extensive tests of the entitys bank reconciliations.
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Substantive Tests of Details of Transactions and Balances

LO# 3 &4

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LO# 3, 4, & 5

The Effects of Controls

Controls for Cash Receipts Controls for Cash Disbursement s The reliability of the clients controls over cash affects the nature and extent of the auditors tests of details.

Completion of Monthly Bank Reconciliation

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LO# 3 &4

Balance-Related Assertions

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Auditing the General Cash Account

Copy of Bank Reconciliation

LO# 5

To audit a cash account, the auditor should obtain these items.

Standard Bank Confirmation

Cutoff Bank Statement

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Bank Reconciliation Working Paper

LO# 5

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Standard Bank Confirmation Form

LO# 5

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LO# 5

Cutoff Bank Statement

Date of Last Bank Reconciliation

7 to 10 Days

A cutoff bank statement normally covers the 7- to 10-day period after the date on which the bank account is reconciled. Any reconciling item should have cleared the clients bank account during the 7- to 10-day period.
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LO# 5

Tests of the Bank Reconciliation

The auditor uses the following audit procedures to test the bank reconciliation:
1. Test the mathematical accuracy and agree the balance per the books to the general ledger.
2. Agree the bank balance on the reconciliation with the balance shown on the standard bank confirmation. 3. Trace the deposits in transit on the bank reconciliation to the cutoff bank statement. 4. Compare the outstanding checks on the bank reconciliation with the canceled checks in the cutoff bank statement for proper payee, amount and endorsement. 5. Agree any charges included on the bank statement to the bank reconciliation.
16-13 6. Agree the adjusted book balance to the cash account lead schedule.

Auditing a Payroll or Branch Imprest Account

LO# 5

The audit of any imprest cash account such as payroll or a branch account follows the same basic audit steps discussed under the audit of the general cash account.

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LO# 5

Auditing Petty Cash

Usually not material.
Potential for defalcation. Seldom perform substantive tests. Document controls.

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LO# 5

Disclosure Issues for Cash

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LO# 5

Disclosure Issues for Cash

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LO# 5

Disclosure Issues for Cash

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LO# 6

Fraud-Related Audit Procedures

Extended Bank Reconciliation Procedures Proof of Cash

Tests for Kiting

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Extended Bank Reconciliation Procedures

LO# 6

In some instances, the year-end bank reconciliation can be used to cover cash defalcations. This is usually accomplished by manipulating the reconciling items in the bank reconciliation.

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LO# 6

Proof of Cash

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LO# 6

Tests for Kiting

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LO# 7

Investments
Common Stock Preferred Stock

Debt Securities

Hybrid Securities

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Control Risk Assessment Investments

Occurrence and Authorization

LO# 8

Here are some of the more important assertions for investments.

Completeness

Accuracy and Classification

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LO# 9

Segregation of Duties

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LO# 10

Substantive Procedures for Testing Investments

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