It is about cash audit Wich needs control

1. chapter 4
CASH AUDIT

2. Cash is medium of exchange readily
acceptable by knowledgeable party
(seller of goods/services) in exchange
for goods and services and by bank for
deposit at face value.

3. Since cash is the asset most likely
to be used improperly by
employees, exposed for
embezzlement and many business
transactions either directly or
indirectly affect it, it is therefore
necessary to have effective control
of cash.

4. Cash includes money on deposit in banks
and other items that a bank will accept
for immediate deposit. It is a medium of
exchange that a bank accepts for
deposit and immediate credit to
depositors account.
Money on deposit in banks includes
checking and saving accounts. Other
items such as ordinary checks received
from customers, money orders, coins and
currency and petty cash also are
included as cash.

5. Cash is more susceptible
(exposed) to theft than any
other asset because it can be
easily directed or improperly
used, Therefore, it is necessary to
effectively safeguard cash by
special controls. Cash is the
single asset readily convertible
into any other type of asset.

6. The following are some of the
characteristics of cash:
Cash is used as medium of
exchange
Cash is the most liquid asset
Cash is mostly affected by business
transactions
Cash is used to measure the value of
other assets
Cash is mostly exposed to
embezzlements

7. Management of cash
Cash management refers to planning,
controlling and accounting for cash
transactions and cash balances. Efficient
management of cash is essential to the
survival and success of every business
organization.
Managing cash requires planning wisely
so that there will not be excess cash held
on hand at any point in time; or there is
no shortage of cash at any point in time
to meet the businesss needs.

8. Internal Control of Cash
The need to safeguard cash is crucial
in most businesses because cash is
mostly exposed to embezzlement.
Firms address this problem through
the internal control system. An
internal control system is a set of
policies and procedures designed to
protect assets, provide accurate
accounting records and evaluate
performances.

10. type of cash account
The general cash account is the central
point of cash for most organizations
because virtually all cash receipts and
disbursements flow through this account.
For example, the disbursements for the
acquisition and payment cycle are
normally paid from this account, while
the receipts of cash in the sales and
collection cycle are deposited in the
account

11. Branch bank accounts are useful for
building banking relations in local
communities and permitting the centralization
of operations at the branch level.
In some companies, the deposits and
disbursements for each branch are made to a
separate bank account, and the excess cash is
periodically transferred electronically to the
main office general bank account. The branch
account in this instance is much like a general
account, but at the branch level.

12. The auditors’ objectives in examination
of cash
The auditors have five objectives in the
audit of cash:
Consider internal control over cash
transactions.
Determine the existence of recorded cash
and the client’s ownership of this asset.
Establish the completeness of recorded
cash.
Establish the clerical accuracy of cash

13. Determine that the statement
presentation of cash is appropriate.
The overall objective of the audit of
cash is to determine that cash is
fairly presented in conformity with
generally accepted accounting
principles.

14. Internal Control Over Cash
(a) Control Objectives
The central control objectives are
that:
All sums are received and
subsequently accounted for.
No payments are made which should
not be made.
All receipts and payments are

15. (b) Control Procedures
A detailed study of the operating routines of
the individual business is necessary in
developing the most efficient control
procedures. These universal rules for
achieving internal control over cash may be
summarized as follows:
Do not permit any one employee to handle
transaction from beginning to end.

16. Separate cash handling from record
keeping.
Centralize receiving of cash as much
as possible.
Record cash receipts immediately.
Encourage customers to obtain
receipts and observe cash register
totals.
Deposit each day’s cash receipts
intact

17. Make all disbursements by cheques with the
exception of small from petty cash.
Have monthly bank Reconciliation prepared
by employees not responsible for the
issuance or custody of cash. The completed
reconciliation should be reviewed promptly
by an appropriate official.
Forecast expected cash receipts and
disbursements and investigate variances
from forecasted amounts.

18. Internal control over cash receipts.
Cash receipts resulted from a variety of
activities. For example, cash is received
from revenue transactions, short and long
term borrowings, the issuance of stock, and
the sale of marketable securities, long term
investments, and other assets. The scope of
this section is limited to cash receipts from
cash sale and collection from customers on
credit sales.

19. The basic internal controls over cash receipts
include the following:
Authority to collect cash should be clearly
defined.
Collections should be recorded when
received.
The collector’s cash receipts should be
reconciled to the eventual banking.
Receipts should be banked immediately.
Each day’s receipts should be recorded
promptly in the cashbook.
Sales ledger account should have not access

20. The processing of receipts from cash
and credit sales involves the following
cash receipts functions:
Receiving cash receipts.
Depositing cash in bank.
Recording the receipts.
Segregation of duties in performing these
functions is an important internal control
activity.

21. Receiving cash receipts
A major risk in processing cash receipts
transactions is the possible theft of cash
before and after a record of cash is
made. Thus, control procedures should
provide reasonable assurance that
documentation establishing
accountability is created at the moment
cash is received and that the cash is
subsequently safeguarded.

22. Depositing cash in bank
Proper physical controls over cash
require that all cash receipts be
deposited intact daily. Intact means
all receipts should be deposited; that
is cash disbursements should not be
made out of un-deposited receipts.

23. Recording the receipts
This function involves journalizing over the
counter and mail receipts and posting mail
receipts to customer accounts. Controls
should ensure that only valid receipts are
entered and that all actual receipts entered at
the correct amount.
To ensure that only valid transactions are
entered, physical access to the accounting
records or computer terminals used in
recording should be restricted to authorized
personnel.

24. Internal Control Over Cash
Disbursements
There are two cash disbursements
functions as follows:
Paying the liability
Recording the cash disbursements.

25. The basic internal controls over cash
disbursements include:
· Unused checks should be held in
a secure place.
The person who prepares checks should
have no responsibility over purchase
ledger or sales ledger.
Checks should be signed only when
evidence of a properly approved
transaction is available.

26. These checks should be evidenced
by signing the supporting
documents.
Check signatories should be
restricted to the minimum practical
number.
Two signatories at least should be
required except perhaps for checks
of small amounts.

27. Checks should be crossed before being
signed.
Supporting documents should be
canceled as paid to prevent their use to
support further check payments.
Checks should preferably dispatch
immediately.

28. Control Over Petty Cash
The level and location of cash floats
should be laid down formally.
Cash should securely hold.
There should be restricted access to the
floats.
All expenditure should require a
voucher system signed by a responsible
official, not the petty cashier.

29. Vouchers should be produced before the
check is signed for reimbursement.
A maximum amount should be placed
on a petty cash payment to discourage
normal purchase procedures being by
passed.
Periodically the petty cash should be
reconciled by an independent person.

30. Audit program for cash
The following audit program indicates the general
pattern of work performed by the auditors in the
verification of cash.
Consider internal control for cash.
Obtain an understanding of internal control for
cash.
Assess control risk and design additional tests of
controls for cash.
Perform additional tests of control for those
controls, which the auditors plan to consider in
their assessment of control risk.

31. (a) Test the accounting records
and reconciliation by re-
performance.
Compare the detail of a sample of
recorded disbursements in cash
payments journal to accounts
payable postings, purchase orders,
receiving reports, invoices, and
paid checks.

32. Compare the detail of a sample of
recorded cash receipts listings to the
cash receipts, journal, accounts
receivable postings, and
authenticated deposit slips.
Reassess control risk and design
substantive tests for cash.

33. The following are examples of typical
tests of controls.
Test the accounting records and
Reconciliation by re-performance.
Compare detail of cash receipts listings to
cash receipts journal, accounts receivable
postings, and authenticated deposit slips.
Compare detail of a sample of recorded
disbursements in cash payments journal,
accounts payable postings, purchase
orders, receiving reports, invoices, and
paid checks.

34. B. Substantive tests
Obtain analyses of cash balances and
reconcile to the general ledger.
Send standard confirmation forms to
banks to verify amounts on deposit.
Obtain or prepare reconciliation’s of
bank accounts as of the balance sheet
date and consider the need to reconcile
bank activity for additional months.
Obtain a cut off bank statement.

35. Verify the client’s cutoff of cash
receipts and disbursements.
Trace all bank transfers for the last
week of audit year and first week of
following year.
Investigate any cheques representing
large or unusual payments to related
parties.
Determine proper financial statement

36. Auditor Objectives
When developing an audit program for
cash, the auditor must consider his
objectives in this area. They are as
follows:
· To discern the internal controls over
cash being used by the client.
· To consider the inherent risks
associated with cash.
· To measuring the risk of material

37. Based on these objectives, the auditor
must develop an audit program that
contains adequate tests of the client’s
substantive procedures and controls
that are targeted at the following:
· Completeness of records. Verify that
the cash stated in the client’s records
has been fully recorded.

38. The following are all considered to be substantive
procedures for cash. Many of these items are
explained more fully in the following sections of
this chapter.
1. Obtain balance detail. Obtain cash balance
information for each cash account and reconcile
these balances back to the general ledger.
2. Confirm balances. Send confirmation forms to the
financial institutions with which the client does
business, asking for verification of account balances.
3. Reconcile accounts. Either review bank
reconciliations prepared by the client or directly
prepare the reconciliations.

39. 4. Examine cutoff. Obtain a cutoff
bank statement that itemizes
transactions subsequent to the balance
sheet date, and verify that
the client has properly cut off the
recording of cash receipts and cash
disbursements.
5. Count cash. Verify the amount of
cash on hand.

40. 6. Review bank transfers. Examine any
bank transfers for one
week on both sides of the balance sheet
date.
7. Examine related party transactions.
Review any unusually large payments to
related parties.
8. Conduct analytical procedures.