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- 1. 1 Auditing the Financing/Investing Process: Cash and Investments Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 2. Cash and Cash Equivalents “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 and money market funds. LO# 1 16-2
- 3. Cash and the Effect of Major Accounting Transactions/Business Processes LO# 1 16-3
- 4. Types of Bank Accounts In order to optimize its cash flow, an entity implements procedures for accelerating the collection of cash receipts and delaying the payment of cash disbursements, to the extent delay is appropriate. General Cash Account Imprest Cash Accounts Branch Accounts Types of Bank Accounts LO# 2 16-4
- 5. The Effects of Controls The reliability of the entity’s controls over cash affects the nature and extent of the auditor’s tests of details. Controls for Cash Receipts Controls for Cash Disbursements Completion of Monthly Bank Reconciliation LO# 2 16-5
- 6. Substantive Analytical Procedures—Cash This limited applicability 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 entity’s bank reconciliations. Because of the residual nature of the cash account, the auditor’s use of substantive analytical procedures for auditing cash is typically limited to . . . comparisons with prior years’ cash balances. comparisons with budgeted amounts. LO# 3&4 16-6
- 7. Substantive Tests of Details of Transactions and Balances LO# 3&4 16-7
- 9. Auditing the General Cash Account Copy of Bank Reconciliation Standard Bank Confirmation Cutoff Bank Statement To audit a cash account, the auditor should obtain these items. LO# 5 16-9
- 10. Bank Reconciliation Working Paper LO# 5 16-10
- 11. Standard Bank Confirmation Form LO# 5 16-11
- 12. 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. For reconciliation purposes, any item should have cleared the entity’s bank account during the 7- to 10-day period. LO# 5 16-12
- 13. Tests of the Bank Reconciliation The auditor typically uses the following audit procedures to test the bank reconciliation: 1. Verify 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 contained in the cutoff bank statement for proper payee, amount, and endorsement. 5. Agree any charges included on the bank statement to the bank reconciliation. 6. Agree the adjusted book balance to the cash account lead schedule. LO# 5 16-13
- 14. Tests for Kiting LO# 6 16-14
Editor's Notes
- Chapter 16: Auditing the Financing/Investing Process: Cash and Investments
- Cash and the Effect of Major Accounting Transactions/Business Processes Cash can come from revenue, sale of PPE, or issuance of LT debt or stock. It is disbursed through purchases, payroll, and paying for LT debt and stock. See Figure 16-1 in the textbook.
- The Effects of Controls The reliability of the entity’s controls over cash affects the nature and extent of the auditor’s tests of details. A company needs to have controls over Cash Receipts and Cash Disbursements and generally complete a monthly bank reconciliation.
- Balance-Related Assertions Refer to Table 16-2 in the text for more details.
- Auditing the General Cash Account To audit a cash account, the auditor should obtain these items. Copy of Bank Reconciliation Standard Bank Confirmation Cutoff Bank Statement
- Cutoff Bank Statement A cutoff bank statement normally covers the 7- to 10-day period after the date on which the bank account is reconciled. For reconciliation purposes, any item should have cleared the entity’s bank account during the 7- to 10-day period.
- Tests of the Bank Reconciliation The auditor typically uses the following audit procedures to test the bank reconciliation: Verify the mathematical accuracy and agree the balance per the books to the general ledger. Agree the bank balance on the reconciliation with the balance shown on the standard bank confirmation. Trace the deposits in transit on the bank reconciliation to the cutoff bank statement. Compare the outstanding checks on the bank reconciliation with the canceled checks contained in the cutoff bank statement for proper payee, amount, and endorsement. Agree any charges included on the bank statement to the bank reconciliation. Agree the adjusted book balance to the cash account lead schedule.