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Chapter 2: AUDIT OF CASH (Receipts and Disbursements) Audit of Cash and Cash Chapter 2 Equivalents Chapter Overview
Chapter 2: AUDIT OF CASH (Receipts and Disbursements) Audit of Cash and Cash Chapter 2 Equivalents Chapter Overview
Chapter 2: AUDIT OF CASH (Receipts and Disbursements) Audit of Cash and Cash Chapter 2 Equivalents Chapter Overview
Chapter Overview
This chapter discusses the audit procedures both test of control and substantive test for cash and cash
equivalents, and the auditor's objectives (assertions) in auditing cash items.
This chapter will analyze transactions of cash receipts and cash disbursements.
LEARNING OBJECTIVES:
1. Define and identify items of cash and cash equivalents in other items of current asset in the financial
statement.
3. Identify the related controls applied by the entity in management of cash. 4. Define and enumerate the
different audit procedures related to cash.
5. Provide conclusion about the fairness of cash balance in the financial statement.
"Yesterday is a cancelled check. Today is cash on the line. Tomorrow is a promissory note." Hank
Stram
Cash is one of the most important assets of the company. Daily business transactions involve receipts
and disbursement of cash, every business ensure that they have enough balance of cash for business
transaction and should account for cash receipts and disbursements properly. Most of the companies
employed a tight Introduction cash management to ensure that this asset is safeguarded, hence, a
control over cash in maintained. This control includes intact deposit system, use of petty cash fund, the
use of imprest system and preparation of bank reconciliation. Some companies however, are not
applying control over cash. As an auditor, we must ensure that cash as presented and reported in the
financial statement is a reasonable amount.
Cash in its very nature is considered to have a high inherent risk as this item is subject to employee theft
or even management fraud. By its nature, a tight internal control shall be imposed by the management
and those charge with governance. Due to high risk involved with cash, more time is devoted in auditing
transactions involving cash.
Cash is presented is the statement of financial position as line item "Cash and Cash equivalents" which
includes cash on hand, cash in bank, and cash equivalents with proper disclosures in the notes to
financial statement.
Cash Items and Classifications
In actual practice "cash items" includes both cash on hand (e.g., coins, currency, checks for deposit and
encashment) and cash in bank (e.g., savings deposit, current account and checking account). The
auditor must be familiar with the different items of cash in which the company under audit may have.
Cash includes the following individual items:
1. Working funds (Petty cash funds, tax fund, change fund etc.)
2. Demand deposits
3. Undeposited checks
4. Bank drafts
5. Money orders
6. Accounts in foreign currency (translated in peso)
Petty cash fund refers to cash on hand maintained in different department or business locations for
small amount of disbursements and expenditures such as repairs, supplies, and other miscellaneous
items.
Demand deposit are amounts of cash maintained in bank in form of savings and checking accounts
which are not restricted for withdrawal.
Undeposited checks are checks payable to the entity but are not yet presented in the bank for
encashment or for direct deposit in the account.
Bank drafts these are form of contract or commitments of banking institution to advance funds on
demand by the party to whom the draft was directed.
Money orders good as cash with same nature of bank drafts, but this item of cash is drawn from
authorized institution like post offices.
Accounts in foreign currencies are cash items of other foreign countries maintained most of the time
in the bank. These currencies must be converted in Philippine peso at year end (or any other functional
currency), the rate used to translate these foreign currency account should be the closing rate (rate of
exchange at year-end). Deposits in foreign banks that are subject to immediate and unrestricted
withdrawal generally qualify as cash. However, when cash in foreign banks is restricted as to use or
withdrawal, it should be segregated and designated as current or non-current asset, depending on the
period of restriction.
Cash set aside by management for special purpose. When cash is restricted as to use or withdrawal, it
should be segregated and designated as current or non. current asset, depending on the period of
restriction.
Bank overdrafts. PAS 7, Statement of Cash Flows, states that when bank overdrafts are repayable on
demand, they form an integral part of the entity's cash management. In this circumstance, bank over
drafts are included as a component of cash and cash equivalent (meaning it is deducted to debit
balance of cash to arriveve at correct cash balance). A characteristic of such banking arrangements is
that the bank balance often fluctuates from being positive to overdrawn. This is known as the right of
offset, which exist when there is an agreement between the bank and the depositor to offset any
overdraft to other bank accounts with positive balance. Otherwise, bank overdraft is reported as current
liability.
Compensating balance. Amount maintained by the depositor in the bank account as minimum cash
balance as included in the agreement between the bank and the depositor. Compensating balance is
either restricted or unrestricted for withdrawal. If compensating balance is restricted it should not be
included as part of cash and cash equivalents. But if the compensating balance is unrestricted for use
and withdrawal it forms part of the cash balance. This must be properly disclosed in the notes to
financial statement.
Cash equivalents. This is held for the purpose of meeting short-term cash commitments rather than for
investment or other purposes. For an investment to qualify as a cash equivalent it must be readily
convertible to a known amount Of cash and be subject to an insignificant risk of changes in value.
Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity of,
say, three months or less from the date of acquisition. (e.g
commercial paper, money market instrument, time deposit and treasury bills)
With the nature of cash and high risk associated, management shall have an effective cash
management system by having good cash planning and control. In actual practice, the major
component of cash planning system is the cash budget. The cash budget is a plan of cash
activities that projects the inflows and outflows of cash. It helps to identify the timing of potential
cash shortage and overage. Cash control system is the means of the management to safeguard
its cash balance. Cash control system adopted by the management includes the following:
INTERNAL CONTROL
ELEMENTS OF CONTROL RECEIPTS DISBURSEMENT
1. Assignment of Specific employees are Specific employees approved
responsibility designated as cashier or purchased documents for
accountants payment, Executives examine
approvals, and then sign the
checks
2. Reliable and Spend training programs for Disbursement is entrusted to
competent personnel employees high level meployees, with
establishment of treasury
department
3. Documents and Customers who paid in mail Suppliers issued an invoice
records should be included in the due for payment and checks
remittance advice showing the are prenumbered. Bank
amount of cash received. statement shows they
Bank statement shows and payment made during the
records statement shows the period
the receipts for specific date
and customers received an
official receipt upon payment.
4. Authorization Only authorize personnel Large disbursements shall be
grant exceptions, approved authorized by those charge in
check receipts above a certain governance. The controller
amount and allow customer to and treasurer examined the
purchase on credit. transactions and ensure that:
l. Invoice is compared with
purchase order and request,
2. invoice is compared with
receiving report, and 3.
Amount recorded in is amount
in the invoices examined.
5. Separation of duties Cashiers and mailroom Employees who handle
employees who handle cash checks do not have access to
do not have access to the accounting records.
accounting records. Accountant who record
Accountants do not handle disbursements do not handle
cash cash
6. Electronic and controls Cash is stored in vaults and in Blank checks are stored in
banks. Receipts are matched vault and controlled by official
with remittance advices and with no accounting duties.
with the bank deposit in the Paid checks are punched to
bank statement. avoid double payment.
The inherent risk for cash is the susceptibility of cash account to misstatement. Likewise, the
inherent risk for cash will directly impact the risk of material misstatement for cash. Inherent risk
is outside the control of auditors, so they can only assess and determine if the inherent risk for
cash is low, moderate or high. The following are the primary inherent risks of cash that could
occur:
1. Cash could be manipulated and stolen by management and employees. The fraud
related to cash is usually due to three factors including incentive, opportunity, and
rationalization, which is also referred to as the triangle of fraud.
2. Cash is susceptible to error due to high transactions and volume as either incomes or
expenses tend to be related to cash.
3. Not all cash transactions are recorded due to error or fraud (e.g. error such as bank
reconciliation items or fraud such as cash received from customers was stolen by
employees)
4. Money laundering due to the cash can be easily transferred from one location to another
Normally, the inherent risk for cash is assesses at high level because of the following reasons:
1. High volume of activity. Usually, cash has a high volume of activities during the period
comparing to other accounts. This is due to either incomes or expenses are likely to involve in
cash in the business transactions. Hence, the high volume of transactions tends to make cash
more susceptible to error compared to other accounts in financial statements.
2. Ease of transferability. The process of cash transfer, either between company branches or
other countries, is much easier because of online platforms available as compared to other
assets such as equipment or machines. This may lead to fraud or errors if no proper controls
are in place.
3. Most liquid asset. It is most susceptible to fraud as it is easily taken out or transferred
between one bank account to another with the electronic transfer.
4. Prone to theft. Cash is most prone to theft either from internal staff or external people if there
are no proper controls in place. Though, the main concern related to cash thief here is the
internal thief as it is usually related to the triangle of fraud whenever fraud and theft happen.
Control risk is the risk that internal controls cannot prevent, detect or correct material
misstatement that could occur on financial statements. Usually, when the inherent risk for cash
is high, auditors would try to assess if the internal control is strong, so that they can tick the
control risk as low and reduce the risk of material misstatement for cash. Similar to inherent risk,
auditors cannot modify the control risk that the client has; they can only assess whether it is low,
moderate or high and perform their work based on the level of risk they have with the client's
cash account. The level of control risk for cash depends on how strong and effective the internal
controls on cash that the client has in place. The segregation of duties and authorization are
usually the most important internal controls for cash as well as many other financial line items.
Auditors usually evaluate the class of transaction or account balance whether it is materially
misstated by testing the various audit assertions.
Usually, existence and completeness are the assertions which auditors usually concern most
about. Existence concern whether cash recorded actually exists in real life. This is the major
concern that auditors usually have with the cash account as the risk of material misstatement for
cash related to existence could be due to fraud.
Completeness is also relevant here as all cash transactions may not be recorded. For example,
employees may have received the cash from sales but they do not record in the accounting
record for having the intention to manipulate and steal the cash.
Other assertions such as valuation may be important in the circumstance that the company has
business activities in different countries that use different currencies.
So, the risk of material misstatement for cash here is about the translation of foreign currencies
back to the original or functional currency.
Presentation and disclosure usually concern with those of cash restrictions that have not been
properly disclosed in the note to financial statements.
Existence: The primary objective of the auditor is to determine that all cash on the statement of
financial position is held by the entity or by others (e.g., a bank) for the entity as of the end of
reporting period. To test the existence of cash, the following are the procedures of the auditor.
1. Cash count (on hand, e.g. petty cash fund and cash in vault)
Cash Count
Companies often have cash on hand in each department or locations. Cash on hand consists of
working funds (petty cash fund etc.). Cash count is made to all cashiers or custodian and might
be conducted throughout the year either before or after the reporting period. In performing cash
count, the following shall be observed by the auditor:
1. A cash count is made on a surprise and irregular interval basis. This is to ensure that all
items of cash, possible cash items and securities found inside the cash box are in control to
avoid floats and transfers during the count.
2. Examine all checks that could probably use to hide discrepancies, inquire with the
managements policies regarding authorization and handing of cash. A check issued by the
custodian might be included in one of the checks in the cash box, if that happens, such
check is not included in the accounted cash balance, it is a normal practice that custodians
are not allowed to encash checks nor issue checks of their own.
3. The count shall be made in the presence of the management representative (custodian) to
ensure that any discrepancies are not made by the auditor.
4. Determine the total accountability of the custodian.
5. Determine the amount accounted for by listing each item in the fund whether in form of
coins, currencies, checks, expense receipts, and etc.
6. Ensure that the custodian will acknowledge the amount counted and sign the count sheet
as evidence of return of funds.
7. Compare the accountability and accounted for to determine any shortage overage. The
objective of the internal control over cash is to responsibility among employees and to
prevent the happening of any discrepancies in the future.
Bank Confirmation
Bank confirmation primarily the procedure for the existence and rights and obligation assertions
related to reported cash balance. An auditor should confirm all bank accounts held by the
company in banking institution including those that were closed during the year under audit.
Also, there are factors considered by the auditor to determine what bank is to confirm like
volume of transaction and nature of bank account such as for payroll of disbursement for
payment to supplier. The following should be observed by the auditor in performing a bank
confirmation:
1. Ask for the list of all bank accounts maintained by the client;
2. Ask the client to prepare the confirmation letter using the company's letter head;
3. Check for the accuracy of the information in the confirmation letter prepared by the
management, if satisfied, the auditor will mail the letter using the auditors reply envelope
and mailing system;
4. Replies should be directly received by the auditor and update the related working paper;
5. Communicate and further investigate any discrepancies with recorded balance and
replies from banks.
On the receipt of confirmation letters, the auditor should review for details of security,
guarantees and restrictions over the entity's use of cash and agree the details of the item
with entity. The auditor should review documents such as minutes of the meetings and
agreements to establish any restrictions over the use of cash.
Completeness: All cash owned by the entity at the statement of financial position date is
included on the statement of financial position. The objective of the auditor is to determine
that all cash items that should have been included in the cash balance must have been
recorded. To test the completeness of cash, the following are the procedures of the auditor.
Proof of cash
A proof of cash is another audit tool used by the auditor in audit of cash balance. If
the auditor believes that the internal control over cash is poor and weak and the
review of bank reconciliation is not enough to provide reasonable assurance, the
auditor may consider preparing the proof of cash. A proof of cash is an expanded
bank reconciliation which normally includes at least two periods. This is prepared by
the auditor to reconcile not only the account balance but also the account
transactions. The proof of cash itself does not prove the correctness of cash balance
but a way of detecting unauthorized cash receipts and disbursements. Specifically, it
is used to identify:
1. Cash receipts and disbursements are recorded in the accounting record but not
in the bank.
2. Cash deposits and check payments are recorded on the bank statement but not
in the accounting records; and
3. Cash receipts and disbursements are recorded on the bank statement at a
different amount as recorded in the accounting records.
A proof of cash is essentially a fraud detection procedure that may be used by the auditor and
the client, for any month during the year.
Test of kiting
When cash has been stolen by an employee, he can conceal the cash shortage by means of
kiting. This involves an employee covering the cash shortage by transferring money from one
bank account to another and recording the transactions improperly on the client's books. The
cash shortage can be covered up by preparing a cheque on one account just before year end;
however, this transaction is not recorded until the next period. The cheque is deposited in a
second account just before year-end and recorded as a cash receipt in the Current period.
Kiting is detected by preparing an interbank transfer schedule. Interbank transfer schedule is
usually obtained if there are numerous bank transfers, regardless of internal controls or for the
purpose of detecting suspected fraud.
1. Verify the accuracy of the information by comparing the disbursements and receipts to
cash book.
2. Compare the dates of transfers on the schedule with the bank statement, noting that all
transfer a few days before and after the end of the reporting period has been included on
the schedule.
1. Obtaining a cut-off bank statement and checking the proper listing Of outstanding
checks and deposits in transit on bank reconciliation.
2. Checking the details of customer payments deposits in comparison to details of
customer payment in daily remittance list or other record Of detail postings.
3. Comparing the cheques listed on a sample of deposit slips from the reconciliation month
to the detail of customer credits listed on the day's posting to customer accounts
receivable
Rights and Obligation: The auditor's objective is to determine that the entity owns, or has a legal
right to, all the cash on the statement of financial position at the statement of financial position
date. All cash is free of restrictions on use, liens, or other security interests or, if not, such
restrictions, liens, or other security interests are identified. Examine standard bank confirmations
and read the minutes of the board of directors' meetings to determine whether any restrictions
have been placed on cash.
Valuation and Allocation: The auditor's objective is to determine that cash is correctly valued in
the financial statement. Some big companies maintain their cash in foreign bank account or is
maintaining a foreign currency denomination unit in a bank for its foreign currency transactions.
Test appropriate valuation of cash and cash equivalents (including overdrafts) in foreign
currencies by re-computation using the closing rate to translate foreign currencies in functional
currency (Philippine Peso). The auditor should test the conversion into Philippine peso. The
auditor should:
1. Obtain from an independent source for the year end foreign exchange rate (Bloomberg,
or BSP);
2. Re-compute the converted peso value of the foreign currency account;
3. Compare the computed value to the amount of conversion made by the client.
4. Proposed adjustment if the difference is material.
1. To gather evidence about the balance per bank in a bank reconciliation, an auditor
would examine all of the following except the
a. Cutoff bank statement.
b. Year-end bank statement.
c. Bank confirmation.
d. General ledger
REVIEW QUESTIONS
2. Two months before year-end, the bookkeeper erroneously recorded the receipt of a
long-term bank loan by a debit to cash and a credit to sales. Which of the following is the
most effective procedure for detecting this type of error?
a. Analyze the notes payable journal.
b. Analyze bank confirmation information.
c. Prepare year-end bank reconciliation.
d. Prepare a year-end bank transfer schedule.
3. As one of the year-end audit procedures, the auditor instructed the clients personnel to
prepare a standard bank confirmation request for a bank account that had been closed
during the year. After the client's treasurer had signed the request, it was mailed by the
assistant treasurer. What is the major flaw in this audit procedure'?
a. The confirmation request was signed by the treasurer.
b. Sending the request was meaningless because the account was closed before the
year-end.
c. The request was mailed by the assistant treasurer,
d. The CPA did not sign the confirmation request before it was mailed.
4. An unrecorded check issued during the last week of the year would most likely be
discovered by the auditor when the
a. Check register for the last month is reviewed.
b. Cut-off bank statement is reconciled.
c. Bank confirmation is reviewed.
d. Search for unrecorded liabilities is performed.
9. Which of the following is the focus of an audit of cash for most companies'?
a. General cash account.
b. b. Payroll cash account.
c. Petty cash account.
d. Money market account.
10. Which of the following cycles does not affect cash in bank?
a. Capital acquisitions cycle.
b. Inventory and warehousing.
c. Payroll and personnel cycle.
d. Acquisitions and disbursements.
11. The audit objective of determining that cash in bank, as stated on the reconciliation,
foots correctly and agrees with the general ledger can be tested by which of the
following procedures?
a. Performing tests for kiting.
b. Receiving and testing a cutoff bank statement.
c. Footing the outstanding checks list and the list of deposits in transit.
d. Examining the minutes of the board of directors for restrictions on the use of cash
12. Which of the following statements is correct?
a. Auditors must obtain bank confirmations on every audit.
b. Auditors obtain bank confirmations at their discretion.
c. Auditing standards do not address specific requirements regarding bank
confirmations.
d. Auditing standards do not require bank confirmations except when there is an
unusually large number of inactive bank accounts.
15. When the auditor believes the year-end bank reconciliation may be intentionally
misstated, it is appropriate to perform extended tests of the year. end bank
reconciliation. Assuming the client has a October 31 year-end, these extended tests
would not include:
a. comparing all September 30 reconciling items with canceled checks and other
documents in the October bank statement.
b. comparing all canceled checks and deposit slips in the October bank statement with
the October cash disbursements and receipts records.
c. carrying out all proper procedures subsequent to the end of the year with the use of
the bank cutoff statement.
d. determining that all outstanding checks had cleared by the date of the bank cutoff
statement.
17. Which of the following would normally not be discovered as part of the audit
a. Failure to bill a customer.
b. Failure to include a deposit in transit on the bank reconciliation.
c. Duplicate payment of a vendor's invoice.
d. Payment to an employee for more hours than she worked.
19. Which of the following balance-related audit objectives typically is assessed as having
high inherent risk for cash?
a. Existence.
b. Cutoff.
c. Detail tie-in.
d. Presentation and disclosure.
21. Because cash is the most desirable asset for people to steal, it has a higher:
a. control risk.
b. inherent risk.
c. detection risk.
d. liquidity risk.
22. Testing the reasonableness of the cash balance at year-end is less important when the
year-end bank reconciliation is verified:
a. on a 100% basis.
b. by someone in client's organization who is independent of the treasurer's function.
c. someone in client's organization who is independent of the controller's function.
d. by the owner/manager.
24. Which of the following errors would be least likely to be discovered during the tests of
the bank reconciliation?
a. Payment was made to an employee for more hours than he worked.
b. Cash received by the client subsequent to the balance sheet date was recorded as cash
receipts in the current year.
c. Payments on notes payable were debited directly to the bank balance by the bank were
not entered in the client's records.
d. Deposits were recorded in the cash receipts records near the end of the year, deposited
in the bank, and were included in the bank reconciliation as a deposit in transit.
25. A proof of cash is not an effective procedure for identifying which of the following types
of misstatements?
a. All recorded disbursements were paid by the bank.
b. All recorded cash receipts were deposited.
c. All amounts that were paid by the bank were recorded.
d. Some checks were written for incorrect amounts.
REVIEW QUESTIONS
1. Which of the following financial statement assertions is not addressed by the
confirmation of accounts receivable?
a. Existence.
b. Presentation and disclosure.
c. Rights.
d. Valuation.
2. Audit working papers often include a client a prepared, aged trial balance of accounts
receivable as of the balance sheet date. An aging is best used by the auditor to
a. Evaluate controls over credit sales.
b. Test the accuracy of recorded charge sales.
c. Estimate credit losses.
d. Verify the validity of the recorded receivables.
3. An entity's financial statements were misstated over a period of years due to large
amounts of revenue having been recorded in journal entries that involved debits and
credits to an illogical combination of accounts. The auditor could most likely have been
alerted to this irregularity by
a. Scanning the general journal for unusual entries.
b. Performing cutoff tests at year-end.
c. Tracing a sample ofjournal entries to the general ledger.
d. Examining documents supporting sales returns and allowances recorded after year-
end.
4. When auditing the allowance for uncollectible accounts, the least reliance —should be
placed on which of the following?
a. The credit manager's opinion.
b. An aging of past due accounts.
c. Collection experience of the client's collection agency.
d. Ratios that show the past relationship of the allowance to net credit sales.
5. In determining the existence of accounts receivable, which of the following would the
auditor consider most reliable?
a. Documents that supports the accounts receivable balance.
b. Credits to accounts receivable from the cash receipts book after the close of
business at year-end.
c. Direct telephone communication between auditor and debtor.
d. Confirmation replies received directly from customers.
7. Customers with substantial due balances have failed to reply after second requests had
been mailed to them directly. Which of the following audit rocedures is most
appropriate?
a. Examine shipping documents.
b. Review cash collections during the year being audited.
c. Intensify the study of internal controls for receivables.
d. Increase the balance in the accounts receivable allowance account.
10. You are auditing the financial statements of a small rural municipality. The receivable
balances represent residents' delinquent real estate taxes. Control risk is at the maximum.
To determine the existence of the account receivable balances at the balance sheet date,
you would most likely
a. Send positive confirmation requests.
b. Send negative confirmation requests.
c. Examine evidence of subsequent cash receipts.
d. Inspect internal records such as copies of tax invoices that had been mailed to the
residents.
11. Which of the following is not a balance-related audit objective evaluated in e audit of
accounts receivable?
a. Timing
b. Realizable value
c. Completeness
d. Accuracy
12. The two primary classes of transactions in the sales and collection cycle are:
a. sales and sales discounts,
b. sales and cash receipts.
c. sales and sales returns.
d. sales and accounts receivable.
13. For most audits, inherent risk for accounts receivable is moderate or low except for
which balance-related audit objectives?
a. Timing and realizable value.
b. Completeness and existence.
c. Existence and accuracy.
d. Realizable value and cutoff.
14. A listing of the balances in the accounts receivable master file at the balance sheet date,
by total balance outstanding and by the amount of time the component parts have been
outstanding, is the:
a. customer list.
b. aged trial balance.
16. Which of the following is likely to be determined first when performing tests of details for
accounts receivable'?
a. Recorded accounts receivable exists.
b. Accounts receivable in the aged trial balance agree with related master file amounts,
and the total is correctly added and agrees with the general ledger.
c. Accounts receivable are owned.
d. Existing accounts receivable are included.
18. If accounts receivable accounts with credit balances are significant, they should be:
a. written off.
b. moved to the debit side.
c. reclassified as accounts payable.
d. corrected by making adjusting entries.
19. If the client's internal control for recording sales returns and allowances is evaluated
as ineffective:
a. a larger sample is needed to verify cutoff.
b. sampling is not appropriate.
c. all sales returns must be traced to supporting documentation.
d. all sales returns must be confirmed with the customer.
20. Which of the following procedures do most auditors perform when auditing the
allowance for doubtful accounts?
a. Send positive confirmations.
b. Inquire of the client's credit manager.
c. Send negative confirmations.
d. Examine sales invoices.
21. Which of the following most likely would be detected by a review of a client's sales
cutoff?
a. Excessive sales discounts.
b. Unrecorded sales for the year.
c. Unauthorized goods returned for credit.
d. Lapping of year-end accounts receivable.
22. The understatement of sales and accounts receivable is best uncovered by:
a. confirming receivables.
b. reviewing the aged trial balance.
c. test of transactions for shipments made but not recorded.
d. reconciling the accounts receivable general ledger account with the schedule of
accounts receivable.
23. An auditor of January learns were that debited collections to cash of and accounts
credited receivable to accounts during receivable the first as ten days of December
31 . The effect generally will be to:
a. overstate the current ratio with no effect on working capital at December 31.
b. overstate both working capital and the current ratio at December 31.
c. overstate working capital with no effect on the current ratio at December 31.
d. leave both working capital and the current ratio unchanged at December 31.
24. When performing tests of controls and tests of transactions for sales, the auditor
generally defines the population as:
a. all accounts receivable transactions for the year.
b. all sales invoices for the year.
c. all cash receipts transactions for the year.
d. all sales invoices less sales return credit memos.
25. For most audits, a proper cash receipts cutoff is less important than the sales cutoff
because the improper cutoff of cash:
a. is detected and correct when cash is separately audited.
b. is unlikely to have a material impact on the balance sheet or the income
statement.
c. affects on the cash and accounts receivable balances on the balance sheet
and does not affect net income.
d. rarely occurs given the control consciousness of most entities.