AUDIT OF CASH – LECTURE

Learning Objectives:
 Explain the risk and responses associated in auditing cash
 Describe the audit procedures in the cash cycle

Typical Transaction Cycles

I. Revenue Cycle

Order
Shipping Billing Collection
Entry

II. Inventory Cycle

Purchasing Receiving Vouchering Disbursement

BASIC CONCEPTS

Cash and Cash Equivalents – defined as cash on hand and in banks and short-term, highly liquid investments
with original maturities of three months or less, readily convertible to known amounts of cash and which are subject
to insignificant risk of changes in value

WHAT ARE YOU AUDITING?

Balance sheet Cash and cash equivalents

Income statement N/A
Statement of changes in stockholders’ equity N/A
Cash flows Cash and cash equivalent
Disclosures Cash and cash equivalent accounting policy

RISK AND RESPONSES RELATED TO CASH

What can go wrong in the cash cycle?

Cash is incorrectly stated:
 Unrecorded cash transactions
 Cash transactions recorded that did not occur
 Cash balances do not exist
 Bank transfers not recorded in proper period

What significant assertion related to these risks?

 Existence/ Occurrence
Financial Statement Assertions:
 Existence or occurrence
o Recorded cash balance not valid
 Confirm cash accounts with financial institutions
 Examine reconciliations for significant cash accounts
 Determine whether transfers near period end between bank accounts (including transfers
between branches, divisions and subsidiaries) are recorded in the same period
 Completeness
o Bank account schedules not complete
 Obtain a schedule of bank accounts maintained and closed during the period
 Valuation – gross/ net
o Recorded foreign currency balance not stated at appropriate exchange rate
 Check exchange rate(s) to the interbank rates as of examination date
 Rights and obligations
o Arrangements with financial institutions not identified
 Obtain details/ confirm arrangements (e.g., contingent liabilities, compensating balances,
cash restrictions, or written guarantees, etc.) with financial institutions
 Presentation and disclosure

AUDIT PROCEDURES IN THE CASH CYCLE

I. Objective of bank reconciliation testing

 Verify that:
o Balance per the bank statement reconciles to general ledger
o All significant reconciling items are valid and cleared in the subsequent period (e.g. deposits,
outstanding checks, etc.)
Purpose of Bank Reconciliations
Checking accounts maintained with banks are used to deposit daily collections and to make payments by
writing and disbursing checks. If more than one checking account is maintained either with the same bank
or another bank, bank transfers may be made from one checking account to another by writing checks
drawn on the transferor bank and depositing the said check with the transferee bank, or through wire
transfers.
Banks send monthly bank statements to their depositors. Bank statement date is usually end of the month.
In most cases, the checking account book balance per the general ledger does not agree with the bank
balance per the bank statement due to timing differences in the posting of transactions between the
depositor and the bank. Reconciling items for transactions posted in the general ledger, but not posted on
the bank statement usually include the following:
Deposit in transit - represents undeposited collections recorded in the general ledger on or before month-
end that are deposited with the bank the next banking day of the following month. Hence, these are credited
by the bank only on the succeeding month.
Outstanding checks - represent checks written and recorded in the general ledger on or before month-end
but the payees have not deposited or cashed such checks on or before month- end. Thus, these checks will
clear the bank only on the succeeding month(s).
Bank transfers - represent money transferred by the depositor between accounts within the same bank or
with another bank and recorded in the general ledger as disbursement and deposit on or before month-end;
however, such transfers are posted by the bank(s) only when the transfers have been completed. This timing
difference should be shown on the bank reconciliation statements of both checking accounts: the transferor
bank should have an outstanding check/wire transfer and the transferee bank should have a deposit in
transit.
For these reasons, the depositor prepares a monthly bank reconciliation statement for each checking
account to reconcile the book balance to the bank balance. This enables the depositor not only to establish
the amounts of the above reconciling items but also identify any unrecorded bank transactions (e.g. interest
for interest bearing accounts, bank charges) and any book or bank errors. In this sense, bank reconciliations
are internal control procedures.

II. Procedures during fieldwork

 Obtain a schedule of banks accounts maintained and closed during the period
o For closed accounts, auditors should perform test of completeness and verify that no
outstanding loans exist.
 By referring to the materiality level set by the audit team, select bank accounts that have reached the
materiality level and those with numerous transactions.
 Request from the client (1) bank confirmation(s), (2) bank reconciliations, (3) bank statements on
cut-off date and succeeding month, & (4) support for reconciling items
III. Objectives of interbank transfer testing
 Verify that transfers between client’s bank accounts are:
o Recorded in same accounting period
o Not included in balances of both banks
 Test can detect double recording of cash