CASH AND CASH EQUIVALENTS

INVESTMENT OF EXCESS CASH – any cash accumulated in

excess of that needed for current operations should be
DEFINITION – CASH invested, even temporarily in some type of revenue
 money and other negotiable instrument that is payable in earning investment
money and acceptable by the bank for deposit and  time deposit, money market instruments, treasury bills
immediate credit
 NOT CASH
o postdated checks – check on which the issuer
has stated a date later than the current date CLASSIFICATIONS OF INVESTMENT OF EXCESS OF CASH
 unacceptable by the bank for deposit
and immediate credit or outright Term Classification
encashment 3 mos. or less cash and cash equivalents
more than 3 mos. but short-term financial
RECOGNITION w/in 1 year assets/temporary
 must be unrestricted in use investments
o must be readily available in the payment of more than 1 year non-current / long-term
current obli and not be subject to any investments
restrictions, contractual, or otherwise
 INCLUSIONS MEASUREMENT
o checks cash face value
o cash on hand cash in foreign currency current exchange rate
 undeposited cash collections bank or financial institution estimated realizable
 customer’s checks holding funds in bankruptcy/ value (if amt recoverable
 cashier’s or manager’s checks financial difficulty < face value)
 traveler’ checks
 bank drafts
 money orders CASH FUND FOR A CERTAIN PURPOSE
o cash in bank
 demand deposit for current operations or for noncurrent purpose or
 checking account payment of current obli payment of noncurrent obli
 savings deposit  current asset  long-term investment
o cash fund  cash and cash
 petty cash fund equivalents
 payroll fund 1. petty cash fund 7. sinking fund
 dividend fund 2. payroll fund 8. preference shares
o deposits in foreign currency not subject to any 3. travel fund redemption fund
foreign exchange restrictions 4. interest fund 9. contingent fund
 deposits in foreign currency subject to 5. dividend fund 10. insurance fund and fund for
any foreign exchange restrictions 6. tax fund acquisition or construction of
classified as NON-CURRENT and the PPE
restriction clearly indicated
NOTE:
DEFINITION – CASH EQUIVALENT (PAS 7) o classification of cash fund is parallel to the classification of
 short-term and highly liquid investments that are readily related liability
convertible into cash and so near their maturity that they
present insignificant risk of changes in value because of BANK OVERDRAFT
changes in interest rate
 credit balance in cash in bank account
 acquired three months before maturity
 results from issuance of checks in excess of the deposits
o 3-month BSP treasury bill
 classified as current liab and should NOT be offset against
o 3-year BSP treasury bill purchased three months other bank accounts with debit bal
before maturity date
o preference shares w/ redemption date and
acquired 3 months before redemption date
 NOT CASH EQUIVALENTS
o equity securities – no maturity date
 AUDIT OF CASH 4. obtain cut-off bank statement showing the entity’s
transaction with the bank at least one week after the
EXISTENCE/ OCCURRENCE reporting date
 cash included in the balance sheet exists – existence a. date is January of the following year if the report
o bank confirmation – third party date is December (tax season from Jan 1 – April
o cash count – includes the certificates, checks 15) – calendar year
 cash are the result of receipt and disbursement b. used to check the completeness, establish the
transactions – occurrence authenticity of the reconciling items
o invoice - receipts 5. obtain a list of interbank transfers of funds a few days
o vouchers - disbursements a. want to get the detailed receipts and
disbursements
Audit trail – trace the transaction using source documents b. kiting
c. lapping
COMPLETENESS 6. test reasonableness of cut-off
 cash includes all amts owned by the entity as of the a. example: deposit in transit
balance sheet date b. bank statements – cash
o ownership is more of control c. invoices - inventory
o if company does not control the cash, includes in 7. inspect savings account passbooks and certificates of
non-current assets deposits
 cash transactions for the period have been properly 8. determine any restrictions on availability of cash
recorded 9. determine proprietary of fs presentation and adequacy of
disclosures
NOTE: 1 audit procedure can satisfy multiple assertions
NOTE: Audit programs includes the reports that you would like to
RIGHTS AND OBLIGATIONS audit. It is coordinated with higher management
 cash are owned and controlled by the entity
CASH COUNT
VALUATION OR ALLOCATION
 cash are stated at their face value
 cash in foreign denominations are stated in their exchange
rate as of balance sheet date
 cash in closed banks are properly valued
o corporate liquidation
o need percentage of recovery to get the net
realizable value

PRESENTATION AND DISCLOSURES

 cash are properly classified in the balance sheet
 compensating balances are properly classified
o to know legal restrictions thru bank
confirmations
 cash deposited in closed banks are properly classified
o confirm with the receiver (trustee)
 cash with restrictions are properly presented and disclosed
AUDIT PROCEDURES
1. conduct of cash count of undeposited collections, petty
cash, and other funds
a. surprise basis
b. other funds can be found in subsidiary ledgers
2. confirm bank balances by direct correspondence with all
the banks in which the entity has deposits and loans during
the year
a. ask for subsidiary ledgers
3. obtain bank recon
 way of safeguarding the cash – cash control
 imprest system
o cash receipts should be deposited intact
o cash disbursement must be made in cash
 demand deposit / checking account
 petty cash fund - small expenses
o how small is the petty? depends on the
company’s policy
BANK RECONCILIATION
 bring into one common amount the sets of independent
records: cash in book and cash in bank
 done by auditee
STEPS IN BANK RECON
1. determine the ending bal per cash books
a. beg bal + receipts – disbursements = end bal
2. determine the ending bal per bank statement
a. beg bal + deposits – withdrawals = end bal
b. beg bal + credits – deposits = end bal
3. compare bank credits (deposits) with cash book debits
(receipts)
4. compare bank debits (withdrawals) with cash book credits
(payments)
5. analyze the differences

a. timing differences
o bank credit not yet recorded in cash
receipts books
 loans from bank directly credited,
collections done by bank for the
depositor, interest earned from
deposits
o book debits not yet credited by the bank
 undeposited collections
 deposit in transits
o bank debits not yet recorded in the cash
payment book
 service charges
 NSF cheques
o book credits not yet debited by the bank
 outstanding checks

b. errors in recording cash, both by bank and the

depositor
 ACCOUNTS RECEIVABLES
AUDIT EVIDENCE IN MANAGEMENT REPORTS AND DATA FILES
REVENUE AND COLLECTION CYCLE
1. pending order master file
INHERENT RISKS 2. credit check files
3. price list master file
1. improper revenue recognition 4. sales detail file (sales journal)
a. cut-off 5. sales analysis report
b. bill and hold 6. AR aged trial balance
c. channel stuffing — 7. cash receipts listing
o the practice of sending more goods to 8. customer statements
distributors and customers than they
currently need. OTHER CONTROLS
o artificially boost its reported sales and
profit levels, thereby deceiving anyone  no sales order w/o customer order
reading its financial statements (bogus  credit check authorization
sales)  restricted access to inventory
o can’t converted to cash  restricted access to terminals and invoices
o can’t sell  no collection since products  all documentation in order to record sales
are not moving  proper dating
2. returns and allowances  invoices compared to BOLs and orders
3. collectability receivables  pending order files reviewed

REVENUE RECOGNITION

 must be (1) realized or realizable and (2) earned

o realizable – the value you can collect; convertible
to cash (deducts bad debts)
 SEC guidance (SAB 104)
o persuasive evidence of an arrangement exists
o delivery has occurred or services have been
rendered
o the seller’s price to the buyer is fixed or
determinable (reasonable value), and
o collectability is reasonably assured

KEY CONTROL PROCEDURES Assertions abt Classes of Transactions and Events for the Period

 segregation of duties
o separate functions for recording (accounting
dept), authorization, custody (treasury dept)

 authorization of transactions
o write-offs (finance dept)
o EDI transactions
o credit checks prior to approval of sale
o pricing
Dual Direction of Test Audit Sample
 access to assets (limit access to inventory and cash)
o shipping department
o lockbox account
AUDITING AR
 adequate documents and records 1. test aged listing of AR
o pre-numbered sales orders, shipping documents 2. confirm balances
(bill of lading), sales invoices 3. perform analytical procedures
o remittance advice o financial ratio – AR Turnover, AR days
4. test sales cut-off
 independent checks on performance
o AR subsidiary ledger to gen ledger
o monthly statement to customer
Assertions and Substantive Procedures in the Revenue and Collection Responses to Positive Confirmations
Cycle
ALTERNATIVE PROCEDURES

 vouch subsequent cash collections

o usually, sufficient evidence of existence,
valuation
 examine shipping docu
 examine client-generated supporting docu, such as
invoices
o depends on internal controls
 inspect correspondence files

OTHER MATTERS RELATED CONFIRMATION

AR Aged Trial Balance
 there are three sets of circumstances that could justify the
USING CONFIRMATIONS omission of the confirmation of a client’s AR
o not material to the fs
1. positive confirmation o if the RMM is low, and the assessed level of
o small number of accounts are involved evidence from analytical procedures and other
o large number of errors are anticipated test of details is sufficient to reduce audit risk to
an acceptably low level, confirmation of AR may
2. negative confirmation  no reply necessary if correct be inefficient
o the combined assessed level of inherent and o confirmation of AR is expected to be ineffective
control risk is low (based on previous year’s audit experience)
o large number of small balances is involved
o the auditor has no reason to believed that the UNCOLLECTIBLE ACCOUNTS
recipients of the requests are unlikely to give
them consideration  inspect customer files for collectability
 recalculate ALLOWANCE AND BAD DEBT EXPENSE
3. blank confirmation  verify reasonableness of ALLOWANCE AND BAD DEBT
o should be used if the recipient is likely to return a EXPENSE
positive confirmation w/o verifying the accuracy  verify appropriateness of accounts written off
of the information o verify attempts to collect receivable – demand
letter / registered mail
CONFIRMATION CONSIDERATIONS o verify authorization is appropriate

 responses to positive and blank confirmations provide ANALYTICAL PROCEDURES – common size, vertical analysis
more reliable evidence than negative responses
 recipients of AR confirmations might not report  sales revenue
understatements o comparisons with previous periods
 non-response to positive/blank confirmation requests o comparisons with industry
o follow up with second and sometimes third  allowance for doubtful accts, bad debts expense
requests o bad debt expense as a percentage of sales
o a lower than expected response rate could be o allowance for doubtful accts as a percentage of
indicative of fictitious customer accounts gross receivables
 AR
 non-response to negative confirmation requests o days sales in AR
o only limited evidence concerning fs assertions o AR Turnover
o alternative procedures are not necessary for
unreturned negative confirmation requests

 follow-up on all exceptions

SALES CUTOFF PROCEDURES

 used to verify whether sales/revenues recorded in the

CORRECT ACCOUNTING RECORDS
 examine SALES INVOICES and SHIPPING DOCUMENTS
shortly prior to and after year-end