AP-2: Audit Program for Cash

Company Balance Sheet Date

The company has the following general ledger accounts that are classified in the cash caption of the balance sheet. General Ledger Account Number Bank Account Number Authori ed Check !igner

Description

Audit Program for Cash Company Balance Sheet Date

Audit "b#ecti$es Audit %rocedures for Consideration *(NANC(AL !TAT+,+NT A!!+-T("N!

+&" +)istence or occurrence. .&A .aluation or allocation.

N&A 'orkpaper %erformed (nde) by

C -&"

Completeness. -ights and obligations.

%&D

%resentation and disclosure.

A/D(T "B0+CT(.+! A. -&"2. Cash e)ists and is owned by the client 1assertions +&" and

B. Cash balances reflect a proper cutoff of receipts and disbursements 1assertions +&"3 C3 and .&A2. C. Cash balances as presented in the balance sheet properly reflect all cash and cash items on hand3 in transit3 or on deposit with third parties 1assertions +&"3 C3 and %&D2. D. Cash balances are properly classified in the financial statements3 and any restrictions on the a$ailability of funds are properly disclosed 1assertions -&" and %&D2. (D+NT(*(CAT("N C"D+! The letters preceding each of the abo$e audit ob#ecti$es3 i.e.3 A3 B3 etc.3 ser$e as identification codes. These codes are presented in the left column labeled Audit "b#ecti$es when a procedure accomplishes an ob#ecti$e. (f the alpha code appears in a bracket3 e.g.3 4A53 4B53 etc.3 the audit procedure only secondarily accomplishes the ob#ecti$e. (f an asterisk precedes a procedure3 it is a preliminary step or a follow up step that does not accomplish an ob#ecti$e. BA!(C %-"C+D/-+! A 6. /sing the standard A(C%A bank confirmation form3 re7uest confirmation as of the audit date for each bank account. Also re7uest confirmation of material cash in sa$ings institutions3 certificates of deposit3 and compensating balances. -etain copies of all confirmations in the workpapers. ,ail second re7uests if necessary. %ractical Considerations8 :. A sample standard bank confirmation form is pro$ided at CL9

(f the client only has a few bank accounts3 confirmations

should generally be sent for e$ery account. ;owe$er3 if the client has one or two primary accounts and numerous secondary accounts that ha$e minimal acti$ity3 confirmations might only be re7uested for the primary accounts. *or the accounts not confirmed3 the bank balance shown on the bank reconciliation can simply be agreed to the bank statement. (n addition to the standard bank confirmation form to confirm deposit accounts 1for e)ample3 checking accounts3 sa$ings accounts3 or certificates of deposit2 the auditor should consider separately confirming details of e)isting cash9related matters such as the following with the appropriate official of the financial institution responsible for the client<s account8 Compensating balance re7uirements or restrictions on withdrawals of funds 1see sample letter at CL9:=2. Automatic in$estment ser$ices. Cash management ser$ices.

Certificates of deposit held in safekeeping 1see additional procedures section2. Normally3 account numbers or certificate of deposit numbers to be confirmed should be listed. Bank account numbers are often incorrectly listed3 thus you may want to check these before mailing. -etain a copy of your bank confirmation re7uest in case a second mailing is necessary. (n lieu of a second mailing3 consider whether a phone call to the bank may be more effecti$e. >The Confirmation and Correspondence Control? at C@9AB can be used to monitor the status of confirmations. (nefficiencies can be a$oided by relying on alternati$e procedures for confirmations not recei$ed. -ather than incur significant time trying to follow up on nonresponses 1or incorrect responses2 for secondary accounts3 the auditor might elect to simply agree the bank balance per the bank reconciliation to the bank statement. C A. Determine those bank accounts for which subse7uent

period cutoff bank statements may be necessary and re7uest from the bank1s2 by letter that such cutoff statements be mailed directly to our 1auditors<2 post bo).

Acct. Name D No.

Bank Address

Cutoff %eriod

%ractical Considerations8 CL9B pro$ides a sample letter.

Normally3 a small business will ha$e one primary bank account used for general receipts and disbursements for which a cutoff may be re7uested. "ther accounts may not ha$e sufficient transaction $olume to necessitate testing by using a cutoff bank statement. (f possible3 procedures that use cutoff bank statements should be timed to allow the return of the statement without interruption of the client<s normal operations. A3 B3 C3 4D5 :. "btain copies of each account<s bank reconciliation for the workpapers and perform the following procedures8 a. Trace the bank balance on the reconciliation to the standard bank confirmation recei$ed from the bank 1or the balance per bank

statement for any accounts not confirmed2. b. Trace the reconciled book balance to the general ledger3 trial balance3 or lead schedule as applicable. c. Test the clerical accuracy of the reconciliation and detail supporting schedules. d. -e$iew the cash receipts and disbursement ledgers for each bank account for a reasonable period 1normally fi$e business days before and after the balance sheet date2 or perform other appropriate procedures to identify interbank transfer checks and deposits3 then $isually determine recording in proper period. !pecifically determine that8 162 Transfers between each ledger were recorded in the same period3 i.e.3 all before9year end transfers were recorded in each ledger before year end3 and $ice9$ersa for post9year end transfers. 1A2 Transfers not clearing the bank in the same accounting period as they were initiated are properly reflected as reconciling items on bank reconciliations. Note: (f interbank transfers during this period are too numerous to make a $isual determination feasible3 consider an additional procedure to prepare a transfer schedule. e. -e$iew the nature and e)tent of the reconciling items 1primarily deposits in transit and outstanding checks2 for reasonableness. *or bank accounts with unusual items or a large $olume of reconciling items3 perform the following procedures using a cutoff or subse7uent month bank statement8 162 Compare the beginning bank balance on the cutoff bank statement to the bank reconciliation. (n$estigate any differences. 1A2 Trace deposits in transit per the bank reconciliation to deposits in the cutoff bank statement noting reasonableness of the time period between book and bank recording. 1:2 (nspect selected canceled checks returned with the cutoff

bank statement. Trace checks dated before the balance sheet date to the list of outstanding checks. 1B2 (nspect the dates that checks cleared the bank. (n$estigate any large or unusual outstanding checks that cleared with the cutoff statement3 but took a long time to clear3 and&or outstanding checks that did not clear 1still outstanding2. !uch checks may be more properly designated accounts payable if they were dated before year end3 but not mailed until after year end. 1E2 Determine the propriety of other reconciling items as deemed necessary. %ractical Considerations8 These procedures should be performed for accounts that ha$e significant acti$ity or unusual items. *or most small businesses3 these procedures will only be necessary for the main operating account. (n recent years3 some banks ha$e abandoned the practice of returning canceled checks to the client with the monthly bank statement. !uch banks may send the auditor canceled checks or copies of such checks with the cutoff statement if the client makes a special re7uest to appropriate bank personnel well in ad$ance of the cutoff period. The auditor might confirm the details of disbursements with payees listed in the client<s records as an alternati$e to e)amining a canceled check. f. *or sa$ings account balances and certificates of deposit3 tie confirmation amounts to general ledger amounts. Consider the possibility of unrecorded interest or substitution of certificate numbers. %ractical Considerations8 Audit inefficiencies often occur because of poorly prepared bank reconciliations. ;a$e the client clearly document the following8 The date and deposit slip total for each deposit in transit.

The check number3 date written3 payee3 and amount of each outstanding check in lieu of the fre7uently recei$ed adding

machine tape. The nature and cause of each ma#or reconciling item3 including the date the item first appeared. *or some small businesses3 the nature and e)tent of reconciling items3 i.e.3 deposits in transit and outstanding checks3 in most bank accounts are insignificantF accordingly3 additional procedures are unnecessary. This would be true for most small imprest payroll bank accounts. ;owe$er3 the nature and e)tent of reconciling items in the general account normally re7uire additional procedures. D B. -e$iew the confirmation1s2 recei$ed from the bank or other financial institutions along with loan and debt agreements3 corporate minutes3 and in7uiries of management and determine whether8 1Coordinate this work with your debt and contingency procedures in other program areas.2 a. Accounts are sub#ect to withdrawal restrictions.

b. There are related guarantees3 endorsements and&or letters of credit3 including guarantee arrangements for related parties. c. There are amounts designated for special purposes.

d. Amounts are restricted in any manner3 including minimum balance re7uirements of loan agreements or debt ser$ice funds established by debt indentures3 or compensating balances maintained for or by related parties. e. Amounts are appropriately classified as cash3 cash e7ui$alents3 or other short9term in$estments. C E. After performing all appropriate procedures3 return cutoff bank statements and obtain a receipt from the client e$idencing their return. G. Consider the need to apply one or more additional procedures. The decision to apply additional procedures should be based on a consideration of whether information obtained or misstatements detected by performing substanti$e tests or from

other sources during the audit alter your #udgment about the need to obtain a further understanding of control acti$ities3 the assessed le$el of risk of material misstatements 1whether caused by error or fraud23 and on an e$aluation of whether the basic procedures ha$e been sufficient to achie$e the audit ob#ecti$es. Attach audit program sheets to document additional procedures. %ractical Considerations8 Certain common additional procedures relating to the following topics are illustrated following this program8 Cut9off bank statement not recei$ed. (nterbank transfers. ,aterial cash on hand. Certificates of deposit. (nade7uate segregation of duties o$er cash disbursements. Accounts closed during the year. %roof of cash.

%ractitioners may refer to %%C<s Guide to *raud (n$estigations for more e)tensi$e fraud detection procedures if it is suspected that the financial statements are materially misstated due to fraud. C H. Consider whether procedures performed are ade7uate to respond to identified fraud risk factors. (f fraud risk factors or other conditions are identified that re7uire an additional audit response3 consider those risk factors or conditions and the auditor<s response in connection with the performance of !tep 66 in A%96b. %ractical Consideration8 !pecific responses to identified fraud risk factors are addressed in indi$idual audit programs. (n connection with e$aluation and other completion procedures in A%96b3 the auditor considers the need to perform additional procedures based on the results of procedures performed in the indi$idual audit programs and the cumulati$e knowledge gained from performing those procedures.

I. Consider whether the results of audit procedures indicate reportable conditions in internal control and3 if so3 add to the memo of points for the communication of reportable conditions. 1!ee section 6E=B for e)amples of reportable conditions3 and see C@96I for a worksheet that can be used to document the points as they are encountered during the audit.2 C"NCL/!("N 'e ha$e performed procedures sufficient to achie$e the audit ob#ecti$es for cash3 and the results of these procedures are ade7uately documented in the accompanying workpapers. 1(f you are unable to conclude on any ob#ecti$e3 prepare a memo documenting your reason.2

Additional Audit Procedures for Cash

Instructions: Additional procedures will occasionally be necessary on some small business engagements. The following listing3 although not all9inclusi$e3 represents common additional procedures and their related ob#ecti$es.

Cutoff Bank !tatement Not -ecei$ed C (f a cutoff 1or subse7uent month2 bank statement that was not recei$ed directly from the bank by the auditor is used to perform additional procedures3 consider the following procedures to pro$e the cutoff bank statement8 a. (nspect the cutoff bank statement for erasures or alterations and determine the clerical accuracy of the statement totalsF and

b. *oot the paid checks and deposit slips supporting the bank statement and compare the totals to the corresponding totals on the bank statement. %ractical Considerations8 +normous time can be wasted performing this step. (f you only plan to use the cutoff statement to e)amine a few significant reconciling items identified during procedures in !tep :3 a proof of the cutoff would generally not be warranted. (f you pro$e the statement and it includes a large number of paid checks3 if possible3 remo$e fi$e checks at random and ha$e the client foot the balance of the paid checks to a >blind total.? Add your fi$e check total to the client<s total and tie to the bank statement.

(nterbank Transfers B (f there are numerous interbank transfers that cannot be ade7uately tested by $isual comparisons3 prepare for the workpapers a bank transfer schedule with the following column headings8 J J J J J J J J Name of disbursing bank. Check number or other reference. Amount. Date disbursed per books. Date disbursed per bank. Name of recei$ing bank. Date deposited per books. Date deposited per bank.

%erform the following8 a. -e$iew the cash receipts and disbursements #ournals3 bank

statements3 and related paid checks 1including the cutoff bank statement2 for a reasonable period 1normally fi$e business days2 before and after year end. -ecord material interbank transfers on the transfer schedule. b. -e$iew the schedule to determine that the deposit and disbursement side of each transfer is recorded in the proper period. !ee that incomplete transfers 1those not consummated and completed in the same accounting period2 are properly reflected as reconciling items on the bank reconciliations. %ractical Consideration8 %reparation of an interbank transfer schedule may detect mo$ements of large amounts of cash among bank accounts with no apparent business purpose. !uch mo$ements might be a red flag to the auditor3 particularly if the auditor has already determined that additional procedures are necessary based on his or her consideration of the risk of material misstatement due to fraud3 and may indicate that the client is kiting or committing other types of fraud.

,aterial Cash on ;and A (f cash on hand is material in relation to the financial statements taken as a whole3 or if there are significant negotiable securities in the custody of the client3 consider performing the following additional procedures8 a. Count the cash fund 1or obser$e and list the securities2 in the presence of a client representati$e. b. ;a$e the client representati$e sign a receipt that all cash 1securities2 was returned to his or her custody intact. c. Tie amounts counted to general ledger balances or lists of securities. %ractical Considerations8 (n most small businesses3 cash on hand is immaterial and should not be counted3 unless it is at the client<s re7uest.

 CL9G presents a >-eceipt for Cash Counted by Auditor3? and CL96E presents a >-eceipt for !ecurities Counted by Auditor.?

Certificates of Deposit A3 4D5 +)amine significant certificates of deposit on hand and compare to bank confirmations. %ractical Considerations8 This procedure pro$ides additional assurance as to whether certificates of deposit ha$e been pledged to secure indebtedness. (f certificates of deposit are held in safekeeping by the financial institution3 the auditor should consider sending a separate confirmation to the financial institution to $erify that the certificates of deposit are held in safekeeping in the client<s name. The confirmation letter at CL96H may be used for this purpose.

(nade7uate !egregation of Duties "$er Cash Disbursements C (f the client has inade7uate segregation of duties for the cash disbursements function3 consider the need for the following additional procedures8 a. "btain bank confirmations and cutoff bank statements for additional accounts. b. +)pand tests of reconciling items.

c. -e$iew selected checks for unusual payees3 endorsements3 addresses3 or amounts. Document the items tested. d. -e$iew cash disbursements for an e)tended period prior to year end. %ractical Considerations8 These additional procedures might be appropriate if the auditor3 based on his or her consideration of fraud risk factors3

decides to modify procedures to consider material fraudulent3 unauthori ed disbursements 1such as $endor or payroll disbursements2. !ee also the additional procedures in A%9K and A%9 6:. A lack of segregation of duties is a particular concern if the employee is authori ed to sign checks or is authori ed to sign for the owner&manager 1for e)ample3 by using a signature stamp23 the employee recei$es bank statements directly and reconciles bank accounts3 and checks are not re$iewed by other personnel or the owner&manager. A common method perpetrators use to misappropriate cash when there is an inade7uate segregation of duties for cash disbursements is to make checks payable to cash3 themsel$es3 or a third party to pay a personal bill. The perpetrator then enters the disbursement in the books of the company3 as being paid to a common $endor of the company3 and charges the payment to an e)pense account or cost of goods sold account that normally has a large balance. -e$iew of cancelled checks for unusual payees and comparing the payee to the cash disbursement records is a procedure designed to detect this type of fraud. The auditor should also consider the need to communicate the lack of segregation of duties as a reportable condition or material weakness in accordance with !A! No. G=. !ection 6G=A discusses the issue further.

Accounts Closed During the Lear C (f considered necessary3 send standard bank confirmations for accounts closed during the year. %ractical Consideration8 (n addition to confirming bank accounts open at year9end3 some auditors send confirmations for all bank accounts closed during the year. The main purpose for this procedure is to detect unrecorded debt. ;owe$er3 it is the authors< opinion that this procedure is not the most effecti$e for detecting unrecorded liabilities. Detail audit testing and analytical procedures on other balance sheet and income statement accounts should generally be

ade7uate to detect any material unrecorded debt.

%roof of Cash C (f the auditor3 based on his or her consideration of fraud risk factors3 decides to modify procedures related to cash balances3 consider performing a proof of cash. %ractical Considerations8 A proof of cash is an e)panded $ersion of a bank reconciliation. (t pro$ides four reconciliations on one formM -econciliation of the beginning9of9period balances per the bank statement and the books. -econciliation of the current period cash receipts per the bank statement to the corresponding items in the general ledger. -econciliation of the current period cash disbursements per the bank statement to the corresponding items in the general ledger. -econciliation of the end9of9period balances per the bank statement to the books. %ractitioners may refer to %%C<s Guide to *raud (n$estigations for more e)tensi$e fraud detection procedures if it is suspected that the financial statements are materially misstated due to fraud.

Additional Audit Procedures for Cash Beginning Balance in Initial Audit

Company Balance Sheet Date

Audit "b#ecti$es Audit %rocedures for Consideration

N&A 'orkpaper %erformed (nde) by

Instructions: Additional procedures will be necessary in an initial audit. These procedures are applied to opening balances and differ depending whether you are relying on your re$iew of a predecessor<s work or placing no reliance on a predecessor<s audit. 1!ection 6I=: discusses considerations when replacing a predecessor auditor3 including a discussion of what the term reliance means when used in this program.2 These procedures may be applied in con#unction with the basic procedures applied to the ending balance. The asterisks preceding the procedures indicate that they are an intermediate step in achie$ing audit ob#ecti$es for the ending balance. C 6. (f a predecessor<s audit of the prior period<s financial statements is to be relied on8 a. !can the predecessor<s cash workpapers and determine whether the predecessor confirmed each bank account and tested the client<s reconciliations and cash cutoff. b. (n$estigate large or unusual reconciling items that had not cleared at the time the predecessor audited cash. C A. (f no reliance on a predecessor<s audit is planned or possible8 a. !can copies of the client<s reconciliations of each bank account made at the close of the prior period. b. Trace balances in the reconciliations to bank statements and the general ledger. c. Trace large or unusual reconciling items to subse7uent bank statements and consider the need for additional in$estigation. %ractical Considerations8 'atch for indications of an improper cutoff3 i.e.3 recording cash disbursements of the current period as transactions of the prior period to impro$e the current ratio of the prior period<s financial statements. (f the client<s reconciliations for the prior period were poorly

prepared3 re7uest that they be redone in the same format as re7uested for the current period. 1!ee practical considerations for basic procedure :.2