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Major types of bank balances include general checking accounts, cash management accounts, petty cash and imprest

payroll accounts. General checking accounts are used for most cash receipts and disbursement transactions The receipts are received directly by the bank through a lockbox or electronic funds transfer and re directly deposited in the client’s account by a bank. Cash management accounts require organization to earn the greatest possible return on idle cash balances. Imprest bank accounts-cash is deposited as needed to cover the payroll checks when they are issued. Petty cash funds to disburse funds to employees who are authorized to make various purchases on behalf of the organization. Major judegement challenge for investment securities 1. Corroborating management’s intent in classifying the assets 2. Determining market value. Five management assertions relevant to cash and other liquid assets 1. 2. 3. 4. 5. Existence Completeness Rights and obligation Valuation Presetation and disclosure

For cash, focus on existence assertion while for marketable securities, valuation and presentation and disclosures. The volume of transactions flowing through these accounts makes them material to the audit- even if the year-end cash balance are immaterial. Cash management techniques: 1. Speed the collection and deposit of cash while minimizing the possibility of error and fraud. 2. Reduce the amount of paperwork 3. Automate the cash management process Lockboxes- the collection of cash and reduction of the possibility of fraud can be facilitated by the use of lockboxes. The bank receives and opens the remittances, prepares a list of cash receipts by customer, credits the client’s general cash account, and notifies the client about details of the transactions. Electronic funds transers- cash transfers are made automatically and instatneously.

Cash management agreements with financial institutions: make sure that there is adequate procedures used for monitoring risk associated with investments and controls are used to assure that investments are not subject to undue risk/ Compensating balances- for disclosure purposes. Auditors usually considers the cash account to be material for the following reasons: 1. 2. 3. 4. 5. Volume of activity Liquidity Automate systems- error will be repeated on a large volume of transaction Importance of meeting debt covenants Can easily manipulated

Inherent risk of cash 1. Individual transactions vary greatly in size 2. Cash is the most negotiable financial instrument. Analytical procedures for cash balances do not reveal a stable relationshop with past cash levels because cash usually has a relatively small ending balane. In assessing control risk, the auditor is initially concerned with the strength of the control environment and its effects on cash management. Once the potential risks to the cash accounts have been identified, the auditor will assess the controls the client has in place to minimize those risks. An understanding of the internal controls affecting cash processing is gained through walkthroughs of processing, including interviews, observation and review of procedures manual and other client documentation. Types of control Segregation of duties:    Segregation of duties does not change as processing systems become automated Segregation of duties is further enhanced by inquiries by customer concerning their account balances are referred to an independent group. Individuals who reconcile the bank accounts should not handle cash or record cash transactions.

Restrictive endorsement: customer checks should be restrictively endorsed for deposit. Independent bank reconciliation   Reconciliation of items received with items recorded. Periodic reconciliation of the bank accounts.

Computerized control totals and edit tests

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A unique identifier for each itm Control totals to assure the completeness of processing Edit test to identify unusual or incorrect items.

Authorization of transactions (three)    Authorization privileges should be assigned to individuals based on unique activities associated with individual and position. Should assure that only authorized personnel can execute transactions. Monitoring should be established.

Prenumbered documents: are important in establishing the completeness of the population. (turnaround documents can also be used) Periodic internal audits and competent, well trained employees. Controls for petty cash     Limiting access to petty cash funds by use of locked boxes Requiring receipts for all petty cash disbursement with date and amount. Reconciling the petty cash fund before replenishing it Keeping customer receipts separate from petty cash funds.

Controls for cash management techniques Lockboxes- sufficient controls must be established to make sure that all customer remittances received by the bank are posted. EFT- adequate controls built in the process Cash management agreements with financial institutions- control regarding cash investments Some effort should be made to rotate control testing over time so that different controls are tested on a rotating and somewhat unpredictable basis. Common types of misstatements regarding cash often include the following:    Transactions recorded in the wrong period Embezzlements covered up by omitting outstanding checks and underfooting the outstanding checks on the reconciliation Double counting by manipulating accounts.

An independent test of the bank reconciliation is quate effective in detecting major errors, such as those that might be covered up by omitting or underfooting outstanding checks.

A normal bank statement prepared at an interim agreed-upon date that is sent directly to the auditor is called a cutoff bank statement. The auditor usually sends a standard bank confirmation to each bank with which the company has transacted to: seek information on client’s deposit balance, interest rates and collaterals and seek any contingent liabilities. Held open ash receipt books and cash disbursements: obtain information on the lash check issued and received. The most effective and efficient way to test for the existence of kting is to prepare a bank transfer schedule.