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Module 2 - Auditing Assurance CA 1 PDF
Module 2 - Auditing Assurance CA 1 PDF
Module 2 - Auditing Assurance CA 1 PDF
SCHOOL OF ACCOUNTANCY
MODULE 2
AUDIT OF CASH AND CASH EQUIVALENTS, PART 1
OVERVIEW:
This module will serve as an introduction to the audit of cash and cash equivalents. This module shall give
you the basic knowledge in internal control system for cash accounts. This way, we will know what are the
control deficiencies of client under audit, that will help us decide whether to rely on their control or not.
KNOWLEDGE REQUIRED:
This module requires knowledge in the information systems and related cycles, such as revenue and
collection cycles; and familiarity with the different assertions made by the client.
LEARNING OBJECTIVES
After studying this module, you should be able to:
1. Know the importance of auditing cash and cash equivalents
2. Know the directional risk of cash
3. Review the common internal controls applied for cash transactions
A cash audit is a review of cash transactions between an identified start date and end date in accordance
with the generally accepted procedures of accounting. We audit cash to ensure proper documentation of
cash received or disbursed and to establish that the cash balance and deposits are accurate. We need to
make sure that no material amount of cash has been unauthorizedly used.
So, in performing your audit procedures, practice your professional skepticism. You should be able to do
your job with questioning mind. Understand the environment by knowing whether the client has sound
internal control over cash, or none.
Sample Situation
The staff having access to cash think they are being paid too low (motivation). Cash is physically available
to employees (opportunity). And top management takes cash without proper recording of transactions
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APPLIED AUDITING MODULE
SCHOOL OF ACCOUNTANCY
(rationalization). In this case, the control risk is very high, thus, you as auditor should perform more
substantive tests (risk-based auditing).
Source:
Accounting Information
Systems by James A. Hall
Source:
Accounting Information
Systems by James A. Hall
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APPLIED AUDITING MODULE
SCHOOL OF ACCOUNTANCY
Refresh your knowledge with these cycles by reading the Accounting Information Systems book by James
A. Hall or Applied Auditing book by Ma. Elenita Cabrera
As auditor, we must know that the goals of our client in handling cash should be to:
• Account for all cash transactions accurately so that correct information is available regarding cash
flows and balances.
• Make certain that enough cash is available to pay bills as they come due.
• Avoid holding too much idle cash because excess cash could be invested to generate income, such
as interest.
• Prevent loss of cash due to theft or fraud.
In order to achieve these goals, common internal controls over cash receipts include the following:
• Prepare a record of all cash receipts as soon as cash is received. Most thefts of cash occur before
a record is made of the receipt. Once a record is made, it is easier to trace a theft.
• Deposit all cash receipts intact as soon as feasible, preferably on the day they are received or on
the next business day. Undeposited cash is more susceptible to misappropriation.
• Arrange duties so that the employee who handles cash receipts does not record the receipts in the
accounting records. This control feature follows the general principle of segregation of duties.
• Arrange duties so that the employee who receives the cash does not disburse the cash. This control
measure is possible in all but the smallest companies.
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APPLIED AUDITING MODULE
SCHOOL OF ACCOUNTANCY
One person receives and/or disburses money, records those transactions in the general ledger, and
reconciles the related bank accounts. The person performing the bank reconciliation does not possess the
skill to perform the duty. Bank reconciliations are not timely performed.
In these situations, the person may get money from customer, for example, and does not record the
receipt, and just use the money for personal use.
ACTIVITY SECTION
ACTIVITY 1:
Provide the document that corresponds with the following:
1. The document which is used to permit the immediate deposit of cash and to improve the control
over the custody of assets is the __________________________.
2. The document which accompanies the customer’s payments is the ________________________.
3. The request of payment by the customer for goods sold or services provided by the seller.
___________________
4. A ___________________ is the official notice from a business or a bank that documents a refund.
5. A ___________________ on a bank statement refers to a deduction from the bank account's
balance. In other words, a debit memo has the same effect as a check written on the bank account.
6. Once the customer has paid their bill, the supplier can issue a/an _________________________.
7. When a customer pays by cheque or cash, the seller will write a _______________________which
will be taken to the bank and presented together with the cheques and cash.
Each month, the company receives from the bank a _______________ _______________ showing
its bank transactions and balances. For example, the statement shows _______________ paid and other
_______________ that reduce the balance in the depositor's account, _______________ and other
_______________ that increase the balance in the depositor's account, and the _______________
_______________ after each day's transactions. Remember that the bank statements are prepared from
the _______________ perspective. Therefore, every deposit received by the bank is _______________ to
the customer's account. The reverse occurs when the bank "pays" a check issued by a company on its
checking account balance: Payment _______________ the bank's liability and is therefore
_______________ to the customer's account with the bank. All paid checks are listed in _______________
_______________ on the bank statement along with the _______________ the check was paid and its
_______________. Upon paying a check, the bank stamps the check "paid"; a paid check is sometimes
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APPLIED AUDITING MODULE
SCHOOL OF ACCOUNTANCY
referred to as a _______________ _______________. In addition, the bank includes with the bank
statement memoranda explaining other _______________ and _______________ made by the bank to
the depositor's account.
A _______________ _______________ is used by the bank when a previously deposited customer's check
"bounces" because of _______________ _______________. In such a case, the check is marked
_______________ (non-sufficient funds) by the customer's bank and is returned to the _______________
bank. The bank then _______________ (decreases) the depositor's account, as shown by the symbol NSF
on the bank statement and sends the NSF check and _______________ memorandum to the depositor as
notification of the charge.
EVALUATION
Which part of the discussion did you Which part of the discussion did you
find most enjoyable to learn? find most difficult?
END OF MODULE 2
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