ADAMSON UNIVERSITY

COLLEGE OF BUSINESS ADMINISTRATION – ACCOUNTANCY DEPARTMENT

AUDITING and ASSURANCE CONCEPTS & APPLICATION 1
1st Semester SY 2022 - 2023

Module 4 : SUBSTANTIVE TESTS OF CASH

 Audit of Cash Balance

The following misstatements which result in the improper payment of or failure to receive cash may be
uncovered through the test of controls and substantive tests of these transactions:
1. Failure to bill a customer
2. Billing a customer at a price lower than called for per company policy.
3. Abstraction of cash receipts from customers before they are recorded.
4. Duplicate payment of a vendor’s invoice.
5. Improper payments of officers’ personal expenses.
6. Payment for merchandise or goods that were not received.
7. Payment to an employee for more hours than he has worked (payroll error)
8. Payment of interest to a related party for an amount far exceeding the going rate.

NOTE:
1. ABSTRACTION – the quality of dealing with ideas rather than events.
2. Numbers 1, 2, & 3 may be uncovered as part of the audit of revenue and cash receipts.
3. Numbers 4, 5 & 6 may be uncovered in the audit of the acquisition and payment cycle.
4. Numbers 7 & 8 may be uncovered in the tests of the payroll and personnel cycle and the
financing and investing cycle.

 Substantive Testing of Cash

ASSERTIONS AUDIT OBJECTIVES SUBSTANTIVE AUDIT PROCEDURES

A. Existence or  To determine whether cash
Occurrence exists at year-end and cash
related transactions occur
within the year.
 To determine that all cash
balances of the client are
reflected on the statement of
financial position at year-end.
1. Obtain analysis of cash balance
and reconcile to the general
ledger.
2. Confirm bank balances as of
statement of financial position
date.
3. Perform cash count procedures
for cash on hand.
4. Obtain or prepare bank
reconciliation as of statement of
financial position date.
5. Trace all transfers occurring
between banks near year-end.

B. Completeness  To determine whether all cash 6. Obtain a cutoff bank statement

transactions are recorded in containing transactions several
 the proper accounting period.
C. Rights and  To determine that cash
Obligations balances are available for use
without restrictions or if with
restrictions, properly indicated
in the statement of financial
position.
D. Valuation or  To determine if cash is
Allocation recorded and presented at the
proper amount.
E. Presentation and  To determine whether cash is
Disclosure presented in accordance with
applicable Financial Reporting
Standards.
AUDIT OF CASH RECEIPTS TRANSACTIONS
 Basic considerations
o A high volume of transactions flows through cash accounts. Because of the vulnerability to
error or fraud, organizations and auditors usually emphasize the quality of controls over the
cash transactions.
o There are a variety of sources of cash receipts, such mentioned below. The discussion will be
limited to cash receipts from sales transactions (cash sales and collections from trade
customers on credit sales :
 from revenue transactions,
 short and long-term borrowings
 issuance of share capital
 sale of marketable securities,
days subsequent to the
statement of financial position
date.
7. Prepare proof of cash and
reconcile cash transactions
occurring during a specified
period as they are recorded by
the bank and the client.
8. Verify the client’s cutoff of cash
receipts and cash
disbursements.
9. Review bank statements and the
bank replies to confirmation
letters.
10. Verify existence of cash in banks
under receivership, cash subject
to court’s restraining order, in
foreign banks and in foreign
currency.
11. Investigate any check
representing large or unusual
payments to related parties.
12. Evaluate proper financial
statement presentation and
disclosure of cash.
  long-term investment
o Executing cash receipts transactions generally involve:
 Receiving mail receipts
 Receiving over-the-counter receipts
 Aggregating total cash received
 Depositing cash in bank

TESTS OF CONTROLS OVER CASH RECEIPTS TRANSACTIONS

Although entities receive cash from many sources, our focus is on collections of cash from customers.
Auditors are interested in the effect of controls on the financial statement assertions embodied in the
cash transactions. In testing cash collections, auditors focus on the following audit assertions:

GENERAL SPECIFIC
1. Existence or  Recorded receipts represent actual collections of cash from
Occurrence customers.

2. Completeness  All receipts are processed and recorded.

3. Rights and  All cash receipts are deposited intact in the account of the
Obligations client.

4. Valuation or  Debits to cash and credits to accounts receivable are valued

Allocation at amounts received.

5. Presentation and  Cash receipts transactions are recorded to result in

Disclosure presentation and disclosure in accordance with PAS/PFRS.

DISCUSSIONS on CONTROLS and TEST OF CONTROLS

1. Existence or Occurrence – recorded receipts represent actual cash collections from customers.

CONTROLS TEST OF CONTROLS

1. A trustworthy employee prepared a  To test this control, the auditor observes
prelisting of cash receipts before further whether a prelisting is prepared and
processing. inquires of the preparer about the
procedures he/she knows.

2. A validated deposit slip is obtained for  The auditor tests this control by obtaining
daily deposits and compared to the cash copies of the validated deposit slips and
receipt summary. comparing them to the cash receipts
summary.

3. Duties of handling cash receipts are  The auditor can tests this control by
 segregated from posting to accounts
receivable. A person performing both
functions could misappropriate cash and
conceal the shortage by making an entry
directly to the customer’s accounts.
4. A bank reconciliation is prepared monthly
by a person not involved in handling cash,
accounts receivable or general ledger
records.
2. Completeness – all receipts are processed and recorded.
CONTROLS
5. Prelisting and cash register procedures
should be monitored.
6. Checks should be restrictively endorsed as
soon as they are received.
7. A daily cash summary is prepared and
reconciled to total prelisting and over the
counter receipts. This control ensures that
all cash receipts are deposited and
recorded.
8. The cash receipts journal total is
independently reconciled to the total
posted to accounts receivable.
3. Rights and Obligations – all cash receipts are deposited in the bank account of the client.
CONTROLS
9. Cash receipts are deposited intact daily in
the company’s bank account. It reduces
the likelihood of misappropriation of cash.
4. Valuation or Allocation – debits to cash and credits to accounts receivable are valued at
amounts received.
CONTROLS
observing the separation of duties and
inquiring of client personnel about their
responsibilities.
 The auditor tests this control by observing
the bank reconciliation have been
prepared by an independent employee.
TEST OF CONTROLS
 Auditors observe the monitoring of these
procedures.
 To this control, auditors observe the
procedure in effect.
 Auditors can inquire of employees who
carry out the procedure about the
regularity and consistency of its
performance
 To tests this control, the auditor observes
the procedures and make inquiry of
personnel performing the procedure.
TEST OF CONTROLS
 The auditor tests this control by observing
the procedure and comparing the cash in
the prelisting with the validated deposit
slips.
TESTS OF CONTROLS
 10. Cash receipts sshould be recorded at the  To test this control, an auditor compares
amount indicated on the remittance entries in the cash receipt journal to
advice. remittance advices.

5. Presentation and Disclosure – cash receipts transactions are recorded to result in presentation
and disclosure in accordance with PAS/PFRS.

CONTROLS TEST OF CONTROLS

11. An accounting supervisor should approve  This control can be tested by the auditor by
classification made in journalizing. This determining that the supervisor’s signature
control reduces likelihood of payments of approval is recorded.
being posted to the wrong account.

AUDIT OF CASH DISBURSEMENTS

Typically, the cash disbursement transactions covers the following areas:

1. Evaluation and obtaining evidence about internal control over cash disbursement transactions,
2. Tests of controls over cash disbursement transactions.
3. Audit program for cash disbursement transactions
4. Substantive test of cash disbursement transactions.

These cash disbursement transactions involve the following business activities:

1. Recording of transactions in a voucher register with appropriate supporting documents such as
purchase order (PO) and receiving report (RR).
2. Submission of approved vouchers with the supporting papers and unsigned check to the
Finance Department.
3. Release of checks signed by authorized signatories.
4. Recording of checks issued.

TEST of CONTROLS OVER CASH DISBURSEMENT TRANSACTIONS

Auditors are interested in the effect of controls in the financial statements assertions embodies in the
cash disbursements. Auditors address the following assertions when testing cash disbursements:

GENERAL
1. Existence or Occurrence
2. Completeness
3. Rights and Obligations
4. Valuation or Allocation
5. Presentation and Disclosure
SPECIFIC
 Recorded cash disbursement occurred.
 All cash disbursements made are recorded
 All cash disbursements made are for obligations
of the business entity.
 Debits to various accounts and credits to cash are
valued at proper amounts.
 Cash disbursements are recorded to result in
presentation and disclosure in accordance with
 PAS/PFRS.

The following presents the controls an entity should have to ensure that propriety of each assertion and
the tests an auditor might perform to determine the effectiveness of the controls on cash disbursement
transactions.

 Existence or Occurrence : Recorded cash disbursements occurred

CONTROLS TESTS of CONTROLS

1. Authorized individual signs and mails  The auditor may inquire of the check
promptly the checks after reviewing signed and employees who worked with
documentation. him / her about whether this procedure is
followed.

2. A review should be made by a person not
responsible for handling disbursements to
determine that checks are processed on a
timely basis.
 The auditor may inquire about whether
this procedure is being followed or may
examine the outstanding checks list to
determine that checks are being
processed promptly.

 Completeness : All cash disbursements made are recorded

CONTROLS TESTS of CONTROLS

3. Checks should be pre-numbered and  To test this control, the auditor should
accounted for to ensure that all checks observed whether the employee who
that were written are entered in the check prepares the check register accounts for
register. the sequence of the checks.

4. An employee who does not handle cash
disbursements and cash receipts.
 The auditor observes that the employee
who prepares the reconciliation does not
handle cash receipts or disbursements. In
addition, the auditor inspects the
reconciliation.

 Rights and Obligations : All cash disbursements made for obligations of the entity.

CONTROLS TESTS of CONTROLS

5. Check signer who is independent of voucher
preparation should examine the supporting
documentation before signing checks to
determine that the payment is for an
obligation of the entity.
 The auditor tests this control by inquiring
about the segregation of duties and
observing whether separation really exists.
 Valuation and Allocation : Debits to various accounts and credits to cash are valued at proper
amounts.

CONTROLS TESTS of CONTROLS

6. Amounts and calculations on vendors’  To test this control, the auditor should
invoices are independently verified. observe the procedure. he/she can examine
signatures on paid invoices.

 Presentation and Disclosure : Cash disbursements are recorded to result in presentation and
disclosure in accordance with PSA/PFRS.

CONTROLS TESTS of CONTROLS

7. Chart of accounts adequately describes  The auditor can test this control by
accounts to be used, and account coding is observing the procedure. He can also
assigned by one person and checked by examine the signatures of the employees
another. performing the review account coding.

SUBSTANTIVE TESTS OF TRANSACTIONS : CASH DISBURSEMENTS

ASSERTIONS AUDIT OBJECTIVES AUDIT PROCEDURES

1. Existence or  To determine that recorded  Examine paid checks for
Occurrence cash disbursements occurred. appropriate endorsements.
Examine documents
underlying payments.

2. Completeness  To determine that all cash  Reconcile cash disbursements

disbursements made are per books with cash
recorded. disbursement per bank.
Prepare or test bank
reconciliation.

3. Rights and  To determine that all cash  Examine underlying

Obligations disbursement made were the documents.
entity’s obligations.
4. Valuation or  To determine that debts to  Recalculate invoices paid.
Allocation various accounts and credits
to cash are valued at proper
amounts.
Presentation and  To determine that cash  Check accuracy of accounts on
Disclosure disbursement transactions invoices by reference to chart
are recorded to result in of accounts.
presentation and disclosure
in accordance with PAS/PFRS.

“ASK STUDENTS TO DISCUSS THE REASON/s

FOR EXAMINING DOCUMENTS UNDERLYING CASH DISBURSEMENTS