SOLUTIONS MANUAL

CHAPTER

12 Audit of Cash

Review Questions
QUESTION 1
For many entities, cash balances represent only a very small proportion of assets but the transaction is
voluminous. Cash is vital to the survival of the business as a going concern. The inability of an entity
to pay its debts as they fall due because of a shortage of cash can render a company insolvent, despite
the profitability of its operations. In addition, the nature of cash balances makes them susceptible to
theft, as numerous kinds of fraudulent schemes involving cash have borne out.

Because of the large volume of transactions and the small account balance, the audit strategy to
concentrate on verifying the account balance. Moreover, because of the significance of cash to an
entity’s liquidity, auditors tend to plan their procedures to detect much smaller levels of misstatements
than for other accounts. Because the balance is small, it is usually more cost-effective to assess
inherent and control risks as high and to obtain the required overall reduction in audit risk through
the performance of substantive tests of details of balances.

QUESTION 2
In smaller entities, it is common to have the following control deficiencies:
• One person receives and/or disburses monies, records these transactions in the general ledger, and
reconciles the related bank accounts
• The person performing the bank reconciliation does not possess sufficient skills to carry out the
task appropriately
• Bank reconciliations are not timely performed

QUESTION 3
• Investigate the purpose of the payment made and get explanation from the management
• Inspect related payment vouchers
• Check if the recipient of the cheque received the cheque
• Since the cheque is only valid for six months, the auditor should propose reversals of amounts for
the outstanding cheques.

QUESTION 4
Bank reconciliation verifies that the balance confirmed with the bank agrees with the bank balance
per the client’s records. Some steps to follow are as listed below:
• Check the mathematical accuracy and compare with the general ledger
• Verify the bank balance per the bank confirmation with the bank balance per the reconciliation
 Solutions Manual
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• Trace unpresented cheques on the bank reconciliation to the subsequent period’s bank statement
• Trace deposits in transit on the bank reconciliation to the subsequent period’s bank statement

QUESTION 5
Jan Description RM
1 Received from cashier 500.00
2 Cleaning 80.00
4 Travelling 55.00
9 Detergent 90.00
12 Cleaning 50.00
20 Stationery 40.00

The top up to restore the imprest cash float is the reimbursement of all the actual expenditure namely,

Cleaning RM80 + Travelling RM55 + Detergent RM90 + Cleaning RM50 + Stationery RM40
= RM315

Case 12: Questions

(a) B because the receipt is recorded in the books prior to year-end, while the disbursement is
recorded subsequent to year-end. Therefore, the cash on the books is overstated.

(b) Procedure to obtain bank confirmation letter (BCL):

• BCL to be issued to all relevant banks.
• BCL to be on external auditor letterhead.
• BCL to be clear and concise.
• Client to authorize disclosure direct to auditor.
• Control over dispatch of BCL.
• Decide on information requested (loan, currency, interest, security)
• Check that replies are complete.

(c) Substantive procedures on bank confirmation letter:

• Agree confirmed balance to bank reconciliation + bank reconciliation to general ledger, trial
balance and financial statements.
• Agree interest due and receivable to GL, TB, profit & loss, statement of financial position.
• Proper disclosure of loan details, ie. terms, interest rate, currency, current liabilities, non-
current liabilities.