Audit of Cash

and Financial instrument

Lecture 12
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 Types of cash

Cash in bank vs other cycles

Outline
Audit of general cash (Cash in bank)

Fraud oriented procedures

Audit of other related cash accounts

1. Accounts associated with the acquisition and payment cycle
2. Accounts
associated
with the
acquisition
and
payment
cycle
General cash account • Immaterial ending balance
• Large amount of cash flowing into and
significant out of the account
• Great susceptibility to embezzlement
in almost all audits
 Misstatements which may not be discovered
as a part of the audit of the bank reconciliation

• Verify transaction during the year

• Bank reconciliation
 Misstatements which may not be discovered
as a part of the audit of the bank reconciliation
• Failure to bill a customer
• An embezzlement of cash by intercepting cash receipts from customers
before they are recorded, with the account charged off as a bad debt
• Duplicate payment of a vendor’s invoice
• Improper payments of officers’ personal expenditures
• Payment for raw materials that were not received
• Payment to an employee for more hours than he or she worked
• Payment of interest to a related party for an amount in excess of the
going rate
 Misstatements are normally discovered
as a part of the audit of the bank reconciliation
• Failure to include a check that has not cleared the bank on the
outstanding check list, even though it has been recorded in the cash
disbursements journal
• Cash received by the client subsequent to the balance sheet date but
recorded as cash receipts in the current year
• Deposits recorded as cash receipts near the end of the year, deposited in
the bank in the same month, and included in the bank reconciliation as a
deposit in transit
• Payments on notes payable debited directly to the bank balance by the
bank but not entered in the client’s records
 METHODOLOGY FOR DESIGNING AUDIT TEST

Identify business risk

PHASE I Set PM
Assess IR & CR

3. Audit of
general Cash PHASE II TOC & STOT

SAP
PHASE III
STDB
 • Obtain client’s bank reconciliation
• Verifies whether the bank reconciliation received from
the client is correct

STDB Existence Cash

Balance-related
Detail tie-in

Audit
Objectives
Completeness Cut-off

Accuracy
STDB
 Bank Obtain a direct receipt of a confirmation
confirmation from every bank or other financial institution

Partial-period bank statement and the

Procedures Cut off related copies of or digital access to
bank statement cancelled checks, duplicate deposit slips, and
other documents.

Verify whether the client’s recorded bank

Bank balance is the same amount as the actual
reconciliation cash in the bank.
 4. Fraud – oriented procedures

• A major consideration in the audit of the general cash balance is the

possibility of fraud
• The auditor must extend the procedures in the audit of year-end
cash to determine the possibility of a material fraud when there are
inadequate internal controls
 For cash receipts:
• Confirmation of accounts receivable

• Tests performed to detect lapping

Procedures • Review of the general ledger entries in the cash

account for unusual items
to uncover • Comparison of customer orders to sales and

fraud subsequent cash receipts

• Examination of approvals and supporting
(trans) documentation for bad debts and sales returns and
allowances

Similar procedure for cash disbursements

Procedures
to uncover 1. Extended test of the bank reconciliation
fraud 2. Proof of cash
Test of interbank transfer
(balance) 3.
 Extended Tests of the Bank Reconciliation

all transactions included in the

journals for the last month of the
When the auditor Verify year were correctly included in or
believes that: excluded from the bank
reconciliation

the year-end bank

reconciliation may be
intentionally misstated
Verify all items in the bank reconciliation
were correctly included.
 Prepare Proof of Cash

To determine whether
• All recorded cash receipts were
deposited
When the client has • All deposits in the bank were recorded
material internal control
weaknesses in cash in the accounting records
• All recorded cash disbursements were
paid by the bank
• All amounts that were paid by the bank
were recorded
 Prepare Proof of Cash

Include 4 main tasks of reconciliation:

1. the balance on the bank statement with the general ledger balance at the
beginning
When of the
the client has proof-of-cash period.
2.material internal deposited
cash receipts control per the bank with receipts recorded in the cash
weaknesses in cash for a given period.
receipts journal
3. electronic payments and cancelled checks clearing the bank with those
recorded in the cash disbursements journal for a given period.
4. the balance on the bank statement with the general ledger balance at the
end of the proof-of-cash period.
 Tests of Interbank Transfers

Kiting: transferring money from one bank to

another and incorrectly recording the
transaction.
When there is a risk of
Kiting Test for Interbank Transfers
• list all interbank transfers made a few days
before and after the balance sheet date
• Then trace each to the accounting records
for proper recording
 Tests of Interbank Transfers

• The accuracy of the information on the interbank transfer schedule

should be verified
• The interbank transfers must be recorded in both the receiving and
disbursing banks.
Objectives
• The date of the recording of the disbursements and receipts for each
transfer must be in the same fiscal year.
• Disbursements on the interbank transfer schedule should be correctly
included in or excluded from year-end bank reconciliations as
outstanding checks.
• Receipts on the interbank transfer schedule should be correctly
included in or excluded from year-end bank reconciliations as deposits
in transit.
 5. Audit of other related cash accounts

Imprest payroll
Petty cash
bank account
Reconciling
Potential for
outstanding
embezzlement
checks.

Immaterial
=> not test
 23-17
Exercises
23-18

23-21
End of chapter!