Auditing Cash

Slide 10-1
 Cash
 Cash represents currency on hand and cash
on deposit in bank accounts including
certificates of deposit, time deposits, and
savings accounts.
 Virtually all accounting transactions pass
through the cash account at some point.

Slide 10-2
 Types of Cash Accounts

 General cash account

 Imprest accounts
» Payroll accounts
» Petty cash accounts
» Branch accounts

Slide 10-3
 Audit Objectives for Cash

 Consider inherent risks of material misstatement,

including fraud risks.
 Consider internal control over cash transactions
 Substantiate the existence of recorded cash
 Establish the completeness of recorded cash
 Determine that the client has rights to recorded cash
 Determine whether the presentation and disclosure of
cash is appropriate.
» Compensating balances
» Bond sinking funds
 Establish the accuracy of cash transactions
 Verify the proper cutoff of cash transactions

Slide 10-4
 Primary Risks for Errors and Fraud
Related to Cash

 Ending cash balance is overstated

» Omission of outstanding check from year-end
reconciliation
» Fictitious check in cash on hand at year end
 Ending cash balance has been improperly
reduced
» Do client’s records reflect all cash transactions
» Were all cash payments properly authorized and
made for legitimate business purpose

Slide 10-5
 General Internal Control
Over Cash

Design of controls should provide assurance

that:
1. All cash that should have been received was
in fact received, recorded accurately and
deposited promptly.
2. Cash disbursements have been made only
for authorized purposes and have been
properly recorded.
3. Cash balances are maintained at adequate,
but not excessive, levels.

Slide 10-6
 Internal Control over
Cash Receipts

• Cash sales
– Involvement of two or more employees
– Cash Registers
– Electronic point of sales systems
• Collections of receivables
– Initial listing of cash receipts
– Custody and depositing of cash receipts
– Maintenance of customer account records
– Reconciliation of customers’ ledgers with control
accounts
– Mailing monthly statements to customers
– Collection activity and past-due accounts
– Lockbox system

Slide 10-7
 Potential Misstatements for
Cash Receipts

• Recording fictitious cash receipts

• Proper segregation of duties
• Bank reconciliations
• Failure to record receipts from cash sales
• Use of cash registers, POS systems, and encouragement of
customers to obtain receipts
• Failure to record cash from collection of accounts
receivables
• Proper segregation of duties
• Reconciliation of subsidiary A/R ledger to GL control account
• Early (late) recognition of cash receipts
• List and deposit cash receipts on a timely basis
• Ethical environment created by top management

Slide 10-8
 Internal Control over
Cash Disbursements

 Proper segregation of duties

 Payment by check or electronic funds transfer
 Match of purchase order and receiving documents
with vendor’s invoice
 Review of supporting documents by authorized check
signer
 Cancel of supporting documents
 Authorized check signer should mail checks

Slide 10-9
 Potential Misstatements for
Cash Disbursements

 Inaccurate recording of a purchase or disbursement

» Proper segregation of duties
» Proper matching of voucher documents
» Adequate chart of accounts and controls over posting
procedures
 Duplicate recording and payment of purchases
» Proper review and cancellation of supporting documents by
check signer
 Unrecorded disbursements
» Proper segregation of duties

Slide 10-10
 Audit Program for Cash

A. Consider internal control over cash

1. Obtain an understanding of internal control.
2. Assess control risk and design additional tests of controls
for cash.
3. Perform additional tests of controls for those controls
necessary to support the planned level of control risk
a. Test records and reconciliations by reperformance
b. Compare a sample from detailed cash receipts listing to CRJ,
A/R postings and bank deposit slips.
c. Compare a sample of recorded disbursements from CDJ to
A/P postings, P/Os, receiving reports, and paid checks.
4. Reassess control risk and modify substantive tests for
cash.

Slide 10-11
 Substantive Tests for Cash Balances
B. Substantive Tests Audit
Objectives
Obtain analyses of cash balances and reconcile them to the Clerical Accuracy
G/L.

Send confirmation forms to financial institutions. Existence and rights

Obtain bank reconciliations and consider reconciling bank
activity.
Obtain bank cutoff statement.
Count cash on hand (concurrently with investments if
possible).
Verify the client’s cutoff of cash transactions. Existence and rights
Analyze bank transfers around year-end. Completeness

Investigate payments to related parties. Presentation and

Evaluate financial statement presentation and disclosure. disclosure
Slide 10-12