CHAPTER 20

Audit of Cash
Balances
What are the auditor’s primary
concerns with regard to
cash?
What are the auditor’s primary
concerns with regard to cash?

- existence
What are the auditor’s primary
concerns with regard to cash?
- existence
- completeness
What are the auditor’s primary
concerns with regard to cash?

- existence
- completeness
- physical control
What are the auditor’s primary
concerns with regard to cash?
- existence
- completeness
- physical control
-
presentation
and disclosure
Cash Audit Procedures
perform
analytical
procedures
to test the
reasonableness
of cash
balances
Cash Audit Procedures
Enquire of management regarding any
cash requirements or restrictions
from debt agreements.
What is kiting?
What is kiting?
Kiting is an irregularity whereby
an overstatement of cash is
cre- ated by a cash transfer
between bank accounts.
What is kiting?
Kiting is an irregularity whereby
an overstatement of cash is
cre- ated by a cash transfer
between bank accounts.
The deposit is
recorded in cash receipts but
the disbursement is not re-
corded in cash disbursements.
 Kiting example
On 12/31, Ace’s bookkeeper writes a $5,000 cheque
on the National Bank and deposits the cheque
in the Canadian Bank account.

National Ace Co. 12/31 Canadian

Ace Co. 5000
National
 Kiting example
On 12/31, Ace’s bookkeeper writes a $5,000 cheque
on the National Bank and deposits the cheque
in the Canadian Bank account.
The bookkeeper records the deposit in the cash
receipts journal but does not record the
cheque in the cash payments journal.
He also fails to list the cheque as outstanding on the
National Bank reconciliation.

cash receipts journal cash payments journal

description _ $$ _ description _ $$
_ Dec.31, 2004
Dec. 31, 5000 - no activity -
2004
Misc. revenue
 Kiting example
On 12/31, Ace’s bookkeeper writes a $5,000 cheque
on the National Bank and deposits the cheque
in the Canadian Bank account.
National will not be aware of
National the cheque until notification from
Canadian, probably during the
first few days of January.

Canadian
 Kiting example
On 12/31, Ace’s bookkeeper writes a $5,000 cheque
on the National Bank and deposits the cheque
in the Canadian Bank account.
National will not be aware of
National the cheque until notification from
Canadian, probably during the
first few days of January.

As a result of the deposit, Canadian

Canadian will increase Ace’s
account on 12/31.
On 12/31, Ace’s bookkeeper writes a $5,000 cheque
on the National Bank and deposits the cheque
in the Canadian Bank account.
National will not be aware of
National the cheque until notification from
Canadian, probably during the
first few days of January.

As a result of the deposit, Canadian Canadian

will increase Ace’s account on 12/31.

As a consequence, the bank records will reflect a

$5,000 cash overstatement for a few days until the
cheque clears. December bank statements will also
support this overstatement.
 From an internal control
perspective, why does kiting
occur?
 From an internal control
perspective, why does kiting
occur?
inadequate
segregation of
duties between
accounting and
cash custody
 What effect is changing
technology having on the
likelihood of kiting?
 What effect is changing
technology having on the
likelihood of kiting?
Kiting is becoming
less likely
because
the “float” is
shrinking; i.e.,
cheques clear banks
faster than in the
past.
What audit procedures
may detect kiting?
What audit procedures
may detect kiting?
tests related to
the cutoff
bank
statement and
schedule of
bank
Cash Audit Procedures
Obtain a bank cutoff statement directly
from the bank.

?
Cash Audit Procedures
Obtain a bank cutoff statement directly
from the bank.

A bank cutoff
statement is prepared
ten business days after the
balance sheet date.
Cash Audit Procedures
Obtain a bank cutoff statement directly
from the bank.

A bank cutoff
statement is prepared
ten business days after the
balance sheet date.
Most items that were outstand-
ing at year-end have cleared
when the cutoff statement
is prepared (cheques,
deposits).
Cash Audit Procedures
Obtain a bank cutoff statement directly
from the bank.

Trace all cheques, deposits, and other

cash changes from the cutoff statement
to cash receipts and disbursements
records, paying particular attention to
dates and amounts.
Cash Audit Procedures

Prepare a schedule of bank transfers

showing all transfers between the
client’s bank accounts during the last
week of the audit period and the first
week of the subsequent period.
Cash Audit Procedures
Prepare a schedule of bank transfers
showing all transfers between the
client’s bank accounts during the last
week of the audit period and the first
week of the subsequent period.

The schedule should

be prepared using cash receipts
and payments journals, year-end
reconciliation, year-end bank state-
ment, and cutoff bank statement.
Cash Audit Procedures

Obtain or prepare a year-end bank

reconciliation or proof of cash for
each client bank account.
Cash Audit Procedures
Obtain or prepare a year-end bank
reconciliation or proof of cash for
each client bank account.

What
is a proof
of cash?
Cash Audit Procedures
Obtain or prepare a year-end bank
reconciliation or proof of cash for
each client bank account.
A proof of
cash is a working
paper prepared by the auditor to
reconcile the bank’s record of the
client’s beginning balance, cash
deposits, cleared cheques, and
ending balance for the period with
the client’s records.
Cash Audit Procedures
Obtain or prepare a year-end bank
reconciliation or proof of cash for
each client bank account.
Trace amounts to
the schedule of bank transfers,
cash receipts and payments
journals, year-end reconcilia-
tion, year-end bank statement,
and cutoff bank statement.
What will a bank reconciliation
help the auditor determine?
What will a bank reconciliation help the
auditor determine?

- whether all client cash receipts

have been deposited

cash receipts journal Canadian

description _ $$ _

Dec. 31, 5000

2004
Misc. revenue
What will a bank reconciliation help the
auditor determine?

- whether all bank deposits have

been recorded in client cash
receipts records

cash receipts journal Canadian

description _ $$ _

Dec. 31, 5000

2004
Misc. revenue
What will a bank reconciliation help the
auditor determine?

- whether all clientcash pay-

ments have been paid by the
bank

cash payments journal Canadian

description _ $$ _
Dec. 31, 2004
Misc. expense 5000
What will a bank reconciliation help the
auditor determine?

- whether all bank payments have

been recorded in client cash
payments records

cash payments journal Canadian

description _ $$ _
Dec. 31, 2004
Misc. expense 5000
What will not be detected by a
bank reconciliation?
What will not be detected by a
bank reconciliation?
- unrecorded cheques that have not
cleared thebank (possible kiting)
What will not be detected by a
bank reconciliation?
-
unrecorded cheques that have
not cleared the bank (possible
kiting)

-
unrecorded deposits that have
not cleared the bank
What will not be detected by a
bank reconciliation?
-
unrecorded cheques that have
not cleared the bank (possible
kiting)

-
unrecorded deposits that have
not cleared the bank

-
cheques written for
Cash Audit Procedures

BANK
Confirm all cash
balances held by
third parties, such as
banks and other financial
institutions.
Cash Audit Procedures
Confirm all cash balances held
by third parties, such as
banks and other financial
institutions.
possibly through
use of the standard
bank confirmation
Cash Audit Procedures
Count all cash on hand at the client’s
premises. If cash is located in multiple
places, count cash simultaneously to
avoid double counting.
Cash Audit Procedures

Review cutoff
of cash receipts
and
disbursements.
Cash Audit Procedures
Account for the numeric sequence of
cancelled cheques. Investigate missing
cheques. Ace Company
6462
Ace Company 6461
Ace Company

6459 ?
Ace Company 6458 Ace
Company 6457

NATIONAL BA NK
Cash Audit Procedures
Review monthly
client-prepared
bank
reconciliations.
Cash Audit Procedures
Investigate any cheques
made out to cash or
bearer.
Ace Company 6458

CASH
NATIONAL BANK
Cash Audit Procedures
Investigate any cheques that were
returned by the bank because the client
account had insufficient funds.
Ace Company 6458

NSF
NATIONAL BANK
Cash Audit Procedures
Review and recalculate translations
of foreign currencies.
 Cash Audit Procedures
Trace a sample of entries from cash receipts journal
to a/r subsidiary ledger

cash receipts journal a/r subsidiary

description _ $$ _ customer _ $$ _
ABC Vending 78,660
May 23, 2004 23,000 5/23/04 payment 23,000
ABC Vending balance 55,660
 Cash Audit Procedures
Trace a sample of entries from cash receipts journal
to a/r subsidiary ledger to bank statements

cash receipts journal a/r subsidiary

description _ $$ _ customer _ $$ _ ABC
Vending 78,660
May 23, 2004 23,000 5/23/04 payment 23,000
ABC Vending balance 55,660
Bank Statement
5/31/04
Deposits:

5/23
$23,000
Cash Audit Procedures
Trace a sample of entries from cash receipts journal
to a/r subsidiary ledger to bank statements to
deposit slips.

cash receipts journal a/r subsidiary

description _ $$ _ customer _ $$ _
ABC Vending 78,660
May 23, 2004 23,000 5/23/04 payment 23,000
ABC Vending balance 55,660
Bank Statement
5/31/04
Deposit
Deposits: Slip
5/23/04
5/23
$23,000 23,000
Cash Audit Procedures
Trace a sample of entries from cash payments
journal to a/p subsidiary ledger

cash payments journal a/p subsidiary

description _ $$ _ vendor _ $$ _
January 23, 2004 MGB Corp 8,780
a/p payment to 1/23/04 payment 4,300
MGB Corp. 4,300 balance 4,480
Cash Audit Procedures
Trace a sample of entries from cash payments
journal to a/p subsidiary ledger to bank statement

cash payments journal a/p subsidiary

description _ $$ vendor _ $$ _
_
January 23, 2004 MGB Corp 8,780
a/p payment to 1/23/04 payment 4,300
MGB Corp. 4300 balance 4,480
Bank Statement
1/31/04
Deposits:

Payments:

1/26 $4300
 Cash Audit Procedures
Trace a sample of entries from cash payments
journal to a/p subsidiary ledger to bank statement to
cancelled cheques.

cash payments journal a/p subsidiary

description _ $$ vendor _ $$ _
_
January 23, 2004 MGB Corp 8,780
a/p payment to 1/23/04 payment 4,300
MGB Corp. 4300 balance 4,480
Bank Statement
1/31/04
Deposits: Ace Company 4512
1/23/04
MGB Corp. 4300
Payments:
NATIONAL BANK

1/26 $4300