CHAPTER 1

AUDIT OF CASH AND CASH EQUIVALENTS

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 Learning objectives

After studying this chapter, students can:

- Understand the characteristics of cash accounts;
- Identify audit objectives for cash accounts;
- Analyse risks and the design of internal controls over cash
accounts;
- Perform audit procedures in the audit of cash accounts.

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AUDIT OF CASH AND CASH EQUIVALENTS

1.1  Contents and characteristics of cash and cash

equivalents

1.2  Internal control over cash and

cash equivalents

1.3  Audit procedures

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 Learning Materials
•Textbook:

[1] Alvin A. Arens, Mark S Beasley, Randal J Elder (2020), Auditing

and Assurance services – an integrated approach, 17th edition.
•Other materials:
[2] Bộ môn Kiểm toán (2019), Kiểm toán. Đại học kinh tế TP.HCM,
NXB Lao Động Xã Hội.
[3] Trần Thị Hải Vân & cộng sự (2016), Tóm tắt lý thuyết và Bài tập
thực hành Kiểm toán doanh nghiệp, Đại học Ngân hàng TP.HCM
[4] Các website: www.mof.gov.vn; www.vacpa.org.vn;...

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 Preparatory questions
What are the accounting characteristics of cash and cash equivalents?
What does the set of accounting documents of the cash accounts include?
Indicate the objectives of auditing cash and cash equivalents.
Describe the control activities for cash.
What are the control risks for cash?
List the substantive tests needed when auditing cash.
1. What is the process for sending a bank confirmation letter?

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 AUDIT OF CASH AND CASH EQUIVALENTS

1.1  Contents and characteristics of cash and cash

equivalents

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 1.1.1. Contents of Cash

Cash is presented on the Balance Sheet

Cash is presented in the assets section of
according to the aggregate number and the
the Balance Sheet (Part A: Current assets,
detailed contents are published in the Notes
Section I: Cash and cash equivalents).
to the financial statements.

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 1. Nội dung
Cash on
hand
Cash at bank

Cash in transit

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Cash on hand
Is the amount of money stored in the safe of the
business.

Including Vietnamese currency, foreign currency, gold

and silver, precious metals, precious stones.

The figure presented on the financial statements of

this item is the balance of the Cash account at the
time of closing after it has been reconciled with the
actual number and made the necessary
adjustments.

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Cash at bank

Including Vietnamese currency, foreign currency, gold

and silver, precious metals, precious stones deposited
at the bank.

The balance of Cash at bank account presented on the

Balance Sheet must be reconciled and adjusted
according to the bank statement at the time of closing.

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Cash in transit

Including Vietnamese and foreign currency

that enterprises have deposited into banks
and state treasuries,... or although it has
carried out procedures for transferring money
from the Bank Deposit account to pay other
entities, but by the closing date, the
enterprise has not received a notice or
statement of the bank, or a notice from the
treasury.

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 1.1.2. Characteristics of cash

Cash is the first item presented on the Balance Sheet and is an

important item in Current Assets. Cash is often used to analyze
the solvency of a business, so this is something that can be
deliberately falsified.

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 1.1.2. Characteristics of cash

Cash is also an affected item and affects many important

items such as income, expenses, liabilities, and most other
assets of the business.
 Because the amount incurred by cash accounts is
often greater than that of many other accounts, mistakes in
money-related operations are more likely and difficult to
detect without an effective internal control system.

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 1.1.2. Characteristics of cash

Cash is also a very "sensitive" asset, so the

likelihood of embezzlement fraud is often higher than in
other accounts.
 Due to all of the above reasons, the potential risk
of this item is generally appreciated. Therefore, auditors
often spend a lot of time checking cash even though
this item usually accounts for a small proportion of total
assets.

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 Example of embezzlement

“Lapping” fraud
Lapping of accounts receivable is the postponement of entries for
the collection of receivables to conceal an existing cash shortage.
The embezzlement is perpetrated by a person who handles cash
receipts and then enters them into the computer system. He or she
defers recording the cash receipts from one customer and covers
the shortages with receipts of another. These in turn are covered
from the receipts of a third customer few days later. The employee
must continue to cover the shortage through repeated lapping,
replace the stolen money, or find another way to conceal the
shortage.

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 Example of embezzlement
“Lapping” Fraud
Date Collect from actual Recording in Record and The amount of
customers received A.Receivable deposit to money
bank account misappropriated
by employees

1/12 An 750.000 750.000

1/12 Ba 1.035.000 Ba 1.035.000

2/12 Chính 750.000 An 750.000
2/12 Danh 130.000 Danh 130.000
3/12 Hoa 1.575.000 Chính 750.000 825.000
3/12 Tài 400.000 Tài 400.000
Total 4.640.000 3.065.000 1.575.000

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1.1.3. Audit objectives - Assertions

Existence

Presentation and
Completeness
disclosure

Evaluation Rights

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Assertions about classes of transactions and
events for the period
i. Occurrence—transactions and events that have been
recorded have occurred and pertain to the entity.
ii. Completeness—all transactions and events that
should have been recorded have been recorded.
iii. Accuracy—amounts and other data relating to
recorded transactions and events have been recorded
appropriately.
iv. Cut-off—transactions and events have been recorded
in the correct accounting period.
v. Classification—transactions and events have been
recorded in the proper accounts.

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Assertions about account balances at the period end

i. Existence—assets, liabilities, and equity interests exist.

ii. Rights and obligations—the entity holds or controls the
rights to assets, and liabilities are the obligations of the
entity.
iii.Completeness—all assets, liabilities and equity interests
that should have been recorded have been recorded.
iv.Valuation and allocation—assets, liabilities, and equity
interests are included in the financial statements at
appropriate amounts and any resulting valuation or
allocation adjustments are appropriately recorded.

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Assertions about presentation and disclosure

(i) Occurrence and rights and obligations—disclosed

events, transactions, and other matters have occurred
and pertain to the entity.
(ii) Completeness—all disclosures that should have
been included in the financial statements have been
included.
(iii) Classification and understandability—financial
information is appropriately presented and described,
and disclosures are clearly expressed.
(iv) Accuracy and valuation—financial and other
information are disclosed fairly and at appropriate
amounts.

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AUDIT OF CASH AND CASH EQUIVALENTS

1.2  Internal control over cash and

cash equivalents

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 1.2.1. Control Objectives

In order to effectively control internal control over cash, it

is necessary to meet the following requirements:
- Control business cycles that affect cash receipts and
disbursements (sales, purchases ...).
- Independent inspection: physical inspection of cash
on hand, bank reconciliation.
- Collect fully, spend properly, and maintain a
reasonable balance of cash

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 1.2.1. Control Objectives

Principles of internal control

Employees must have sufficient competence and integrity.
Apply the principle of division of responsibilities.
Immediately deposit the proceeds of the day into a fund or bank.
Make maximum payments through the bank, and limit payments by
banknote/paper money/note.
At the end of each month/week/day, compare the amount of money
recorded in the cash book with the actual money in the safety
box/strongbox/till.

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 1.2.2. Control activities

Direct cash collection:

- Separate the function of sales and cash collection;
- Number the order continuously in advance on cash
receipts and invoices;
- Use cash registers, hand over the bills to customers;
- Compare the total proceeds of the goods sold according to
the books with the money paid by the employee on the
same day;
- Prepare daily sales reports.

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 1.2.2. Control activities

Collecting debts:
-Customers come to pay: cash receipts;
-To the customer’s company collecting money: referral, debt
reconciliation;
-Postal collection: assign tasks to employees: invoicing –
tracking debts – reconciling general books with details – listing
cheques received – depositing cheques in banks – collecting
money;

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 1.2.2. Control activities

Some of the internal control procedures commonly used

for expenditures are as follows:
Use forms of payment through banks, minimizing the use of
note/paper money in payment.
Properly apply the principle of authorization and approval.
Develop procedures for reviewing expenditures.
Monthly/weekly conduct bank reconciliation.

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AUDIT OF CASH AND CASH EQUIVALENTS

1.3  Audit procedures

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 1.3.1. Risk assessment
Common risks and errors
Cash on hand
Physical cash counting: No regular counting, no independent
participants in the cash counting; cash in different places
differences are not handled in a timely manner...
Record in the cash ledger when the cash has not been
received.
 For revenues and expenses in foreign currencies: not
track the original currency, use incorrect exchange rates, and
not assess unrealized exchange rate differences for year-end
balances.

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 1.3.1. Risk assessment
Common risks and errors

Cash at bank
There is no regular reconciliation between the accounting book and
the bank statements.
Inadequate and untimely accounting record cash receipts and
disbursement.
There are many deposit accounts in many different banks, many
of which are not used but do not settle during the year.

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1.3.1. Risk assessment

Evaluate internal controls

For small and medium-sized businesses, auditors

often compose narratives, while for large businesses,
auditors often use flowcharts to describe the internal
control structure.
 Auditors typically rely on inquiring, observing, and
using internal control questionnaires to understand the
internal controls and assess control risks.

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 1.3.1. Risk assessment
Questionnaire on internal control over cash
Answers Note
Questions
Yes No Weakness

Important Not
significant

Does the entity divide responsibilities

between treasurers and accountants?
Are receipts and disbursements numbered
continuously before use?
Does the treasurer check the validity of
receipts and disbursements before
collecting or spending money?
1. Does the treasurer ensure that
documents are always signed or
stamped?

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 1.3.1. Risk assessment
Questionnaire on internal control over cash

Answers Note
Questions Y N Weakness
Important Not
significant

5. Is there a cash stocktaking at the end of the day?

6. Is there a periodic reconciliation between the fund
log and the fund book?
7. Is there a periodic comparison between the bank
deposit book and the bank statement?
8. Are there regulations on disbursements review in
the entity?
………………………………….

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 1.3.2. Tests of control

Preliminary assessment of control risks:

Control procedure: Limit substantive tests

Low Control R
effective Perform tests of control

Control procedure:
High Control R Perform tests of details
Weakness

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 1.3.3. Substantive tests

Reassess control risks and redesign tests of details

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 1.3.3. Substantive tests

General procedures
- Check that accounting principles apply consistently with
the previous year and in accordance with the provisions of current
accounting standards and regimes.
- Make a table of aggregate figures (Lead sheet) that compare
figures of this year with the balance at the end of the previous
year.

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 1.3.3. Substantive tests

Analytical procedures
- Compare this year's cash balances and cash
equivalents to the previous year, explaining the unusual
fluctuations.
- Analysis of the ratio of deposit balances to total short-
term assets, financial ratios of cash, and solvency and
comparison with balances at the end of the previous year,
explaining unusual fluctuations.

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 1.3.3. Substantive tests
Tests of details:
Collect a summary table of cash balances and cash equivalents
at the closing date, and compare it with the balances on the
detailed ledgers, ledgers, and financial statements.
• Check the beginning of the year balance:
+Compare the beginning of the year balance of cash with the minutes of cash
inventory and books of previous years.
+Send confirmation letters that including the confirmation for the balance at the
beginning of the year.
• Witness the counting of cash funds/ Physical observation of
cash counting (including gold, silver, and gems, if any) at the
closing date and compare them with the balance of the fund
book and the detailed book at the closing date, ensuring that
all funds of the enterprise are counted.
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 1.3.3. Substantive tests

In case of witnessing cash on hand before or after the closing date, select a
sample to check receipts/ expenditures for operations arising after or before
the time of cash counting, compare downstream / reverse to the actual
balance of money on the fund book at the closing date by adjusting the
corresponding arising cash receipt and disbursement operations.
• Detect and find out the cause of the discrepancy (if any).

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 1.3.3. Substantive tests

Make and send a letter confirming the account balance to send to

the bank.
Summarize the results received, compare with the balance on the
detail book.
Explain the spreads (if any).
Skim the Ledger to detect unusual operations in value, reciprocal
accounts or in the nature of business.
• Check to the original document (if necessary).

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 1.3.3. Substantive tests

Check the application of the exchange rate to the accounting

currency for foreign currency-based balances at the time of
closing.
Check how exchange rate differences are calculated and
accounted for.
Check for large or unusual revenues and expenditures before and
after the closing date, determining if they were recorded in due
course.
• Check the presentation of cash and cash equivalents on
financial statements.

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 Questions
Question 1: Present the basic content to perform an audit of cash
and cash equivalents
Question 2: When carrying out the audit procedure to send a letter
confirming the bank deposit balance, what should be noted?
Question 3: Tell me how the Lapping trick is performed? What are
the effects of this trick? Recommend control procedures to
prevent lapping, and tell which audit tests can detect it?

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 Requirements
Use Exercise and Practice Materials
• Do exercises 1, 2, 3, 6/ pages 11 – 15

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