Audit of Cash Balances

Chapter 23

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 1

 Learning Objective 1

Show the relationship of cash

in the bank to the various
transaction cycles.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 2

 Relationships of Cash in the
Bank and Transaction Cycles
Capital Acquisition and Repayment Cycle:

Capital Stock – Common Dividends Payable

Redemption Issue of Payment of
of stock stock dividends

Paid-in Capital in Excess

of Par – Common Cash in Bank
Redemption Issue of
of stock stock

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 3

 Relationships of Cash in the
Bank and Transaction Cycles
Acquisition and Payment Cycle:

Accounts Payable
Payment

Cash in Bank

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 4

 Relationships of Cash in the
Bank and Transaction Cycles
Sales and Collection Cycle:

Accounts Receivable Cash Discounts Taken

Cash
receipts

Gross Sales Cash in Bank

Cash
sales

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 5

 Relationships of Cash in the
Bank and Transaction Cycles
Payroll and Personnel Cycle:
Accrued Wages, Salaries, Accrued Payroll
Bonuses, and Commissions Tax Expense
Payment Payment

Withheld Income Taxes

and Other Deductions Cash in Bank
Payment

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 6

 Cash in the Bank and
Transaction Cycles
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 interception
of cash receipts from customers before
they are recorded, with the account
charged off as a bad debt

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 7

 Cash in the Bank and
Transaction Cycles
 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
worked
 Payment of interest to a related party for
an amount in excess of the going rate

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 8

 Cash in the Bank and
Transaction Cycles
Misstatements which are normally discovered
as a part of the tests of a bank reconciliation:
 Failure to include a check that has not
cleared the bank, 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

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 9

 Cash in the Bank and
Transaction Cycles
 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

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 10

 Learning Objective 2
Identify the major types of cash
accounts maintained by
business entities.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 11

 Types of Cash Accounts

 General cash account

 Imprest accounts
 Branch bank account
 Imprest petty cash fund
 Cash equivalents

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 12

 Relationship of General Cash to
Other Cash Accounts
Branch Bank Imprest Payroll
Account Account

General
Cash

Cash Imprest Petty

Equivalents Cash Fund

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 13

 Learning Objective 3
Design and perform audit tests
of the general cash account.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 14

 Methodology for Designing Tests
of Balances for Cash in the Bank
Identify client business
risks affecting cash Phase I
in bank
Set tolerable misstatement
and assess inherent Phase I
risk for cash in bank
Assess control
risk for Phase I
several cycles
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 15
 Methodology for Designing Tests
of Balances for Cash in the Bank

Design and perform

tests of controls and
substantive tests of Phase II
transactions for
several cycles

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 16

 Methodology for Designing Tests
of Balances for Cash in the Bank

Design and perform

analytical procedures Phase III
for cash in bank

Design tests of Audit procedures

details of cash in Sample size
bank to satisfy Phase III
balance-related Items to select
audit objectives Timing
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 Audit Schedule for a Bank
Reconciliation
Clawson Industries Schedule A-2 Date
Bank Reconciliation Prepared by Client DED 1/10/10
12/31/09 Approved by SW 1/18/10
Account 101 – General account, First National Bank

Balance per bank $109,713

Add: Deposits in transit 21,117
Deduct: Outstanding checks – 87,462
Other reconciling items: Bank error – 15,200
Balance per bank, adjusted $ 28,168

Balance per books before adjustments $ 32,584

Adjustments: Unrecorded bank service charge 216
NSF 4,200 – 4,416
Balance per books, adjusted $ 28,168
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 18
 Balance-related Audit
Objectives
Detail tie-in:
Cash in the bank foots correctly and
agrees with the general ledger.
Existence:
Cash in the bank as stated on the
reconciliation exists.
Completeness:
Existing cash in the bank is recorded.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 19

 Balance-related Audit
Objectives
Accuracy :
Cash in the bank as stated on the
reconciliation is accurate.
Cutoff:
Cash receipts and cash disbursements
transactions are recorded in the proper
period.

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 Procedures

 Receipt of a bank confirmation

 Receipt of a cutoff bank statement

 Tests of the bank reconciliation

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 Extended Tests of the Bank
Reconciliation
When the auditor believes that the year-end bank
reconciliation may be intentionally misstated,
it is appropriate to perform extended tests
of the year-end bank reconciliation.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 22

 Types of Audit Tests Used for
General Cash in Bank
Cash in Bank
Beginning balance
Cash receipts Cash disbursements

Audited by Audited by
TOC-T, STOT, and AP TOC-T, STOT, and AP

Ending balance

Audited by
TOC-B, AP, and TDB

TOC-T + TOC-B + STOT + AP + TDB

= Sufficient appropriate evidence
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 Learning Objective 4
Recognize when to extend audit
tests of the general cash account
to test further for material fraud.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 24

 Fraud Oriented Procedures

The auditor must extend the procedures

in the audit of year-end cash to determine
the possibility of a material fraud.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 25

 Extended Tests of the
Bank Reconciliation
When the auditor believes that the year-end
bank reconciliation may be intentionally
misstated, it is appropriate to perform
extended tests of the year-end bank
reconciliation.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 26

 Proof of Cash

 All recorded cash receipts were deposited

 All deposits in the bank were recorded in
the accounting records
 All recorded cash disbursements were
paid by the bank
 All amounts that were paid by the bank
were recorded

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 27

 Proof of Cash

Includes the following reconciliation tasks:

1. The balance on the bank statement with
the general ledger balance at the
beginning of the proof-of-cash period
2. Cash receipts deposited per the bank with
the cash receipts journal for a given period

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 28

 Proof of Cash

Includes the following reconciliation tasks:

3. 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

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 29

 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.

The date of the recording of the disbursements

and receipts for each transfer must be in
the same fiscal year.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 30

 Interbank Transfers

Disbursements on the interbank transfer

schedule should be correctly included in or
excluded from year-end bank reconciliation
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.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 31

 Learning Objective 5
Design and perform audit tests of
the imprest payroll bank account.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 32

 Audit of the Imprest Payroll
Bank Account
Typically, the only reconciling
items are outstanding checks.

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 Learning Objective 6
Design and perform audit tests
of imprest petty cash.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 34

 Petty Cash

Petty cash is a unique account because

it is often immaterial in amount, yet it is
verified on many audits.

The account is verified primarily because

of the potential for embezzlement and the
client’s expectation of an audit review
even when the amount is immaterial.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 35

 Audit of Imprest Petty Cash

 Internal controls over petty cash

 Audit tests for petty cash

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 36

 End of Chapter 23

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 37