Modern Auditing:
Assurance Services and the Integrity
of Financial Reporting, 8th Edition
William C. Boynton
California Polytechnic State
University at San Luis Obispo
Raymond N. Johnson
Portland State University
Chapter 18 – Auditing Investments and Cash Balances
Chapter Overview
Auditing Investments
Investments – Audit Objectives
Investments
• Understanding the Entity and
Environment
• Analytical Procedures
• Inherent Risk
Consideration of Internal Controls –
Common Documents and Records
• Stock certificate
• Bond certificate
• Bond indenture
• Broker’s advice
Consideration of Internal Controls –
Common Documents and Records
• Broker’s statement
• Books of original entry
• Investment subsidiary ledger
Functions and Related Controls
• Authorize Investment Transactions
– Purchasing securities
– Selling securities
• Receive or Deliver Securities
–
–
–
–
Receiving securities
Safeguarding securities
Delivering securities
Receiving periodic income
Functions and Related Controls
• Record Transactions
– Recording purchases, sales, and income
– Recording market adjustments and
reclassifications
– Reviewing purchases, sales, and income
transactions
• Settle Transactions
– Receiving cash
– Disbursing cash
– Assessing investment performance and
reporting
Preliminary Audit Strategies for
Investments
Substantive Tests of Investments
• Initial Procedures
• Analytical Procedures
• Tests of Details of Transactions
Substantive Tests of Investments
• Tests of Details of Balances
– Inspect and Count Securities on Hand
– Confirm Securities Held by Others
– Recalculate Investment Revenue Earned
• Tests of Details of Accounting
Estimates
– Proper Classification of Investments
Substantive Tests of Investments
• Auditing the Fair Value of
Investments
• Tests of Details of Presentation and
Disclosure
Study Break
1. This document is an engraved,
prenumbered form showing the
number of bonds owned by a
bondholder.
A.
B.
C.
D.
Stock certificate
Bond certificate
Bond indenture
Broker’s advice
B. Bond certificate
Study Break
2. While recording investing transactions,
all of the following functions need to be
carried out, except:
A. Recording purchases, sales, and income
B. Recording market adjustments and
reclassifications
C. Reviewing purchases, sales, and income
transactions
D. Assessing investment performance and
reporting
D. Assessing investment performance and
reporting
Study Break
3. All of the following are proper
classification for investments,
except:
A.
B.
C.
D.
Held-to-maturity securities
Daily securities
Trading securities
Available-for-sale securities
B. Daily securities
Auditing Cash Balances
Cash Balances – Audit Objectives
Cash Balances
• Analytical Procedures
• Inherent Risk
• Consideration of Internal Controls
Preliminary Audit Strategies for
Cash Balances
Substantive Tests for Cash
Balances
• Initial Procedures
• Analytical Procedures
Substantive Tests for Cash
Balances
• Tests of Details of Transactions
– Perform Cash Cutoff Tests
• Cash Receipts
• Cash Disbursements
– Trace Bank Transfers
• Kiting
• Bank Transfer Schedule
Substantive Tests for Cash
Balances
• Tests of Details of Transactions
– Count Cash on Hand
• Cash Counts
– Tests to Detect Lapping
• Confirm Accounts Receivable
• Make a Surprise Cash Count
• Compare Details of Cash Receipts Journal
Entries with the Details of Corresponding
Daily Deposit Slips
Substantive Tests for Cash
Balances
• Tests of Details of Balances
– Confirm Bank Deposit and Loan Balances
– Confirm Other Arrangements with Banks
– Scan, Review, or Prepare Bank
Reconciliations
– Obtain and Use Bank Cutoff Statements
• Tests of Details of Presentation and
Disclosure
Study Break
4. Cash is related to all of the
following cycles, except:
A.
B.
C.
D.
Revenue Cycle
Financing Cycle
Expenditure Cycle
All of the Above
D. All of the Above
Study Break
5. This test of details of transactions
for cash balances involves the
counting of all undeposited cash
receipts and change funds.
A.
B.
C.
D.
Perform Cash Cutoff Tests
Trace Bank Transfers
Count Cash on Hand
Tests to Detect Lapping
C. Count Cash on Hand
Study Break
6. ______ is a form of fraud the results
in the deliberate misappropriation
of cash receipts.
A.
B.
C.
D.
Kiting
Cash Counts
Compensating Balance
Lapping
D. Lapping