Cash
Audit Procedures
Assertions & Objectives
Management
Cash
• Exists
• Include all transactions that
should be presented
• Represents rights of the
entity
• Valued appropriately
• Presented and disclosed
properly within the financial
statements
Audit
• Existence or occurrence
• Completeness
• Rights and obligations
• Valuation or allocation
• Presentation and disclosure
Approach to audit
• Nature – using persuasive procedures (bank
account confirmation)
• Timing – perform procedures at the balance
sheet date (cut-off)
• Extent – test more extensively (increase sample
size)
DUE TO:
1. Detection risk
2. Control risk
3. Inherent risk
Audit Procedures
CASH
Substantive Tests: Cash Balance
Assertions
Existence, rights valuation
Procedures
1. Confirm year-end cash balance with all banks and
other depositories
valuation
2. Verify mathematical accuracy of recorded cash
balance:
• Foot cash journals
• Trace totals to the general ledger and to yearend bank reconciliations prepared by client
• Test cash on hand as necessary
Existence
Completeness
Valuation
3. Test cut-off
• Obtain cut-off bank statements directly from
banks
Assertions
Procedures
Existence
Completeness
Valuation
3. Test cut-off (continued)
• Obtain cut-off bank statements directly from
banks
a. Verify accuracy of cut-off bank statements
b. Examine information and trace to
reconciling items in year-end bank
reconciliation and to entries in cash journals
c. Consider necessity of preparing proof of
cash
• Reconcile recorded cash balance with returned
bank confirmations
• Examine intercompany and interbank transfer
near year end
Presentation and disclosure
4. Review financial statements to determine whether:
• Cash balance are properly classified and
described
• Disclosures are adequate
Confirm cash balances
• Standard form to confirm
account balance with
financial institutions
Verify mathematical
accuracy
• Recompute totals in cash
journals and clientprepared bank
reconciliations
• Trace cash journal totals to
postings in general ledger
• Counts cash on hand (petty
cash)
Test cut-off
• Test if cash receipts and
disbursements are recorded
in the proper accounting
period
Cash journals
General ledger
Bank reconciliations
VS
Year-end bank statements
Cut-off bank statements
Returned bank confirmations
BANK RECONCILIATION
Reconciliation of Bank Balances
Schedule explaining any differences between the
bank’s and the company’s records of cash.
Reconciling Items:
1. Deposits in transit.
2. Outstanding checks.
3. Bank charges and credits.
Time Lags
4. Bank or Depositor errors.
LO 10 Explain common techniques employed to control cash.
Reconciliation of Bank Balances
LO 10
LO 10 Explain common techniques employed to control cash.
Illustration: Journalize the adjusting entries at November 30 on
the books of Nugget Mining Company.
Nov. 30
Cash
542
Office expense
Accounts receivable
18
220
Accounts payable
180
Interest revenue
600
LO 10 Explain common techniques employed to control cash.
Review Question
The reconciling item in a bank reconciliation that will
result in an adjusting entry by the depositor is:
a. outstanding checks.
b. deposit in transit.
c. a bank error.
d. bank service charges.
LO 10 Explain common techniques employed to control cash.
Issues related to Cash
FINANCIAL STATEMENT
PRESENTATION AND DISCLOSURE
What is Cash?
A financial asset—also a financial instrument.
Financial Instrument - Any contract that gives rise to a
financial asset of one entity and a financial liability or
equity interest of another entity.
What is Cash?
► Most liquid asset.
► Standard medium of exchange.
► Basis for measuring and accounting for all other items.
► Current asset.
Examples: coin, currency, available funds on deposit at the
bank, money orders, certified checks, cashier’s checks, personal
checks, bank drafts and savings accounts.
LO 1 Identify items considered cash.
Reporting Cash
Cash Equivalents
Short-term, highly liquid investments that are both
(a) readily convertible to cash, and
(b) so near their maturity that they present insignificant risk
of changes in interest rates.
Examples: Treasury bills, commercial paper, and money market
funds.
LO 2 Indicate how to report cash and related items.
Restricted Cash
When material in amount:
Segregate restricted cash from “regular” cash.
Current assets or non-current assets
Examples, restricted for: (1) plant expansion, (2) retirement of
long-term debt, and (3) compensating balances.
Bank Overdrafts
When a company writes a check for more than the
amount in its cash account.
Generally reported as a current liability.
Offset against cash account only when available cash is
present in another account in the same bank on which
the overdraft occurred.
LO 2 Indicate how to report cash and related items.
Summary of Cash-Related Items
Illustration 7-3
LO 2