SUBSTANTIVE TEST OF CASH
CHAPTER 1
OUR LADY OF FATIMA UNIVERSITY
QUEZON CITY
Professor : Bernadette Kho Dimzon
8/17/2021
1
LEARNING OBJECTIVES

Describe the auditor’s objectives for the substantive audit
of cash in bank and on hand

Explain the nature of the appropriate audit procedures to
accomplish the objectives for audit of cash

Understand the preparation of audit working papers to
document the audit procedures for cash
Professor : Bernadette Kho Dimzon
8/17/2021
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AUDIT OF CASH ON HAND AND IN BANK

Cash has higher degree of inherent risk, more audit time
is devoted to the audit of the account than is indicated by
its peso amount

The amount of cash flowing in and out of the cash account
is frequently larger than for any other account in the
financial statement
Professor : Bernadette Kho Dimzon
8/17/2021
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AUDIT OF CASH ON HAND AND IN BANK

Furthermore , the susceptibility of cash to defalcation is
greater than for other types of assets because most other
assets be converted to cash to make them usable
Professor : Bernadette Kho Dimzon
8/17/2021
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AUDIT OF CASH ON HAND AND IN BANK

The following misstatements which result in the improper
payment of or failure to receive cash may be uncovered
through the test of controls and substantive tests of
transactions
o
Failure to bill a customer
o
Billing a customer at a price lower than called for by the
company policy
o
Abstraction of cash receipts from customers before they
are recorded
Professor : Bernadette Kho Dimzon
8/17/2021
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AUDIT OF CASH ON HAND AND IN BANK
o
Duplicate payment of a vendor’s invoice
o
Improper payments of officer’s personal expenses
o
Payment for merchandise or goods that were not received
o
Payment to an employee for more hours that he or she
has worked
o
Payment of interest to a related party for an amount far
exceeding the going rate
Professor : Bernadette Kho Dimzon
8/17/2021
6
AUDIT OF CASH ON HAND AND IN BANK
o
The first three misstatements could be uncovered as part
of the audit of revenue and cash receipts cycle, the next
three audit of acquisition and payment cycle and the last
two are tests of payroll and personnel cycle , financing
and investing cycle
Professor : Bernadette Kho Dimzon
8/17/2021
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AUDIT OF CASH ON HAND AND IN BANK
o
Different types of misstatements are normally discovered
in applying substantive test of details of balances

Cash received by the client subsequent to the statement
of financial position date but recorded as cash receipts in
the current year

Deposits recorded as cash receipts near the end of the
year , deposited in the bank in the same month but still
reported as deposit in transit in the bank reconciliation
Professor : Bernadette Kho Dimzon
8/17/2021
8
AUDIT OF CASH ON HAND AND IN BANK

Understatement of the outstanding checks in the bank
reconciliation

Payments of notes payable debited directly to the bank
balance by the banks but not entered in the client’s record
o
The appropriate methods for discovering the preceding
misstatements by testing the client’s bank reconciliation
will become clearer as we proceed
Professor : Bernadette Kho Dimzon
8/17/2021
9
AUDIT OF CASH ON HAND AND IN BANK

At this point, it is important only that the reader distinguish
between the tests of controls and substantive tests of
transactions that are related to cash account and tests
that determine whether the book balance reconciles with
the bank balance

To blend the conceptual and procedural aspects of
substantive tests for cash balance as well as for other
accounts , the audit program presented is keyed to
Professor : Bernadette Kho Dimzon
8/17/2021
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SUBSTANTIVE TESTING OF CASH
ASSERTIONS
1. EXISTENCE AND
OCCURRENCE
Professor : Bernadette Kho Dimzon
AUDIT OBJECTIVES
AUDIT PROCEDURES
a. To determine whether the cash
exists at year-end and cash
related transactions occur within
the year
b. To determine that all cash
balances of the client are reflected
on the statement of financial
position at year-end
8/17/2021
1. Obtain an analysis of cash balance
and reconcile to the general ledger
2. Confirm bank balances as of the
statement of financial position date
3. Perform cash count procedures for
cash on hand
4. Obtain (prepare) bank
reconciliations as of the statement
of financial position date
5. Trace all transfers occurring
between banks near year-end
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SUBSTANTIVE TESTING OF CASH
ASSERTIONS
2. COMPLETENESS
Professor : Bernadette Kho Dimzon
AUDIT OBJECTIVES
AUDIT PROCEDURES
1. Obtain a cut-off bank statement
containing all transactions several
days subsequent to the statement
of financial position date. Examine
items returned with the cutoff
bank statements
2. Prepare proof of cash and reconcile
transactions occurring during a
specified period as they are
recorded by the bank and the client
3. Verify the client’s cut off of cash
receipts and disbursements
a. To determine whether all cash
transactions are recorded in the
proper accounting period
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SUBSTANTIVE TESTING OF CASH
ASSERTIONS
AUDIT OBJECTIVES
AUDIT PROCEDURES
3. RIGHTS AND
OBLIGATIONS
a. To determine that cash balances
are available for use without
restrictions or if with restrictions
properly indicated in the statement of
financial position
4. VALUATION OR
ALLOCATION
a. To determine if cash is recorded
and presented at the proper account
Professor : Bernadette Kho Dimzon
1. Review bank statements and the
bank replies to confirmation
letters
1. Verify existence of cash in banks
under receivership, cash subject
to court’s retraining order, in
foreign banks an din foreign
currency . This in addition to the
foregoing procedures which will
enable13 the auditor to verify
8/17/2021
proper valuation of cash
SUBSTANTIVE TESTING OF CASH
ASSERTIONS
3. PRESENTATION
AND DISCLOSURE
Professor : Bernadette Kho Dimzon
AUDIT OBJECTIVES
a. To determine whether cash is
presented in accordance with
generally accepted accounting
principles
AUDIT PROCEDURES
1. Investigate any checks
representing large or unusual
payments to related parties
2. Evaluate proper financial
statement presentation and
disclosure of cash
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SUBSTANTIVE AUDIT PROCEDURES

Obtain analysis of cash balance and reconcile to the
general ledger
o
This schedule will typically list the bank , the account
number, account type (current, savings and time deposit)
and the year-end balance will then be traced and
reconciled to the general ledger as necessary
Professor : Bernadette Kho Dimzon
8/17/2021
15
SUBSTANTIVE AUDIT PROCEDURES

Confirm bank balances as of the statement of financial
position date
o
A direct approach in proving the existence of cash is to
confirm amounts on deposit by communicating with
financial institution officials
o
To assist he financial institution in completing this form ,
information identifying accounts, loans and their balances
are typed by the auditor
Professor : Bernadette Kho Dimzon
8/17/2021
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SUBSTANTIVE AUDIT PROCEDURES
o
Other information such as additional accounts , loans
maybe provided by the financial institution
o
Bank confirmation request should be
o
Send to all banks in which the client has an account
o
Signed by the client’s signatories
o
Mailed by the auditor and returned directly to the auditor
Professor : Bernadette Kho Dimzon
8/17/2021
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SUBSTANTIVE AUDIT PROCEDURES

Perform cash count procedures for cash on hand
o
Existence of undeposited collections , petty cash funds
and other funds may be verified by conducting a surprise
cash count

In conducting the cash count the auditor should follow
these procedures
o
Control all cash and negotiable instruments held by the
client until all funds have been counted
Professor : Bernadette Kho Dimzon
8/17/2021
18
SUBSTANTIVE AUDIT PROCEDURES

In conducting the cash count the auditor should follow
these procedures
o
Insist the custodian of the cash be present throughout the
count
o
Obtain a signed receipt from the custodian on return of
funds to the client
o
Ascertain that all undeposited checks are payable to the
order of the client either directly or through endorsement
Professor : Bernadette Kho Dimzon
8/17/2021
19
SUBSTANTIVE AUDIT PROCEDURES

Obtain (prepare) bank reconciliations as of the statement
of financial position date
o
If the client provides the auditor with the reconciliation of
the balance per bank statement at the statement of
financial position date with the balance per the company’s
accounting records, he should examine such in detail to
satisfy himself that it has been properly prepared
Professor : Bernadette Kho Dimzon
8/17/2021
20
SUBSTANTIVE AUDIT PROCEDURES

Obtain (prepare) bank reconciliations as of the statement
of financial position date
o
A careful review of the client’s reconciliation is important
because of cash shortage may be concealed by omitting a
check from the outstanding check list or by purposely
making an error in addition on the reconciliation
Professor : Bernadette Kho Dimzon
8/17/2021
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SUBSTANTIVE AUDIT PROCEDURES
o
The examination of the client-prepared bank reconciliation
should also include :

Tracing bank balances to bank confirmation responses

Verifying the validity of the reconciling items

Scanning the bank statements for erasures and alteration
Professor : Bernadette Kho Dimzon
8/17/2021
22
SUBSTANTIVE AUDIT PROCEDURES
o
Trace all transfers occurring between the banks near yearend

Tracing bank transfers is an effective procedure to
disclose overstatement of cash balances resulting from
kiting

Kiting is an irregularity involving transfer of cash between
banks , check drawn on one bank is deposited in another
several days (called the float period) usually pass before
the check clears the bank on which it is drawn
Professor : Bernadette Kho Dimzon
8/17/2021
23
SUBSTANTIVE AUDIT PROCEDURES

During the period , the amount of the check is included in
the balance of deposit at both banks

The bank balances are temporarily overstated to conceal
a cash shortage or meet short-term cash needs
Professor : Bernadette Kho Dimzon
8/17/2021
24
SUBSTANTIVE AUDIT PROCEDURES
o
Obtain a cutoff bank statement containing transactions
several days subsequent to the statement of financial
position date

A cutoff bank statement is a statement covering a
specified number (usually 7 to 10 days) following the end
of the client’s reporting period
Professor : Bernadette Kho Dimzon
8/17/2021
25
SUBSTANTIVE AUDIT PROCEDURES

The statement should be sent directly by the bank to the
auditor. Upon receipt of the statement, the auditor should
o
Trace all prior year dated checks to the outstanding
checks listed on the bank reconciliation
o
Trace deposits in transit on the bank reconciliation to
deposits on the cutoff statement
o
Scan the cutoff statement and enclosed data to unusual
items
Professor : Bernadette Kho Dimzon
8/17/2021
26
SUBSTANTIVE AUDIT PROCEDURES

Prepare proof of cash and reconcile cash transactions
occurring during a specified period as they are recorded
by the bank and the client
o
A proof of cash is a simultaneous reconciliation of bank
transactions and balances with corresponding data per
books for a specified time period
o
A proof of cash is substantive test that is generally
prepared only when internal control over the recording of
cash receipts and disbursements is considered weak
Professor : Bernadette Kho Dimzon
8/17/2021
27
SUBSTANTIVE AUDIT PROCEDURES
o
This is essentially a fraud detection procedure which may
be used for the last month of the year or selected months
during the year
Professor : Bernadette Kho Dimzon
8/17/2021
28
SUBSTANTIVE AUDIT PROCEDURES

Verify the client’s cutoff of cash receipts and cash
disbursements
o
If a cash count cannot be done on the statement of
financial position date to verify the accuracy of the client’s
cutoff of cash receipts , the auditor can trace the deposits
in transit on the year-end bank reconciliation to the credits
on the bank statement on the first business day of then
new year
Professor : Bernadette Kho Dimzon
8/17/2021
29
SUBSTANTIVE AUDIT PROCEDURES
o
To ensure an accurate cutoff of cash disbursement , the
auditor should determine the number of the last check
prepared on each bank account on the statement of
financial position date and verify whether all checks up to
this number have actually been mailed
o
For cash receipts , the auditor should verify the number of
the last official receipt and cash sales invoice used on the
statement of financial position date
Professor : Bernadette Kho Dimzon
8/17/2021
30
SUBSTANTIVE AUDIT PROCEDURES

Review bank statements and bank replies to confirmation
letters
o
The auditor should review any bank overdrafts and note
the existence of any funds that may be subject to
withdrawal restrictions in order to determine the effect(s) if
any on financial statement presentation
Professor : Bernadette Kho Dimzon
8/17/2021
31
SUBSTANTIVE AUDIT PROCEDURES

Verify existence of cash in bank under receivership, cash
in foreign banks and in foreign currency
o
This can be done through examination of minutes , loan
agreements and confirmations
Professor : Bernadette Kho Dimzon
8/17/2021
32
SUBSTANTIVE AUDIT PROCEDURES

Investigate any checks representing large or unusual
payments to related parties
o
Any large or unusual checks payable to directors, officers,
employees, affiliated companies should be carefully
reviewed to determine if whether the transactions are
properly authorized , recorded and adequately disclose to
the financial statements
Professor : Bernadette Kho Dimzon
8/17/2021
33
SUBSTANTIVE AUDIT PROCEDURES

Evaluate proper financial statement presentation and
disclosure of cash
o
Material savings account and certificates of deposits are
disclosed separately from cash in bank
o
Cash restricted to certain uses and compensating
balances are adequately disclosed
o
Bank overdrafts are included in the current liabilities
Professor : Bernadette Kho Dimzon
8/17/2021
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