Audit of Cash Balances
Chapter 23
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Overview
• Identify types of bank and investment
accounts
• Relationship of cash in bank to transaction
cycles
• Understand tests of general cash account
• Recognize when to extend testing of cash
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Learning Objective 2
Identify the major types of cash accounts
maintained by business entities.
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Types of Cash Accounts
 General cash account
 Imprest accounts
 Branch bank account
 Imprest petty cash fund
 Cash equivalents
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General Account
• Majority of the company’s cash receipts and
disbursements flow through this account
• Focal point in audit of cash
• Audit regardless of whether the ending
balance is material
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Imprest Accounts
• Usually used for disbursements, such as
payroll
• A set book balance, and minimum bank
balance, is maintained
– On payday, net pay amount transferred from
general account to payroll account
– Deposit amount is equal to the value of the issued
and outstanding pay checks
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Payroll Bank Account
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Learning Objective 3
Design and perform audit tests of the
general cash account.
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Balance-related Audit Objectives
Detail tie-in
Existence
Cash
Balance-related
Audit
Objectives
Completeness
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Cutoff
Accuracy
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Bank Reconciliation Audit Schedule
Clawson Industries
Bank Reconciliation
12/31/09
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Schedule A-2
Date
Prepared by Client DED 1/10/10
Approved by SW
1/18/10
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Procedures
Dec 31, 2012
Dec 31, 2012
Bank
Confirmation
Bank
Reconciliation
Cutoff
Bank
Statement
Jan 1 – 15, 2013
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Procedures
• Test reconciliation for clerical accuracy
• Compare book balance to trial balance (GL)
• Compare bank confirmation to bank balances
on the bank statement and bank
reconciliation
• Compare transaction information in cut-off
bank statement to bank reconciliation
– We audit FROM the cut-off statement TO the
reconciliation
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Cut-Off Statement Procedures
• Checks and deposit slips dated December 31,
2011 and earlier should be shown as
outstanding on reconciliation
• Investigate significant amounts that did not
clear with the cut-off statement
• Determine whether bank charges, returned
checks and other adjustments are recorded
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Bank Reconciliation Audit Schedule
Clawson Industries
Bank Reconciliation
12/31/09
©2013 Pearson/Prentice Hall
Schedule A-2
Date
Prepared by Client DED 1/10/10
Approved by SW
1/18/10
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Misstatements which may not be discovered
as a part of the audit of the bank reconciliation:
• Failure to bill a customer
• Embezzlement (theft) of cash
receipts
• Duplicate payments
• Improper payments
• Payment for materials not
received
• Payment for services not
rendered
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Misstatements which are normally discovered
as a part of the tests of a bank reconciliation:
• Failure to include check as outstanding
• Cash recorded as received in wrong period
• Deposits recorded near year end, deposited in
the bank in same month, also shown as
deposit in transit
• Payments on notes payable debited directly
to the bank balance but not recorded on
books
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Learning Objective 4
Recognize when to extend audit tests of
the general cash account to test further
for material fraud.
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Fraud-oriented Procedures
The auditor may extend the procedures
in the audit of year-end cash to address
the possibility of a material fraud.
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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.
For example, also test the November
reconciliation and December
transactions
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Proof of Cash Audit Objectives
 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
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Proof of Cash Schedule
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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
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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
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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.
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Interbank Transfer Schedule
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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.
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Learning Objective 5
Design and perform audit tests of the
imprest payroll bank account.
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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.
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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.
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End of Chapter 23
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