Audit
4 English - 2021/2022
Chapter (7)
Audit of cash
Cash is the only account included in every cycle except inventory and warehousing.
Major Types of Cash Maintained by the business entities:
• General Cash Account: ‫حساب النقد العام‬
The focal point of cash because all cash receipts and disbursements flow through this
account
• Imprest Accounts: ‫حساب نقدية المرتبات‬
Many companies establish a separate account for payroll to improve internal control over
payroll disbursements
• Branch Bank Account: ‫الحسابات البنكية للفرع‬
Companies operating in different locations often have separate bank account at each
location
‫صندوق النقدية ر‬
• Imprest Petty Cash Fund: ‫النثية‬
Not a bank account but a preset amount of cash kept on hand for incidental expense
• Cash Equivalents: ‫بدائل للنقد‬
Companies often invest excess cash accumulated during the accounting cycle that will be
needed in near future in short-term and highly liquid investments (Cash Equivalents)
Relationship of General Cash to Other Cash Accounts
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Relationships of Cash in the Bank and Transaction Cycles:
Reconciliation of Cash most likely will not detect this misstatement:
- Failure to bill a customer
‫عدم تسجيل فاتورة‬
- Embezzlement of cash by intercepting cash receipts from customers before they are
recorded, with account charged off as a bad debt.
‫اختالس النقود من مدفوعات العمالء‬
- Duplicate payment for vendor invoices
‫تكرار تسجيل دفع فواتث الموردين‬
- Improper payment of officers’ personal expenditures ‫نفقات شخصية غث مالئمة‬
- Payment for raw materials not received
- Payment to an employee for hours more than he worded
- Payment of interest to a related party for excess amounts
Test of Bank reconciliation often identify these misstatements:
- Failure to include a check that has not cleared the bank on the outstanding checks list,
even though it has been recorded in the cash disbursements ‫عدم تسجيل شيك‬
- Cash received by the client subsequent to the balance sheet date but recorded as cash
‫تسجيل تحصيل يخص ر‬
receipts in the current year
‫فثات قادمة‬
- 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
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The methodology for auditing year-end cash is essentially the same as that for all other balance
sheet accounts:
Phase 1:
1- Identify Client Business Risks Affecting Cash. ‫عل النقدية‬
‫مخاطر العميل المؤثرة ي‬
Client business risk may arise from inappropriate cash management policies or handling
cash
2- Set Performance Materiality and Assess Inherent Risk.
‫تحديد المخاطر المالزمة ومستوي األهمية‬
Since cash is more susceptible to theft than other assets, there is high inherent risk for
existence, completeness and accuracy objectives (low performance materiality because
auditor audit the whole cash account)
3- Assess Control Risk:
‫تقييم مخاطر الرقابة‬
There are two categories of internal controls for cash:
1- Controls over the transaction cycles affecting the recording of cash receipts and
disbursements.
If the controls affecting cash related transactions are adequate. It is possible to
reduce control risk and then audit tests and then audit tests for the bank
reconciliation
2- Independent bank reconciliations:
Accounting software often incorporates bank reconciliations. The control is
enhanced when a qualified employee reviews the monthly bank reconciliation soon
after its completion.
Phase II:
Design and Perform Tests of Controls and Substantive Tests of Transactions
Since the cash balance is affected by all other cycles except inventory and warehousing,
an extremely large number of transactions affect cash. Therefore, cash transactions are
audited through these transaction cycle tests.
Phase III:
a) Design and Perform Substantive Analytical Procedures
Auditors commonly compare the ending balance on the bank reconciliation, deposits in
transit, outstanding checks and other reconciling items with prior year reconciliation.
b) Design Tests of Details of Cash Balance
The starting point for the verification of the balance in general bank account is to obtain a
bank reconciliation from the client for inclusion in the auditor documentation
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Balance-Related Audit Objectives and Tests of Details of Balances for General Cash in The Bank:
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The following three procedures are important to the audit of cash in the bank:
1- Receipt of a Bank Confirmation: ‫استالم مصادقات من البنك‬
- Auditing standards do not require bank confirmations, but auditors usually obtain a direct
receipt of a confirmation from every bank or financial institution with which the client does
business.
- A completed “standard form to confirm account balance information with financial
institutions"
- The confirmation also requests information regarding any loans not included.
‫تقييم مدي الفصل بي حسابات ر‬
2- Accessing Cutoff Bank Activity after Year-End: ‫الفثات‬
- A cutoff bank statement is a partial-period (usually 7-10 days) bank statement, along with
related documents, provided by the bank directly to the CPA firm's office.
- This allows the auditor to verify reconciling items on the bank reconciliation in a timely
manner.
- Because the cutoff statement is received directly from the bank, the information is highly
reliable.
3- Tests of the Bank Reconciliation: ‫فحص التسوية البنكية‬
- Verify that the client's bank reconciliation is mathematically accurate.
- Trace checks written and recorded before year-end included with the bank cutoff
statement to the list of outstanding checks.
- Investigate all significant checks included on the outstanding list that did not clear with
the cutoff statement.
- Trace deposits in transit to the cutoff statement.
- Account for other reconciling item on the bank reconciliation.
Types of Audit Tests Used for General Cash in the Bank:
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Fraud-oriented procedures:
A major consideration in the audit of general cash is the possibility of fraud:
- If internal controls are inadequate, the auditor must extend.
- The audit of cash to determine the possibility of material fraud.
There are three audit procedures used by auditor to detect fraudulent activities in the cash
accounts which are:
1.Extended Bank Reconciliation procedures
1. Start with the bank reconciliation for November and compare all reconciling items with the
cancelled checks and other documents in the December bank statement.
2. Compare all remaining cancelled checks and deposit slips in the December bank statement
with the December cash disbursements and receipts journals.
3.Trace all uncleared items in the November bank reconciliation and the December cash
disbursements and receipts journals to the client's December bank reconciliation.
4.Verify that all reconciling items in the December bank reconciliation represent items from
the November bank reconciliation and December's journals that have not yet cleared the
bank.
2.Proof of Cash
3.Tests for kitting ‫اختبار حدوث اختالس او تالعب يف النقدية‬
- Embezzlers occasionally cover a theft of cash by a practice known as kiting.
- This involves transferring money from one bank to another
- and incorrectly recording the transaction.
- To test for kiting as well as unintentional errors in recording interbank transfers, auditors list
all interbank transfers near the balance sheet date and trace to the accounting records for
proper recording
Bank Reconciliation
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Balance per Bank
Deposits in Transit
Outstanding Checks
Adjusted Bank Balance
Balance per Books before adjustments
Notes Receivable Collected by Bank
Interest Revenues
Notes Payment
Interest Expense
NSF Checks
Bank Service Charge
Balance per Books after adjustments
Error at bank or at Books +/-
XX
XX
(XX)
XX
XX
XX
XX
(XX)
(XX)
(XX)
(XX)
XX
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Balance per bank
Deposits in transit
Outstanding checks
Balance per books
19
8378
600
2578
6400
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a.
Bank Reconciliation
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Balance per Bank
Deposits in Transit [600 + 26,874 – 25,474]
Check erroneously charged to X Company
Outstanding Checks
[2578 – 2411] = 167
[23,171 – 21,120] = 2051
Adjusted Bank Balance
1522
2000
646
(2218)
1950
Balance per Books before adjustments
Unrecorded Check
Notes Payment [6,000 + 400 interest]
NSF Checks
Bank Service Charge
Balance per Books after adjustments
10,103
(1,130)
(6,400)
(516)
(107)
1950
b. Adjusting Entry:
Miscellaneous Expense
Interest Expense
Note Payable
Allowance for Doubtful accounts
Purchases
Cash in Bank
107
400
6,000
516
1,130
8,153
c.
Reconciling Item
1. Deposits in transit
2. Erroneous check
3. Outstanding checks
Audit Procedure
Trace duplicate deposit slip and entry on cutoff bank statement
Examine correction notice in August charge received from bank
Obtain cutoff bank statement.
Trace enclosed checks to outstanding check list.
Trace uncleared items to supporting documentation
4. Bank service charge Examine advice returned with July bank statement
5. Note payment
Examine cancelled notes, Recompute interest
Check for absence of note on 7/31 bank confirmation
6. NSF Check
Examine advice returned with July bank statement
Examine other related evidence from credit manager to determine if account
in uncollectible
7. Unrecorded check
Examine check returned with July bank statement
Trace number to absence in July cash disbursements journal and recording in
August
Examine supporting documentation
Investigate why unrecorded
d. The correct Cash balance for the financial statements is $1950
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Exercise:
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