Chapter 22
Audit of Cash Balances

Review Questions
22-4 The controller's approach is to reconcile until the balance agrees. The
shortcoming of this approach is that it does not include a review of the items that
flow through the account and it opens the door for the processing of improper items.
Such items as checks payable to improper parties, reissuance of outstanding
checks to improper parties, and kiting of funds would not be discovered with the
controller's approach. The controller's procedures should include the following:
a.
b.
c.
Examination of all checks clearing with the statement (including those
on previous month's outstanding check list) and comparison of payee
and amount to the cash disbursements journal.
Test of cash receipts to determine that they are deposited within a
reasonable amount of time.
Follow-up on old outstanding checks so that they can be recognized
as income after it is determined that they will not be cashed, and no
liability exists.
22-5 Bank confirmations differ from positive confirmations of accounts receivable
in that bank confirmations request several specific items of information, namely:
1.
2.
3.
4.
The balances in all bank accounts.
Restrictions on withdrawals.
The interest rate on interest-bearing accounts.
Information on liabilities to the bank for notes, mortgages, or other
debt.
Positive confirmations of accounts receivable request of the buyer to confirm
an account balance stated on the confirmation form or designate a different amount
with an explanation. The auditor anticipates few exceptions to accounts receivable
confirmations, whereas with bank confirmations he expects differences that the
client must reconcile. Bank confirmations should be requested for all bank
accounts, but positive confirmations of accounts receivable are normally requested
only for a sample of accounts. If bank confirmations are not returned, they must be
pursued until the auditor is satisfied as to what the requested information is. If
positive confirmations of accounts receivable are not returned, second and maybe
third requests may be made, but thereafter, follow-ups are not likely to be pursued.
Alternative procedures, such as examination of subsequent payments or other
support of customers' accounts may then be used.
22-1
22-5 (continued)
The reason why more importance is placed on bank confirmations than
accounts receivable confirmations is that cash, being the most liquid of assets, must
be more closely controlled than accounts receivable. In addition, other information-such as liabilities to the bank must be known for purposes of the financial
statements. Finally, there are usually only a few bank accounts and most bank
accounts have a large volume of transactions during the year.
22-9 An imprest bank account for a branch operation is one in which a fixed
balance is maintained. After authorized branch personnel use the funds for proper
disbursements, they make an accounting to the home office. After the expenditures
have been approved by the home office, a reimbursement is made to the branch
account from the home office's general account for the total of the cash
disbursements. The purpose of using this type of account is to provide controls
over cash receipts and cash disbursements by preventing the branch operators
from disbursing their cash receipts directly, and by providing review and approval of
cash disbursements before more cash is made available.
22-10 The purpose of the four-column proof of cash is to verify:




Whether all recorded cash receipts were deposited.
Whether all deposits in the bank were recorded in the accounting
records.
Whether all recorded cash disbursements were paid by the bank.
Whether all amounts that were paid by the bank were recorded as
cash disbursements in the accounting records.
Two types of misstatements that the four-column proof of cash is meant to
uncover are:


Cash received that was not recorded in the cash receipts journal
Checks that cleared the bank but have not been recorded in the cash
disbursements journal
22-13 Assuming a client with excellent internal controls uses an imprest payroll
bank account, the verification of the payroll bank reconciliation ordinarily takes less
time than the tests of the general bank account even though the number of payroll
checks exceeds those written on the general account because an imprest payroll
account has no activity other than payroll checks drawn and deposits made to
reestablish the standard minimum account balance. Furthermore, most employees
cash their checks quickly, so there usually are few outstanding checks, especially
older ones, and no other reconciling items. On the other hand, the general bank
account will include all regular activity plus bank charges, notes, other liabilities,
etc., which must be reconciled and verified.
22-14 The verification of petty cash reimbursements consists of footing the petty
cash vouchers supporting the amounts of the reimbursements, accounting for a
sequence of petty cash vouchers, examining the petty cash vouchers for
authorization and cancellation, and examining the supporting documentation
attached to the vouchers for reasonableness. The balance in the fund is verified by
a count of the petty cash. Testing of petty cash transactions is more important than
22-2
the ending balance in the account, because even if the amount of the petty cash
fund is small, there is potential for a large number of improper transactions if the
fund is frequently reimbursed.
22-19 a.

(3)
b. (3)
c.
(4)
Discussion Question And Problems
22-20
MOTIVATION
INTERNAL CONTROL
AUDIT PROCEDURE
1. To cover a shortage.
Internal verification of
bank reconciliation,
including accounting for
all checks recorded in the
cash disbursements
journal as cleared or still
outstanding.
Trace all checks dated on or
before June 30 that cleared
with the cutoff bank statement
to the June 30 outstanding
check list.
2. Same as 1.
Same as 1.
Verify the bank reconciliation
by tracing checks dated on or
before June 30 in the cash
disbursements journal to
checks clearing with the June
30 bank statement. Any
checks not clearing should be
included on the June 30
outstanding check list.
3. Hold open books to
improve cash position.
Independent bank
reconciliation.
Trace deposits in transit to
cutoff bank statements to
determine deposit date.
22-3
22-20
MOTIVATION
INTERNAL CONTROL
AUDIT PROCEDURE
4. To cover a cash
shortage or to improve
the current ratio.
Independent bank
reconciliation.
Obtain bank confirmation.
5. Original check was
unauthorized and illegal.
Outstanding check
made the bank
reconcile.
Independent bank
reconciliation that
includes accounting for
all cash disbursement
transactions.
Verify the bank reconciliation,
including cash disbursements
for all material uncleared
outstanding checks.
6. Kiting-covering a
defalcation or padding a
cash position.
Independent bank
reconciliation.
Trace all interbank transfers to
accounting records.
7. To cover a shortage.
Internal verification of
bank reconciliation.
Foot outstanding check list.
22-21
SUBSTANTIVE AUDIT PROCEDURE
TYPE OF TEST
1.
Prepare an interim period proof of cash.
Substantive test of transactions
2.
Trace prelisting of cash receipts to cash
receipts book.
Substantive test of transactions
3.
Examine bank cancellation date for checks
clearing near the end of the year; obtain
the last check number issued directly from
the client.
Test of details of cash balances.
4.
Compare recorded cash disbursements to
receiving reports.
Substantive test of transactions
5.
Examine invoices for discounts not taken.
Substantive test of transactions
6.
Trace deposits in transit to the cash
receipts journal for the current item.
Test of details of cash balances.
7.
Prepare an interim proof of cash.
Substantive test of transactions
22-4
22-27
Tuck Company
RECONCILIATION OF CASH RECEIPTS, CASH DISBURSEMENTS
AND BANK ACCOUNT
For the Month of December 2002
11/30/02
Beginning
Reconciliation
Per bank statement
Deposits in transit:
11/30/02
12/31/02
Outstanding checks:
11/30/02
12/31/02
Check of Tucker Co.
charged in error
Dishonored checks
returned during
December
Adjusted bank
amounts
Per books before
adjustment
Correction of
recording of
check #1501
Cancellation of
check #1504
Counter check
drawn by
president
Postdated check
#1575 presented
for payment
Correction of
recording of
note proceeds
Bank service
charges made
in December
Adjustment for
check #2540
Adjusted book
amounts
Cash
Receipts
12/31/02
Cash
Ending
Disbursements Reconciliation
$19,400
$148,700
$132,500
1,100
(1,100)
2,400
2,400
(2,300)
(2,300)
4,000
(300)
(400)
$35,600
(4,000)
300
(400)
$18,200
$149,600
$133,500
$34,300
$18,200
$149,690
$124,885
$43,005
$18,200
$149,600
22-5
(675)
675
(800)
800
200
(200)
10,000
(10,000)
(90)
(90)
30
(30)
(140)
140
$133,500
$34,300