Audit of Cash Balances
Chapter 23
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
22 - 1
Learning Objective 1
Show the relationship of
cash in the bank to the
various transaction cycles.
Relationships of Cash in the
Bank and Transaction Cycles
Capital Acquisition and Repayment Cycle
Capital Stock – Common
Issue of
stock
Paid-in Capital in Excess
of Par – Common
Issue of
stock
Dividends Payable
Payment of
dividends
Cash in Bank
Relationships of Cash in the
Bank and Transaction Cycles
Acquisition and Payment Cycle
Accounts Payable – paying off inventory/PPE
Payment
Cash in Bank
Relationships of Cash in the
Bank and Transaction Cycles
Sales and Collection Cycle
Accounts Receivable
Cash
receipts
Cash Discounts Taken
Gross Sales
Cash
sales
Cash in Bank
Relationships of Cash in the
Bank and Transaction Cycles
Payroll and Personnel Cycle
Accrued Wages, Salaries,
Bonuses, and Commissions
Payment
Withheld Income Taxes
and Other Deductions
Payment
Accrued Payroll
Tax Expense
Payment
Cash in Bank
Cash in the Bank and
Transaction Cycles
Misstatements (understatements) which may NOT be
discovered as part of the audit of the bank reconciliation
• Failure to bill a customer (Sales ToT,
I/C-completeness)
• Billing a customer at a lower price than called
for by company policy (Sales ToT, I/C – accuracy)
• A defalcation of cash by interception of cash
receipts from customers before they are recorded
(cash completeness), with the account charged off as
a bad debt (Sales and collection I/Cs – segregation
of duties, authorization of A/R write-offs, statements)
Cash in the Bank and
Transaction Cycles
Misstatements (overstatements) which ARE normally
discovered as a part of the tests of a bank reconciliation.
• Failure to include a check (in o/s listing) that has
not cleared the bank, even though it has been recorded
in the 12/31 cash disbursements journal (trace checks
(reductions) in cut-off statement to o/s check listing).
• Cash received by the client subsequent to the
balance sheet date but recorded as cash receipts (dep
in transit) in the current year (trace dep. in transit to
post-12/31 cash remittance documentation).
Cash in the Bank and
Transaction Cycles
• Deposits recorded as cash receipts near the end of
the year, deposited in the bank in the same month
(in December), and included in the bank reconciliation
as a deposit in transit OR pocketed cash in DIT.
(trace dep. in transit to cutoff (January) bank statement)
Note: The main concern for cash is existence/cutoff for
deposits in transit and completeness/cutoff for o/s
checks: over-stating cash balance (example: Parmalat).
Other objectives generally covered in ToT for Sales
and Collection cycle (see slide 7 and p. 463 for
examples).
Learning Objective 2
Identify the major types of
cash accounts maintained
by business entities.
Types of Cash Accounts
 General cash accounts
 Imprest payroll account
 Branch bank accounts
 Imprest petty cash fund
 Cash equivalents
Relationship of General Cash
to Other Cash Accounts
Branch Bank
Imprest Payroll
General
Cash
Cash
Equivalents
Imprest Petty
Cash Fund
Learning Objective 3
Design and perform audit tests
of the general cash account.
Methodology for Designing Tests of
Balances – Cash In the Bank
Identify client business risks
affecting cash in bank. Cash strapped?
Set tolerable misstatement and
assess inherent risk (usually low) for cash in bank.
Assess control risk (varies) for cash in bank.
Methodology for Designing Tests of
Balances – Cash In the Bank
Design and perform tests of
controls and substantive tests
of transactions: several cycles p. 461
Design and perform analytical
procedures for cash in bank
Not often done – more test of details
Methodology for Designing Tests of
Balances – Cash In the Bank
Design tests of details
of cash in bank balance
to satisfy balance-related
audit objectives.
Audit procedures
Sample size
Items to select
Timing
Audit Schedule for a
Bank Reconciliation
Schedule
A-2 Date
Prepared by CO 1/10/08
Reviewed by PZ 1/18/08
Acct. 101 – General account
Balance per bank, 12/31 (confirm????) $63,275
Add deposit in transit 12/31
11,250
$74,525
Less outstanding check
(8,000)
Balance per bank, adjusted
$66,525
Audit Tests
Confirm Balance per Bank.
 Deposits in Transit – sample from listing –
trace sample from listing to cutoff of Jan. bank
statement plus trace to cash remittance doc
(pre-12/31?). Existence/Cutoff test.
 O/S Checks – sample (search) from reductions
on cutoff or Jan. bank statement, obtain check
– if pre-12/31 – trace to O/S check listing. If
post 12-31, is it properly excluded?
Completeness/Cutoff test.

Audit Schedule for a
Bank Reconciliation
Balance per books, 12/31
Add: Note receivable
collected by the bank
Interest income
Less: Payment of electric bill
NSF check
Service charge
Balance per books, adjusted
$66,647
1,325
265
$68,237
1,500
200
12
$ 66,525
Audit Tests
Trace all reconciling items to December bank
statement. Review December statement for
items missed.
 Trace all adjustments for Balance for Books to
general ledger.
 Make sure final balance per
accounting = $ 66,525

Existence, Accuracy,
and Completeness
Receipt of a bank
confirmation
Receipt of a cutoff bank statement
or January bank statement
Tests of the bank
reconciliation
Learning Objective 4
Recognize when to extend audit
tests of the general cash account
to test further for material fraud.
Tests of Interbank Transfers – Fig
23-7 p. 748
The accuracy of the information on the interbank
transfer schedule should be verified. See Note:
anything missing/completeness???
The interbank transfers must be recorded in
both the receiving and disbursing banks (5 and 8).
Trace to Dec and Jan bank statements
The date of the recording of the disbursements
and receipts (dr. and cr. to cash) for each
transfer must be inthe same fiscal year (4 and 7).
Tests of Interbank Transfers – Fig
23-7 p. 748
Disbursements on the interbank transfer schedule
should be correctly included in or excluded from
year-end bank reconciliation as outstanding checks
(4 and 5).
Receipts on the interbank transfer schedule should
be correctly included in or excluded from year-end
bank reconciliations as deposits in transit (7 and 8).
Key: Detect double counting of cash – see
Fig 23-7 p. 748. What if check # 8029 was
not on o/s checks list?
End of Chapter 23
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 22 - 25