Chapter 6
Audit of Cash
Accounting 408
Chapter 6
1
1. Substantive Tests –
General Concepts


Audits are performed by dividing the f/s into smaller segments
or components
Transaction cycles


Groups of repetitive transactions
Examples

Revenue Cycle


Acquisition Cycle


referring to purchases, payables, and payments
Production Cycle


relating to sales, shipping, receivables, and collections
relating to manufacturing products and storage
Also, payroll, investing, financing
Accounting 408
Chapter 6
2
Assertions, Objectives, Evidence and Procedures
Accounting 408
Chapter 6
3
1. Substantive Tests –
General Concepts

Combining CR assessments


accounts affected by a single transaction
cycle
accounts affected by more than one
transaction cycle
Accounting 408
Chapter 6
4
Accounting 408
Chapter 6
5
1. Substantive Tests –
General Concepts (con’t)

Approaches for substantive tests





tests of details of balances
tests of details of transactions
overstatement errors
understatement errors
Designing substantive tests



nature
timing
extent
Accounting 408
Chapter 6
6
Accounting 408
Chapter 6
7
1. Substantive Tests –
General Concepts (con’t)

Types of substantive tests

tests of details




of transactions
of balances
effectiveness depends on type of test used and sample size
substantive analytical procedures



usually less effective than tests of details
usually lower in cost
can enhance effectiveness by




Accounting 408
more reliable procedure (e.g., comparing ratios to industry average instead of just
comparing account balance to prior year account balance, regression analysis)
more reliable expectations, (more predictable relationships) (e.g., obtained from
independent sources, independence level of internal sources)
effectiveness of internal control (i.e., source data is more reliable)
less effective procedure if data used is subject to management
discretion (e.g., maintenance expense, advertising expense)
Chapter 6
8
2. Cash - Internal Control

Internal control over cash receipts




general rules for handling cash
separate functions: receiving cash, depositing
cash, recording the transactions, reconciling
controls over cash sales, payments received
through the mail
documents and records: remittance advice,
cash receipts list, daily cash summary, deposit
slip
Accounting 408
Chapter 6
9
2. Cash - Internal Control

Internal control over cash
disbursements


steps: pay from approved voucher, control
check signing, mail payment, cancel
voucher, record cash payment
documents and records: paid voucher file,
cash disbursements journal
Accounting 408
Chapter 6
10
2. Cash - Internal Control


Cash key control activities
Information processing




Physical controls over the security of assets






deposit cash and checks daily and intact
lock box account
dual custody over cash
unused checks secured
check imprinting machine
Segregation of duties


voucher packet (Purchase requisition, purchase order, receiving report, invoice)
matched prior to cash disbursement authorization
deposits reconciled to amounts credited to accounts receivable ledger
bank reconciliation
separate authorization, custody, recording, reconciliation
Reconciliations
Accounting 408
Chapter 6
11
3. Cash - Substantive Tests

Cash







Bank confirmation
Cutoff bank statement
Bank reconciliation
Four-column proof of cash
Interbank transfer schedule
Cash cutoff tests
Count cash on hand
Accounting 408
Chapter 6
12
Exhibit 6.8
Bank
Confirmation
Accounting 408
Chapter 6
13
Proof of
Cash
Accounting 408
Chapter 6
14
3. Cash - Substantive Tests

Cash

Existence and Occurrence


Rights and Obligations


confirmation, cutoff tests, cash count, reconciliation
confirmation, cash count, reconciliation
Completeness

Accounting 408
analytical procedures, confirmation, cutoff tests,
cash count
Chapter 6
15
3. Cash - Substantive Tests

Cash

Valuation


little problem, confirmation, cash count
Presentation and Disclosure


Accounting 408
compare statement presentation to GAAP
compensating balances, overdrafts, lines of
credit, loan guarantees
Chapter 6
16
Review Questions for Discussion

Chapter 6
6.16
6.10
6.17
6.11
6.19
6.15
Accounting 408
Chapter 6
17