Chapter 6
Audit of Cash
Accounting 408
Chapter 6
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1. Substantive Tests –
General Concepts
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Audits are performed by dividing the f/s into smaller segments
or components
Transaction cycles
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Groups of repetitive transactions
Examples
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Revenue Cycle
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Acquisition Cycle
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referring to purchases, payables, and payments
Production Cycle
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relating to sales, shipping, receivables, and collections
relating to manufacturing products and storage
Also, payroll, investing, financing
Accounting 408
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Assertions, Objectives, Evidence and Procedures
Little
Match
Company
Accounting 408
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1. Substantive Tests –
General Concepts
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Combining CR assessments
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accounts affected by a single transaction
cycle
accounts affected by more than one
transaction cycle
Accounting 408
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Accounting 408
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1. Substantive Tests –
General Concepts (con’t)
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Approaches for substantive tests
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tests of details of balances
tests of details of transactions
overstatement errors
understatement errors
Designing substantive tests
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nature
timing
extent
Accounting 408
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Accounting 408
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1. Substantive Tests –
General Concepts (con’t)
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Types of substantive tests
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tests of details
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of transactions
of balances
effectiveness depends on type of test used and sample size
substantive analytical procedures
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usually less effective than tests of details
usually lower in cost
can enhance effectiveness by
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Accounting 408
more reliable procedure (e.g., comparing ratios to industry average instead of just
comparing account balance to prior year account balance, using nonfinancial data)
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)
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2. Cash - Internal Control
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Internal control over cash receipts
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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
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2. Cash - Internal Control
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Internal control over cash
disbursements
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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
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2. Cash - Internal Control
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Cash key control activities
Information processing
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Physical controls over the security of assets
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deposit cash and checks daily and intact
lock box account
dual custody over cash
unused checks secured
check imprinting machine
Segregation of duties
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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
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3. Cash - Substantive Tests
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Cash
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Bank confirmation
Cutoff bank statement
Bank reconciliation
Four-column proof of cash
Interbank transfer schedule
Cash cutoff tests
Count cash on hand
Accounting 408
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Exhibit 6.8
Bank
Confirmation
Accounting 408
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Proof of
Cash
Accounting 408
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3. Cash - Substantive Tests
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Cash
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Existence and Occurrence
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Rights and Obligations
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confirmation, cutoff tests, cash count, reconciliation
confirmation, cash count, reconciliation
Completeness
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Accounting 408
analytical procedures, confirmation, cutoff tests,
cash count
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3. Cash - Substantive Tests
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Cash
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Valuation
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little problem, confirmation, cash count
Presentation and Disclosure
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Accounting 408
compare statement presentation to GAAP
compensating balances, overdrafts, lines of
credit, loan guarantees
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Review Questions for Discussion
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Chapter 6
6.16
6.10
6.17
6.11
6.19
6.15
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Purchase Transactions ICs
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Purchase requisition – requesting department
Purchase order – purchasing department
Goods received – receiving dock
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disclose quantities or not?
All documents to accounting department –
accounts payable department
Receive purchase invoice from vendor
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Cash Payments ICs
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Accounting department (accounts payable)
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match all documents (purchase requisition, purchase order,
receiving reports, purchase invoice)
prepare check and transmit to treasurer’s office with
documentation
Treasurer’s office
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sign check/enter electronic payment
do not return check to accounting department
make payment on due date
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Sales Transactions ICs
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Receive customer order
Credit check
Ship goods – shipping dock
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create shipping documentation
All documents to accounting department – accounts
receivable department
Prepare sales invoice
Book sale
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Cash Receipts ICs
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Received by mail
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>1 person open immediately
prepare remittance list
cash (checks) to treasurer’s office for deposit
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remittance list and remittance advice to accounting department
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prepare deposit slip and reconcile to remittance list
take to bank
compare bank receipt to deposit slip and remittance list
post to sub-ledger account and general ledger and reconcile amounts
compare total to bank deposit
Cash sales
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deposit intact at least daily
safeguard cash on hand
Accounting 408
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