Chapter Sixteen
Auditing the
Financing/Investing
Process:
Cash and
Investments
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Cash and the Effect of Other Business
Processes
‘Cash’ reported in the financial statements
represents currency on hand and cash on
deposit in bank accounts, including
certificates of deposit, time deposits and
savings accounts.
‘Cash equivalents’ are frequently combined with cash
for presentation in the financial statements.
Definition: Short-term, highly liquid investments that
are readily convertible to known amounts of cash or
which are subject to an insignificant risk of changes in
value.
Examples: Treasury bills, commercial paper, and money
market funds.
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Cash and the Effect of Other Business
Processes
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Types of Bank Accounts
Types of
Bank
Accounts
General Imprest
Branch
Cash Cash
Accounts
Account Accounts
In order to maximize its cash position, an entity
implements procedures for accelerating the collection
of cash receipts and delaying the payment of cash
disbursements, to the extent delay is appropriate.
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The Effects of Controls
Controls for
Controls for
Cash
Cash Receipts
Disbursements
The reliability of the client’s
controls over cash affects
the nature and extent of the
auditor’s tests of details.
Completion of
Bank
Reconciliation
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Substantive Analytical Procedures – Cash
Because of the residual nature of the
cash account, the auditor’s use of
substantive analytical procedures for
auditing cash is limited to . . .
comparisons with
comparisons with
prior years’ cash
budgeted amounts.
balances.
This limited use of substantive analytical procedures is normally offset
by (1) extensive tests of controls and/or substantive tests of transactions
for cash receipts and disbursements or (2) extensive tests of the entity’s
bank reconciliations.
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Substantive Tests of Details of Transactions
and Balances
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Balance-Related Assertions
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Auditing the General Cash Account
Copy of Bank To audit a cash
Reconciliation account, the auditor
should obtain these
items.
Bank
Confirmation
Cut-off Bank
Statement
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Bank Reconciliation Working Paper
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Cut-off Bank Statement
Date of Last 7 to 10
Bank Days
Reconciliation
A cut-off bank statement normally covers the 7-
to 10-day period after the date on which the bank
account is reconciled.
For reconciliation purposes, any item should
have cleared the client’s bank account during the
7- to 10-day period.
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Tests of the Bank Reconciliation
The auditor uses the following audit procedures
to test the bank reconciliation:
1. Test the mathematical accuracy and agree the balance per the books
to the general ledger.
2. Agree the bank balance on the reconciliation with the balance shown
on the bank confirmation.
3. Trace the deposits in transit on the bank reconciliation to the cut-off
bank statement.
4. Compare the outstanding cheques on the bank reconciliation with the
cancelled cheques in the cut-off bank statement for proper payee,
amount and endorsement.
5. Agree any charges included on the bank statement to the bank
reconciliation.
6. Agree the adjusted book balance to the cash account lead schedule.
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Fraud-Related Audit Procedures
Extended Bank
Reconciliation
Procedures
Proof of Cash
Tests for Kiting
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Extended Bank Reconciliation Procedures
In some instances, the year-end bank
reconciliation can be used to cover cash
defalcations. This is usually accomplished by
manipulating the reconciling items in the bank
reconciliation. For example, suppose a client
employee was able to steal €5,000 from the client.
The client’s cash balance at the bank would then
be €5,000 less than reported on the client’s books.
The employee could ‘hide’ the €5,000 shortage in
the bank reconciliation by including a fictitious
deposit in transit.
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Proof of Cash
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Tests for Kiting
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Auditing a Payroll or Branch Imprest
Account
The audit of any imprest cash
account such as payroll or a branch
account follows the same basic
audit steps discussed under the
audit of the general cash account.
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Auditing Petty Cash Fund
Usually not
material.
Potential for
defalcation.
Seldom perform
substantive
tests.
Document
controls.
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Disclosure Issues for Cash
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Disclosure Issues for Cash
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Disclosure Issues for Cash
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Investments
Common Stock Preferred Stock
Debt Securities Hybrid Securities
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Control Risk Assessment –
Investments
Here are some of
Occurrence the more important
and assertions for
Authorization investments.
Completeness
Accuracy
and
Classification
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Segregation of Duties
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Substantive Procedures for Testing
Investments
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Tests of Details – Investments
Existence
The auditor should perform one or more of the following procedures when gathering evidence for existence:
• Physical examination
• Confirmation with the issuer
• Confirmation with the custodian
• Confirmation of unsettled transactions with the broker-dealer
• Confirmation with the counter-party
• Reading executed partnership or similar agreements
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Tests of Details – Investments
Valuation and Allocation
The auditor must also determine if there
has been any permanent decline in the
value of an investment security.
Accounting standards provide guidance
for determining whether a decline in
value below amortized cost is other than
temporary.
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Tests of Details – Investments
Valuation and Allocation
Here are some factors that may indicate an other-than-temporary impairment
of investment value (IAS 39):
•Significant financial difficulty of the issuer or obligor.
•A breach of contract, such as a default or delinquency in interest or principal payments.
•The lender, for economic or legal reasons relating to the borrower’s financial difficulty,
granting to the borrower a concession that the lender would not otherwise consider.
•It becoming probable that the borrower will enter bankruptcy or other financial
reorganization.
•The disappearance of an active market for that financial asset because of financial
difficulties.
•Observable data indicating that there is a measurable decrease in the estimated future
cash flows from a group of financial assets since the initial recognition of those assets,
although the decrease cannot yet be identified with the individual financial assets in the
group, including adverse changes in the payment status of borrowers in the group and
national or local economic conditions that correlate with defaults on the assets in the
group.
Permanently Impaired = Write down to new carrying amount
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Tests of Details – Investments
Disclosure Assertions
Marketable securities need to be properly classified as held-to-
maturity, trading and available-for-sale.
Held-to-maturity securities and individual available-for-sale
securities should be classified as current or non-current assets
based on whether management expects to convert them to cash
within 12 months.
All trading securities should be classified as current assets.
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End of Chapter 16
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