Chapter 1Chapter 16
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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 cash or so near their maturity that there is little
risk of change in their value.
Examples: Treasury bills; commercial paper; and money market
funds.
LO# 1
LO# 1
Types of Bank Accounts
In order to maximize its cash position, an entity implements
procedures for accelerating the collection of cash receipts and
properly delaying the payment of cash disbursements.
LO# 2
Substantive Analytical Procedures—Cash
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.
LO# 3 & 4
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 prior years’ cash balances.
comparisons with budgeted amounts.
LO# 3 & 4
The Effects of Controls
The reliability of the client’s controls over cash affects the
nature and extent of the auditor’s tests of details.
LO# 3, 4, & 5
Controls for Cash Receipts
Controls for Cash Disbursements
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Copy of Bank Reconciliation
Standard Bank Confirmation
Cutoff Bank Statement
To audit a cash account, the auditor should obtain these
items.
LO# 5
Cutoff Bank Statement
A cutoff bank statement normally covers the 7- to 10-day period
after the date on which the bank account is reconciled.
Any reconciling item should have cleared the client’s bank account
during the 7- to 10-day period.
LO# 5
7 to 10 Days
Tests of the Bank Reconciliation
The auditor uses the following audit procedures to test the bank
reconciliation:
Test the mathematical accuracy and agree the balance per the books
to the general ledger.
Agree the bank balance on the reconciliation with the balance shown
on the standard bank confirmation.
Trace the deposits in transit on the bank reconciliation to the
cutoff bank statement.
Compare the outstanding checks on the bank reconciliation with the
canceled checks in the cutoff bank statement for proper payee,
amount and endorsement.
Agree any charges included on the bank statement to the bank
reconciliation.
Agree the adjusted book balance to the cash account lead
schedule.
LO# 5
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.
LO# 5
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.
LO# 6
Here are some of the more important assertions for
investments.
LO# 8
LO# 10