Lecture Auditing and assurance services (Second international edition) Chapter 16 Auditing the financinginvesting process

Chapter Sixteen

Auditing the
Financing/Investing
Process:
Cash and
Investments

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Cash and the Effect of Other Business
Processes
‘Cash’
‘Cash’reported
reported in
in the
the financial
financial statements
statements
represents
represents currency
currency on
on hand
hand and
and cash
cash on
on
deposit
deposit in
in bank

bank accounts,
accounts, including
including
certificates
certificates of
of deposit,
deposit, time
time deposits
deposits and
and
savings
savings accounts.
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
Cash
Account

Imprest
Cash
Accounts

Branch
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
Cash
Disbursements

Controls for
Cash Receipts

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
Becauseof
ofthe
theresidual
residualnature
natureof
ofthe
the
cash
cashaccount,
account,the
theauditor’s
auditor’suse
useof
of
substantive
substantiveanalytical

analyticalprocedures
proceduresfor
for
auditing
auditingcash
cashisislimited
limitedto
to. .. .. .

comparisons
comparisonswith
with
prior
prioryears’
years’cash
cash
balances.
balances.

comparisons
comparisonswith
with
budgeted
budgetedamounts.
amounts.

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
To audit a cash
account, the auditor
should obtain these
items.

Copy of Bank
Reconciliation

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
Bank
Reconciliation

7 to 10
Days

A cut-off bank statement normally covers the 7to 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
Insome
someinstances,
instances,the
theyear-end
year-endbank

bank
reconciliation
reconciliationcan
canbe
beused
usedto
tocover
covercash
cash
defalcations.
defalcations.This
Thisis
isusually
usuallyaccomplished
accomplishedby
by
manipulating
manipulating the
thereconciling
reconcilingitems
itemsin
inthe
thebank
bank
reconciliation.
reconciliation.For
Forexample,
example,suppose
supposeaaclient
client

employee
employeewas
wasable
ableto
tosteal
steal€5,000
€5,000from
fromthe
theclient.
client.
The
Theclient’s
client’scash
cashbalance
balanceat
atthe
thebank
bankwould
would then
then
be
be €5,000
€5,000less
less than
thanreported
reportedon
onthe
theclient’s
client’sbooks.
books.

The
Theemployee
employee could
could ‘hide’
‘hide’the
the€5,000
€5,000shortage
shortage in
in
the
thebank
bankreconciliation
reconciliationby
byincluding
including aafictitious
fictitious
deposit
deposit in
intransit.
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
The audit
audit of
of any
any imprest
imprest cash
cash
account
account such
such as
as payroll
payroll or
or aa branch
branch
account
account follows
follows the
the same
same basic
basic
audit
audit steps
steps discussed
discussed under

under the
the
audit
audit of
of the
the general
general cash
cash account.
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
the more important
assertions for
investments.

Occurrence
and
Authorization

Completeness

Accuracy
and
Classification

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Segregation of Duties

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Substantive Procedures for Testing
Investments

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