Relationship between account

The general cash account is the focal point of cash for most
organizations because virtually all cash receipts and disbursements General cash account
flow through this account.

A fixed balance is maintained in the imprest payroll bank account.

Immediately before each pay period, one check is drawn on the
Imprest accounts
general cash account to fund the net payroll paid from the payroll
account.

For a company operating in multiple locations, it is often desirable to Type of Accounts

have a separate bank balance at each location. Branch bank
accounts build local relations and permit the centralization of Branch bank account
operations as excess cash is periodically transferred electronically to
the main office general bank account.

An imprest petty cash fund is not a bank account, but it is sufficiently

similar to cash in the bank to merit inclusion. A petty cash account is
Imprest petty cash fund
as simple as a preset amount of cash set aside in a cash box for
incidental expenses.

Companies will often invest excess cash in short-term highly liquid

cash equivalents. These may include time deposits, certificates of Cash equivalents
deposit, and money market funds.

Most companies are “unlikely” to have significant client business risks

affecting cash balances. However, client business risk may arise from
“inappropriate cash management” policies or handling of funds held in
trust for others. Identify client business
risks affecting cash
Client business risk is more likely to arise from “cash equivalents and in bank
other types of investments”. Several financial services firms have
suffered large trading losses from the activities of individual traders
that were hidden by misstating investment

Because cash is more susceptible to theft than other assets, there is

high inherent risk for the existence, completeness, and accuracy
Set Tolerable Misstatement and Assess Inherent Risk
objectives. These objectives are usually the focus in auditing cash
balances.

Controls over the transaction cycles affecting the recording of cash

receipts and disbursements

Compare cancelled checks or electronic bank records of payment with

the cash disbursements records for date, payee, and amount

Examine cancelled checks or electronic bank records of payment for Phase I

signature, endorsement, and cancellation

Compare deposits in the bank with recorded cash receipts for date,
customer, and amoun

Account for the numerical sequence of checks, and investigate

missing ones Assess Control Risk
Reconcile all items causing a difference between the book and bank Independent bank reconciliations
balance and verify their appropriateness for the client’s business

Reconcile total debits on the bank statement with the totals in the
cash disbursements records

Reconcile total credits on the bank statement with the totals in the
cash receipts records

Review month-end interbank transfers for appropriateness and

proper recording

Follow up on outstanding checks and stop-payment notices

Because the cash balance is affected by all other cycles except

inventory and warehousing, an extremely large number of transactions Design and Perform Tests of Controls and Substantive Tests of
affect cash. Phase II
Transactions
Cash transactions are audited through these transaction cycle tests.

Audit of the general cash account.

The purpose of the cutoff bank statement is to verify the reconciling
items on the client’s year-end bank reconciliation with evidence that is
not accessible to the client. To fulfill this purpose, the auditor requests
the client to have the bank send the statement for 7 to 10 days
subsequent to the balance sheet date directly to the auditor.
Auditors commonly compare the ending balance on the bank
reconciliation, deposits in transit, outstanding checks, and other
reconciling items with the prior-year reconciliation. Similarly, auditors
normally compare the ending balance in cash with previous months’
balances
Receipt of a Bank Confirmation
Receipt of a Cutoff Bank Statement
Cash is important because of its susceptibility to theft, and
Design and Perform Analytical Procedures cash can also be significantly misstated
Failure to include a check that “has not cleared the bank” on the
outstanding check list, even though it has been recorded in the cash
disbursements journal (outstanding check)
Cash received by the client “subsequent to the balance sheet” date but
It is relatively easy to verify the client’s reconciliation of the balance in recorded as cash receipts in the “current year”
the bank account to the general ledger Deposits recorded as cash receipts near the end of the year,
deposited in the bank in the same month, and included in the bank
reconciliation as a “deposit in transit”

Payments on notes payable debited directly to the bank balance by

Verify that the client’s bank reconciliation is mathematically accurate.
Trace the balance on the bank confirmation and/or the beginning
balance on the cutoff statement to the balance per bank on the bank
reconciliation to ensure they are the same.
Trace checks written and recorded before year-end and included with
the cutoff bank statement to the list of outstanding checks on the bank
reconciliation and to the cash disbursements journal in the period or
periods prior to the balance sheet date.
The first step in the investigation should be to
Investigate all significant checks included on the outstanding check list
trace the amount of any items not clearing to the cash disbursements
that have notcleared the bank on the cutoff statement
journal
All cash receipts not deposited in the bank at the end of the year Trace deposits in transit to the cutoff bank statement.
should be traced to the cutoff bank statement to make sure that they
were deposited shortly after the beginning of the new year.
the bank but “not entered in the client’s records”
In the audit of cash, auditors must distinguish between
Characteristic
verifying the client’s “reconciliation” of the balance on the bank
Beware statement to the balance in the general ledger, and verifying
The starting point for the verification of the balance in the general bank whether “recorded cash” in the general ledger correctly reflects
account is to obtain a bank reconciliation from the client for inclusion in Failure to bill a customer
all cash transactions that took place during the year
the auditor’s documentation
An embezzlement of cash by intercepting cash receipts from
customers before they are recorded, with the account charged
off as a bad debt
Tests of the Bank Reconciliation
Duplicate payment of a vendor’s invoice
but a significant part of the total audit of a company involves verifying
Improper payments of officers’ personal expenditures
Phase III whether cash transactions are correctly recorded
Payment for raw materials that were not received
Design Tests of Details of Cash Balance
Payment to an employee for more hours than he or she
worked

Payment of interest to a related party for an amount in

These include such items as bank service charges,
Account for other reconciling items on the bank statement and bank excess of the going rate
bank errors and corrections, and unrecorded transactions debited or
reconciliation.
credited directly to the bank account by the bank

The only reconciling items are outstanding checks. Audit of the Imprest Payroll Bank Account

The most important internal control for petty cash is the use of an
Internal Controls Over Petty Cash
imprest fund that is the responsibility of one individual.

The emphasis in verifying petty cash should be on testing controls Audit of Petty Cash
over petty cash transactions rather than the ending balance in the Audit Tests for Petty Cash
account.

the improper segregation of duties between the handling of cash and

the recording of cash transactions in the accounting records and the
lack of an independently prepared monthly bank reconciliation.

Start with the bank reconciliation for November and “compare”

all reconciling items with cancelled checks and other
documents in the December bank statement.

Compare all remaining cancelled checks and deposit slips in

the December bank statement “with” the December cash The extended procures verify whether “all transactions” included in the
The auditor must extend the procedures
disbursements and receipts journals. journals for the last month of the year were correctly “included in or
The extended procedures verify whether all transactions included in in the audit of year-end cash to determine
excluded” from the bank reconciliation and verify whether “all items in
the journals for the last month of the year were correctly included in the bank reconciliation were correctly included”. the possibility of a material fraud.
Trace all uncleared items in the November bank
or excluded from the bank reconciliation and verify whether all items in
reconciliation and the December cash disbursements and
the bank reconciliation were correctly included
receipts journals “to” the client’s December 31 bank
reconciliation to make sure they are included.

Verify that all reconciling items in the December 31 bank

reconciliation represent items from the November bank
reconciliation and December’s journals “that have not yet”
cleared the bank.
All recorded cash receipts were deposited

All deposits in the bank were recorded in the accounting records The auditor uses a proof of cash to determine whether the following
All recorded cash disbursements were paid by the bank were done:

All amounts that were paid by the bank were recorded

Reconcile the balance on the bank statement with the general

ledger balance at the beginning of the proof-of-cash period.

Reconcile cash receipts deposited per the bank with receipts

recorded in the cash receipts journal for a given period.

Reconcile electronic payments and cancelled checks clearing the
bank with those recorded in the cash disbursements journal for a given
period.
Reconcile the balance on the bank statement with the general
ledger balance at the end of the proof-of-cash period.
A proof of cash includes the following four reconciliation tasks
Fraud
Auditors sometimes prepare a proof of cash when the client
has material internal control weaknesses in cash. A proof of
cash receipts is a test of recorded transactions, whereas a
bank reconciliation is a test of the balance in cash at a point in
time.

The auditor should compare the disbursement and receipt information

The accuracy of the information on the interbank transfer schedule
on the schedule to the cash disbursements and cash receipts records
should be verified.
to make sure that it is accurate

The interbank transfers must be recorded in both the receiving and

disbursing banks.
Disbursements on the interbank transfer schedule should be correctly
included in or excluded from year-end bank reconciliations as
outstanding checks
Transferring money from one bank to another and incorrectly
recording the transaction. Near the balance sheet date, a check is
Interbank Transfer Kiting
drawn on one bank account and immediately deposited in a second
account for the credit before the end of the accounting period.

Receipts on the interbank transfer schedule should be correctly

included in or excluded from year-end bank reconciliations as deposits
in transit.