Audit of Cash Balances

Chapter 23

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Learning Objective 1
Show the relationship of cash
in the bank to the various
transaction cycles.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Relationships of Cash in the

Bank and Transaction Cycles
Capital Acquisition and Repayment Cycle:
Capital Stock Common
Redemption Issue of
of stock
stock

Dividends Payable
Payment of
dividends

Paid-in Capital in Excess

of Par Common
Redemption Issue of
of stock
stock
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

Cash in Bank

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Relationships of Cash in the

Bank and Transaction Cycles
Acquisition and Payment Cycle:
Accounts Payable
Payment

Cash in Bank

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Relationships of Cash in the

Bank and Transaction Cycles
Sales and Collection Cycle:
Accounts Receivable
Cash
receipts

Cash Discounts Taken

Gross Sales
Cash
sales

Cash in Bank

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Relationships of Cash in the

Bank and Transaction Cycles
Payroll and Personnel Cycle:
Accrued Wages, Salaries,
Bonuses, and Commissions
Payment

Accrued Payroll
Tax Expense
Payment

Withheld Income Taxes

and Other Deductions
Payment
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

Cash in Bank

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Cash in the Bank and

Transaction Cycles
Misstatements which may not be discovered
as a part of the audit of the bank reconciliation:
Failure to bill a customer
An embezzlement of cash by interception
of cash receipts from customers before
they are recorded, with the account
charged off as a bad debt

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Cash in the Bank and

Transaction Cycles
Duplicate payment of a vendors invoice
Improper payments of officers personal
expenditures
Payment for raw materials that were not
received
Payment to an employee for more hours
worked
Payment of interest to a related party for
an amount in excess of the going rate
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Cash in the Bank and

Transaction Cycles
Misstatements which are normally discovered
as a part of the tests of a bank reconciliation:
Failure to include a check that has not
cleared the bank, even though it has been
recorded in the cash disbursements journal
Cash received by the client subsequent to
the balance sheet date but recorded as
cash receipts in the current year

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Cash in the Bank and

Transaction Cycles
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 the bank but not
entered in the clients records

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Learning Objective 2
Identify the major types of cash
accounts maintained by
business entities.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Types of Cash Accounts

General cash account
Imprest accounts
Branch bank account
Imprest petty cash fund
Cash equivalents

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Relationship of General Cash to

Other Cash Accounts
Branch Bank
Account

Imprest Payroll
Account
General
Cash

Cash
Equivalents

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

Imprest Petty
Cash Fund

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Learning Objective 3
Design and perform audit tests
of the general cash account.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Methodology for Designing Tests

of Balances for Cash in the Bank
Identify client business
risks affecting cash
in bank

Phase I

Set tolerable misstatement

and assess inherent
Phase I
risk for cash in bank
Assess control
risk for
several cycles

Phase I

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Methodology for Designing Tests

of Balances for Cash in the Bank
Design and perform
tests of controls and
substantive tests of Phase II
transactions for
several cycles

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Methodology for Designing Tests

of Balances for Cash in the Bank
Design and perform
analytical procedures Phase III
for cash in bank
Design tests of
details of cash in
bank to satisfy
balance-related
audit objectives

Audit procedures
Sample size
Items to select

Phase III

Timing

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Audit Schedule for a Bank

Reconciliation
Schedule A-2
Prepared by Client
Approved by SW
Account 101 General account, First National Bank

DED
1/1
1/18/10

Balance per bank

Add: Deposits in transit
Deduct: Outstanding checks
Other reconciling items: Bank error
Balance per bank, adjusted

$109,713
21,117
87,462
15,200
$ 28,168

Balance per books before adjustments

Adjustments: Unrecorded bank service charge
216
NSF
4,200
Balance per books, adjusted

$ 32,584

Clawson Industries
Bank Reconciliation
12/31/09

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

Date

4,416
$ 28,168
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Balance-related Audit
Objectives
Detail tie-in:
Cash in the bank foots correctly and
agrees with the general ledger.
Existence:
Cash in the bank as stated on the
reconciliation exists.
Completeness:
Existing cash in the bank is recorded.
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Balance-related Audit
Objectives
Accuracy :
Cash in the bank as stated on the
reconciliation is accurate.
Cutoff:
Cash receipts and cash disbursements
transactions are recorded in the proper
period.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Procedures
Receipt of a bank confirmation
Receipt of a cutoff bank statement
Tests of the bank reconciliation

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Extended Tests of the Bank

Reconciliation
When the auditor believes that the year-end bank
reconciliation may be intentionally misstated,
it is appropriate to perform extended tests
of the year-end bank reconciliation.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Types of Audit Tests Used for

General Cash in Bank
Cash in Bank
Beginning balance
Cash receipts
Cash disbursements
Audited by
TOC-T, STOT, and AP

Audited by
TOC-T, STOT, and AP

Ending balance
Audited by
TOC-B, AP, and TDB
TOC-T + TOC-B + STOT + AP + TDB
= Sufficient appropriate evidence
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Learning Objective 4
Recognize when to extend audit
tests of the general cash account
to test further for material fraud.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Fraud Oriented Procedures

The auditor must extend the procedures
in the audit of year-end cash to determine
the possibility of a material fraud.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Extended Tests of the

Bank Reconciliation
When the auditor believes that the year-end
bank reconciliation may be intentionally
misstated, it is appropriate to perform
extended tests of the year-end bank
reconciliation.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Proof of Cash
All recorded cash receipts were deposited
All deposits in the bank were recorded in
the accounting records
All recorded cash disbursements were
paid by the bank
All amounts that were paid by the bank
were recorded

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Proof of Cash
Includes the following reconciliation tasks:
1. The balance on the bank statement with
the general ledger balance at the
beginning of the proof-of-cash period
2. Cash receipts deposited per the bank with
the cash receipts journal for a given period

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Proof of Cash
Includes the following reconciliation tasks:
3. Cancelled checks clearing the bank with
those recorded in the cash disbursements
journal for a given period
4. The balance on the bank statement with the
general ledger balance at the end of the
proof-of-cash period

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Interbank Transfers
The accuracy of the information on the
interbank transfer schedule should be verified.
The interbank transfers must be recorded in
both the receiving and disbursing banks.
The date of the recording of the disbursements
and receipts for each transfer must be in
the same fiscal year.
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Interbank Transfers
Disbursements on the interbank transfer
schedule should be correctly included in or
excluded from year-end bank reconciliation
as outstanding checks.
Receipts on the interbank transfer schedule
should be correctly included in or excluded
from year-end bank reconciliations as
deposits in transit.
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Learning Objective 5
Design and perform audit tests of
the imprest payroll bank account.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Audit of the Imprest Payroll

Bank Account
Typically, the only reconciling
items are outstanding checks.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Learning Objective 6
Design and perform audit tests
of imprest petty cash.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Petty Cash
Petty cash is a unique account because
it is often immaterial in amount, yet it is
verified on many audits.
The account is verified primarily because
of the potential for embezzlement and the
clients expectation of an audit review
even when the amount is immaterial.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Audit of Imprest Petty Cash

Internal controls over petty cash
Audit tests for petty cash

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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End of Chapter 23

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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