Auditing: Auditing Cash: Lecture 12 - Professor Helen Brown Liburd (Spring 2014)

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Principles of Auditing: Professor Liburd Lecture 12 Auditing Cash 4/11/14 Please visit our website at http://raw.rutgers.edu TIME STAMPS 0:32 Cash & the Effect of Other Business Processes 2:31 Cash in the Bank & Transaction Cycles 8:43 Cash in the Bank & Transaction Cycles (continued) 14:27 Types of Audit Tests Used for General Cash in Bank 17:38 The Effects of Controls 18:35 Cash Internal Control Considerations 20:17 Cash Receipts & Disbursements: Key Control Activities 23:38 Tests of Controls for Cash Receipts (Diagram) 27:02 Tests of Controls over Cash Disbursements ********SKIP UNTIL NEXT TIMESTAMP 53:24 Substantive Analytical Procedures - Cash 54:48 Auditing the General Cash Account 57:11 Audit Evidence Used to Test Cash 57:24 Audit of Cash 59:53 Confirmation of Bank Balances 1:04:19 Check Kiting 1:05:15 Proof of Cash 1:05:54 Other Fraud Detection Procedures for Cash It is apparent why the general cash account is considered significant in almost all audits even when the ending balance is immaterial. The amount of cash flowing into and out of the cash account is often larger than that for any other account in the financial statements. Misstatements that may not be discovered as a part of the audit of the bank reconciliation include: failure to bill a customer, an embezzlement of cash receipts from customers, duplicate payments, improper payments of personal expenses, payment for raw materials not received, payment to employee for hours not worked, and payment of excessive interest to related parties. Misstatements which ARE normally discovered as a part of the tests of a bank reconciliation include: failure to include a check on the outstanding check list, and cash received by the client recorded in the wrong period. The reliability of the client's controls over cash affects the nature and extent of the auditor's tests of details (controls for cash receipts, controls for cash disbursements, and completion of monthly bank reconciliation). Cash is highly liquid, easily transportable, and not easily identifiable, and therefore is a primary target for employee thieves. Some strong internal control activities include dual custody of cash at all times, lockbox arrangement, and fidelity bonds. Information processing includes voucher packets (purchase requisition, purchase order, receiving report, invoice) matched prior to cash disbursement authorization, deposits reconciled to amounts credited to accounts receivable ledger, and bank reconciliations. Physical controls over the security of assets include depositing cash and checks daily and intact, lock box account, EDI transactions, dual custody over cash, unused checks secured, and check imprinting machine. Segregation of duties of custody, authorization, recording, and execution is important. Other key control activities include performance reviews and reconciliations. 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 and comparisons with budgeted amounts. The limited applicability 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. The first procedures in an audit of cash is to obtain a bank reconciliation for each cash account and audit them in the following manner: balance per book (confirm directly with bank, agree amount to cutoff bank statement), add deposits in transit (trace to cash receipts journal and vouch to cutoff bank statement), subtract outstanding checks (vouch to cash disbursements journal, trace checks cleared from cutoff bank statement), add / subtract other debit / credit memos (inspect bank credit / debit memo and audit for reasonableness, examine relevant supporting documentation), balance per books (foot the entire reconciliation for mathematical accuracy, trace the amount to the trial balance). Standard bank confirmation inquiry must be mailed under auditor's own control. It is used to confirm deposit balances and loan balances, and also can be used to request information about contingent liabilities and secured transactions. Electronic confirmation requests are used by many banks now. It can improve the control of both delivery and receipt of the confirmation request, and is allowed by professional auditing standards. A proof of cash would be used in situations where controls over cash are weak. It essentially combines two bank reconciliations, reconciling all transactions that occurred during the period to the client's cash receipts journal and cash disbursements journal. Other fraud detection procedures for cash include counting the petty cash twice in one day, carefully examine endorsements on canceled checks, audit general journal entries.