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CHAPTER 20 Audit of Cash Balances

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What are the auditors primary concerns with regard to cash?

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What are the auditors primary concerns with regard to cash?

- existence

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What are the auditors primary concerns with regard to cash?

- existence - completeness

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What are the auditors primary concerns with regard to cash?

- existence - completeness - physical control


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What are the auditors primary concerns with regard to cash?

- existence - completeness - physical control - presentation and disclosure

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Cash Audit Procedures


perform analytical procedures to test the reasonableness of cash balances
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Cash Audit Procedures


Enquire of management regarding any cash requirements or restrictions from debt agreements.

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What is kiting?

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What is kiting?
Kiting is an irregularity whereby an overstatement of cash is created by a cash transfer between bank accounts.
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What is kiting?
Kiting is an irregularity whereby an overstatement of cash is created by a cash transfer between bank accounts.
The deposit is recorded in cash receipts but the disbursement is not recorded in cash disbursements.
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Kiting example
On 12/31, Aces bookkeeper writes a $5,000 cheque on the National Bank and deposits the cheque in the Canadian Bank account.

National

Ace Co.
National

Ace Co.

12/31 5000

Canadian

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Kiting example
On 12/31, Aces bookkeeper writes a $5,000 cheque on the National Bank and deposits the cheque in the Canadian Bank account. The bookkeeper records the deposit in the cash receipts journal but does not record the cheque in the cash payments journal. He also fails to list the cheque as outstanding on the National Bank reconciliation.
cash receipts journal description _ $$ _ Dec. 31, 2004 Misc. revenue 5000 cash payments journal description _ $$ _ Dec.31, 2004 - no activity 20 - 13

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Kiting example
On 12/31, Aces bookkeeper writes a $5,000 cheque on the National Bank and deposits the cheque in the Canadian Bank account. National will not be aware of the cheque until notification from Canadian, probably during the first few days of January.

National

Canadian

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Kiting example
On 12/31, Aces bookkeeper writes a $5,000 cheque on the National Bank and deposits the cheque in the Canadian Bank account. National will not be aware of the cheque until notification from Canadian, probably during the first few days of January.

National

As a result of the deposit, Canadian will increase Aces account on 12/31.

Canadian

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On 12/31, Aces bookkeeper writes a $5,000 cheque on the National Bank and deposits the cheque in the Canadian Bank account. National will not be aware of National the cheque until notification from Canadian, probably during the first few days of January. As a result of the deposit, Canadian will increase Aces account on 12/31.
Canadian

As a consequence, the bank records will reflect a $5,000 cash overstatement for a few days until the cheque clears. December bank statements will also support this overstatement.
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From an internal control perspective, why does kiting occur?

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From an internal control perspective, why does kiting occur?


inadequate segregation of duties between accounting and cash custody

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What effect is changing technology having on the likelihood of kiting?

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What effect is changing technology having on the likelihood of kiting?


Kiting is becoming less likely because the float is shrinking; i.e., cheques clear banks faster than in the past.
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What audit procedures may detect kiting?

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What audit procedures may detect kiting?


tests related to the cutoff bank statement and schedule of bank transfers
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Cash Audit Procedures


Obtain a bank cutoff statement directly from the bank.

?
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Cash Audit Procedures


Obtain a bank cutoff statement directly from the bank.

A bank cutoff statement is prepared ten business days after the balance sheet date.

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Cash Audit Procedures


Obtain a bank cutoff statement directly from the bank.
A bank cutoff statement is prepared ten business days after the balance sheet date. Most items that were outstanding at year-end have cleared when the cutoff statement is prepared (cheques, deposits).
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Cash Audit Procedures


Obtain a bank cutoff statement directly from the bank. Trace all cheques, deposits, and other cash changes from the cutoff statement to cash receipts and disbursements records, paying particular attention to dates and amounts.
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Cash Audit Procedures


Prepare a schedule of bank transfers showing all transfers between the clients bank accounts during the last week of the audit period and the first week of the subsequent period.

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Cash Audit Procedures


Prepare a schedule of bank transfers showing all transfers between the clients bank accounts during the last week of the audit period and the first week of the subsequent period.
The schedule should be prepared using cash receipts and payments journals, year-end reconciliation, year-end bank statement, and cutoff bank statement.
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Cash Audit Procedures


Obtain or prepare a year-end bank reconciliation or proof of cash for each client bank account.

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Cash Audit Procedures


Obtain or prepare a year-end bank reconciliation or proof of cash for each client bank account.

What is a proof of cash?


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Cash Audit Procedures


Obtain or prepare a year-end bank reconciliation or proof of cash for each client bank account.
A proof of cash is a working paper prepared by the auditor to reconcile the banks record of the clients beginning balance, cash deposits, cleared cheques, and ending balance for the period with the clients records.
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Cash Audit Procedures


Obtain or prepare a year-end bank reconciliation or proof of cash for each client bank account.
Trace amounts to the schedule of bank transfers, cash receipts and payments journals, year-end reconciliation, year-end bank statement, and cutoff bank statement.
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What will a bank reconciliation help the auditor determine?

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What will a bank reconciliation help the auditor determine?

- whether all client cash receipts have been deposited


cash receipts journal description _ $$ _ Dec. 31, 2004 Misc. revenue 5000

Canadian

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What will a bank reconciliation help the auditor determine?

- whether all bank deposits have been recorded in client cash receipts records
cash receipts journal description _ $$ _ Dec. 31, 2004 Misc. revenue 5000

Canadian

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What will a bank reconciliation help the auditor determine?

- whether all client cash payments have been paid by the bank
cash payments journal description _ $$ _ Dec. 31, 2004 Misc. expense 5000

Canadian

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What will a bank reconciliation help the auditor determine?

- whether all bank payments have been recorded in client cash payments records
cash payments journal description _ $$ _ Dec. 31, 2004 Misc. expense 5000

Canadian

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What will not be detected by a bank reconciliation?

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What will not be detected by a bank reconciliation?


- unrecorded cheques that have not cleared the bank (possible kiting)

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What will not be detected by a bank reconciliation?


- unrecorded cheques that have not cleared the bank (possible kiting) - unrecorded deposits that have not cleared the bank
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What will not be detected by a bank reconciliation?


- unrecorded cheques that have not cleared the bank (possible kiting)

- unrecorded deposits that have not cleared the bank


- cheques written for incorrect amounts
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Cash Audit Procedures

BANK
Confirm all cash balances held by third parties, such as banks and other financial institutions.

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Cash Audit Procedures


Confirm all cash balances held by third parties, such as banks and other financial institutions.

possibly through use of the standard bank confirmation


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Cash Audit Procedures


Count all cash on hand at the clients premises. If cash is located in multiple places, count cash simultaneously to avoid double counting.

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Cash Audit Procedures

Review cutoff of cash receipts and disbursements.


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Cash Audit Procedures


Account for the numeric sequence of cancelled cheques. Investigate missing cheques. Ace Company 6462
Ace Company
Ace Company Ace Company Ace Company 6457 6458 6459

6461

NATIONAL BANK

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Cash Audit Procedures

Review monthly client-prepared bank reconciliations.


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Cash Audit Procedures


Investigate any cheques made out to cash or bearer.
Ace Company 6458

CASH
NATIONAL BANK

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Cash Audit Procedures


Investigate any cheques that were returned by the bank because the client account had insufficient funds.
Ace Company 6458

NATIONAL BANK

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Cash Audit Procedures


Review and recalculate translations of foreign currencies.

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Cash Audit Procedures


Trace a sample of entries from cash receipts journal to a/r subsidiary ledger

cash receipts journal description _ $$ _ May 23, 2004 ABC Vending 23,000

___a/r subsidiary customer _ $$ _ ABC Vending 78,660 5/23/04 payment 23,000 balance 55,660

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Cash Audit Procedures


Trace a sample of entries from cash receipts journal to a/r subsidiary ledger to bank statements
___a/r subsidiary customer _ $$ _ ABC Vending 78,660 5/23/04 payment 23,000 balance 55,660

cash receipts journal description _ $$ _ May 23, 2004 ABC Vending 23,000 Bank Statement 5/31/04 Deposits: 5/23 $23,000

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Cash Audit Procedures


Trace a sample of entries from cash receipts journal to a/r subsidiary ledger to bank statements to deposit slips.
cash receipts journal description _ $$ _ May 23, 2004 ABC Vending 23,000 Bank Statement 5/31/04 Deposits: 5/23 $23,000
23,000
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___a/r subsidiary customer _ $$ _ ABC Vending 78,660 5/23/04 payment 23,000 balance 55,660

Deposit Slip 5/23/04

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Cash Audit Procedures


Trace a sample of entries from cash payments journal to a/p subsidiary ledger

cash payments journal description _ $$ _ January 23, 2004 a/p payment to MGB Corp. 4,300

a/p subsidiary vendor _ $$ _ MGB Corp 8,780 1/23/04 payment 4,300 balance 4,480

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Cash Audit Procedures


Trace a sample of entries from cash payments journal to a/p subsidiary ledger to bank statement

cash payments journal description _ $$ _ January 23, 2004 a/p payment to MGB Corp. 4300 Bank Statement 1/31/04 Deposits: Payments: 1/26 $4300

a/p subsidiary vendor _ $$ _ MGB Corp 8,780 1/23/04 payment 4,300 balance 4,480

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Cash Audit Procedures


Trace a sample of entries from cash payments journal to a/p subsidiary ledger to bank statement to cancelled cheques.
cash payments journal description _ $$ _ January 23, 2004 a/p payment to MGB Corp. 4300 Bank Statement 1/31/04 Deposits: Payments: 1/26 $4300
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a/p subsidiary vendor _ $$ _ MGB Corp 8,780 1/23/04 payment 4,300 balance 4,480

Ace Company

4512
1/23/04

MGB Corp.
NATIONAL BANK

4300

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