SolutionARENSAuditing13eAEBSMCH231.docx

SolutionARENSAuditing13eAEBSMCH231.docx

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SolutionARENSAuditing13eAEBSMCH231

Chapter23

AuditofCashBalances

ReviewQuestions

23-1Theappropriatetestsfortheendingbalanceinthecashaccountsdependheavilyontheinitialassessmentofcontrolrisk,testsofcontrols,andsubstantivetestsoftransactionsforcashreceipts.Thecompany'scontrolsovercashreceiptsassisttheauditorindeterminingthatcashreceivedispromptlydeposited,thatreceiptsrecordedareproper,thatcustomeraccountsarepromptlyupdated,andthatthecashcutoffatyear-endisproper.Iftheresultsoftheevaluationofinternalcontrol,thetestsofcontrols,andthesubstantivetestsoftransactionsareadequate,itisappropriatetoreducethetestsofdetailsofbalancesforcash,especiallyforthedetailedtestsofbankreconciliations.Ontheotherhand,ifthetestsindicatethattheclient'scontrolsaredeficient,extensiveyear-endtestingmaybenecessary.

23-2Theappropriatetestsfortheendingbalanceinthecashaccountsdependheavilyontheinitialassessmentofcontrolrisk,testsofcontrols,andsubstantivetestsoftransactionsforcashdisbursements.Thecompany'scontrolsovercashdisbursementsassisttheauditorindeterminingthatcashdisbursedisforapprovedcompanypurposes,thatcashdisbursementsarepromptlyrecordedintheproperamount,andthatcashcutoffatyear-endisproper.Iftheresultsoftheevaluationofinternalcontrol,thetestsofcontrols,andthesubstantivetestsoftransactionsareadequate,itisappropriatetoreducethetestsofdetailsofbalancesforcash,especiallyforthedetailedtestsofbankreconciliations.Ontheotherhand,ifthetestsindicatethattheclient'scontrolsareinadequate,extensiveyear-endtestingmaybenecessary.

Anexampleinwhichtheconclusionsreachedaboutthecontrolsincashdisbursementswouldaffectthetestsofcashbalanceswouldbe:

Ifcontrolsovertheissuanceofblankchecks,thereviewofpayees,amounts,andsupportingdocumentation,thesigningofchecks,andthereconciliationofbankstatementsandvendors'statementsareadequate,theauditor'sreviewofoutstandingchecksontheyear-endbankreconciliationmaybegreatlyreduced.Theyear-endoutstandingcheckscanbeverifiedbytestingasampleofchecksreturnedwiththecutoffbankstatementratherthantracingallpaidoutstandingchecksandthefinalmonthlychecksinthecashdisbursementsjournaltothelastmonth'sclearedchecksandthebankreconciliation.

23-3Themonthlyreconciliationofbankaccountsbyanindependentpersonisanimportantinternalcontrolovercashbalancesbecauseitprovidesanopportunityforaninternalverificationofthecashreceiptsandcashdisbursementstransactions,investigationofreconcilingitemsonthebankreconciliation,andtheverificationoftheendingcashbalance.Anyoneresponsibleforthefollowingdutieswouldnotbeconsideredindependentforthepurposesofpreparingmonthlybankreconciliations:

Issuanceofchecks

Receiptanddepositofcash

Otherhandlingofcash

Recordkeeping

23-4Thecontroller'sapproachistoreconcileuntilthebalanceagrees.Theshortcomingofthisapproachisthatitdoesnotincludeareviewoftheitemsthatflowthroughtheaccountanditopensthedoorfortheprocessingofimproperitems.Suchitemsascheckspayabletoimproperparties,reissuanceofoutstandingcheckstoimproperparties,andkitingoffundswouldnotbediscoveredwiththecontroller'sapproach.Thecontroller'sproceduresshouldincludethefollowing:

a.Examinationofallchecksclearingwiththestatement（includingthoseonpreviousmonth'soutstandingchecklist）andcomparisonofpayeeandamounttothecashdisbursementsjournal.

b.Testofcashreceiptstodeterminethattheyaredepositedwithinareasonableamountoftime.

c.Follow-uponoldoutstandingcheckssothattheycanberecognizedasincomeafteritisdeterminedthattheywillnotbecashed,andnoliabilityexists.

23-5Bankconfirmationsdifferfrompositiveconfirmationsofaccountsreceivableinthatbankconfirmationsrequestseveralspecificitemsofinformation,namely:

1.Thebalancesinallbankaccounts.

2.Restrictionsonwithdrawals.

3.Theinterestrateoninterest-bearingaccounts.

4.Informationonliabilitiestothebankfornotes,mortgages,orotherdebt.

Positiveconfirmationsofaccountsreceivablerequestofthebuyertoconfirmanaccountbalancestatedontheconfirmationformordesignateadifferentamountwithanexplanation.Theauditoranticipatesfewexceptionstoaccountsreceivableconfirmations,whereaswithbankconfirmationsheexpectsdifferencesthattheclientmustreconcile.Bankconfirmationsshouldberequestedforallbankaccounts,butpositiveconfirmationsofaccountsreceivablearenormallyrequestedonlyforasampleofaccounts.Ifbankconfirmationsarenotreturned,theymustbepursueduntiltheauditorissatisfiedastowhattherequestedinformationis.Ifpositiveconfirmationsofaccountsreceivablearenotreturned,secondandmaybethirdrequestsmaybemade,butthereafter,follow-upsarenotlikelytobepursued.Alternativeprocedures,suchasexaminationofsubsequentpaymentsorothersupportofcustomers'accountsmaythenbeused.

23-5（continued）

Thereasonwhymoreimportanceisplacedonbankconfirmationsthanaccountsreceivableconfirmationsisthatcash,beingthemostliquidofassets,mustbemorecloselycontrolledthanaccountsreceivable.Inaddition,otherinformation–suchasliabilitiestothebankmustbeknownforpurposesofthefinancialstatements.Finally,thereareusuallyonlyafewbankaccountsandmostbankaccountshavealargevolumeoftransactionsduringtheyear.

23-6Thisisagoodauditingprocedurethatattemptstodiscoverifanyaccountsthatshouldhavebeenclosedarestillbeingused,suchasbyacompanyemployeetodepositcustomerremittances.Theproceduremayalsodiscoverunrecordedandcontingentliabilities.

23-7Acutoffbankstatementisapartialperiodbankstatementwiththerelatedcancelledchecks,duplicatedepositslips,andotherdocumentsincludedinbankstatements,whichismailedbythebankdirectlytotheauditor.Thepurposeofthecutoffbankstatementistoverifythereconcilingitemsontheclient'syear-endreconciliationwithevidencethatisinaccessibletotheclient.

23-8Auditorsareusuallylessconcernedabouttheclient'scashreceiptscutoffthanthecutoffforsales,becausethecutoffofcashreceiptsaffectsonlycashandaccountsreceivableandnottheincomestatement,whereasamisstatementinthecutoffofsalesaffectsaccountsreceivableandtheincomestatement.

Forthepurposeofdetectingacashreceiptcutoffmisstatement,therearetwousefulauditprocedures.Thefirstistotracethedepositsintransittothecutoffbankstatementtodeterminethedatetheyweredepositedinthebankaccount.Becausetherecordedcashwillhavetobeincludedasdepositsintransitonthebankreconciliation,theauditorcantestforthenumberofdaysittookforthein-transititemstobedeposited.Ifthereismorethanatwoorthreedaydelaybetweenthebalancesheetdateandthesubsequentdepositofalldepositsintransit,thereisanindicationofacutoffmisstatement.Thesecondauditprocedurerequiresbeingonthepremisesatthebalancesheetdateandcountingallcashandchecksonhandandrecordingtheamountintheauditfiles.Whenthebankreconciliationistested,theauditorcanthencheckwhetherthedepositsintransitequaltheamountrecorded.

23-9Animprestbankaccountforabranchoperationisoneinwhichafixedbalanceismaintained.Afterauthorizedbranchpersonnelusethefundsforproperdisbursements,theymakeanaccountingtothehomeoffice.Aftertheexpenditureshavebeenapprovedbythehomeoffice,areimbursementismadetothebranchaccountfromthehomeoffice'sgeneralaccountforthetotalofthecashdisbursements.Thepurposeofusingthistypeofaccountistoprovidecontrolsovercashreceiptsandcashdisbursementsbypreventingthebranchoperatorsfromdisbursingtheircashreceiptsdirectly,andbyprovidingreviewandapprovalofcashdisbursementsbeforemorecashismadeavailable.

23-10Thepurposeofthefour-columnproofofcashistoverify:

Whetherallrecordedcashreceiptsweredeposited.

Whetheralldepositsinthebankwererecordedintheaccountingrecords.

Whetherallrecordedcashdisbursementswerepaidbythebank.

Whetherallamountsthatwerepaidbythebankwererecordedascashdisbursementsintheaccountingrecords.

Twotypesofmisstatementsthatthefour-columnproofofcashismeanttouncoverare:

Cashreceivedthatwasnotrecordedinthecashreceiptsjournal

Checksthatclearedthebankbuthavenotbeenrecordedinthecashdisbursementsjournal

23-11Wheneveracutoffbankstatementisnotreceiveddirectlyfromthebank,theauditormayverifythebankstatementforthemonthsubsequenttoyear-end.Theauditproceduresusedfortheverificationareasfollows:

1.Footallofthecancelledchecks,debitmemos,deposits,andcreditmemos.

2.Checktoseethatthebankstatementbalanceswhenthetotalsin1areused.

3.Reviewtheitemsincludedin1tomakesuretheywerecancelledbythebankintheproperperiodanddonotincludeanyerasuresoralterations.

Thepurposeofthisverificationistotestwhethertheclient'semployeeshaveomitted,added,oralteredanyofthedocumentsaccompanyingthestatement.

23-12Lappingisadefalcationinwhichacashshortageisconcealedbydelayingthecreditingofcashreceiptstotheproperaccountsreceivable.Thefirststepinthefraudistowithholdcashremittedbyacustomerfromabankdeposit.