performing the audit - 1

step 4 in the audit process

perform audit procedures

audit procedures

• inquiry

• observation

• inspection

• vouching

• tracing

• reperformance

• analytical procedures

• confirmation

general accounts

are checking accounts similar in nature to those maintained by individuals.

payroll and patty cash accounts

“imprest” low balances. When payroll is paid, a transfer is made from the general account to the payroll account

cash equivalents

are often combined with cash items to create the current asset classification called “cash and cash equivalents”

auditors objectives

1. Use the understanding of the client and its environment to consider inherent risks, including fraud risks, related to cash

2. Obtain an understanding of internal control over cash.
   

3. Assess the risks of material misstatement of cash and design tests of controls and substantive procedures

   • existence

   • accuracy

   • completeness

   • cutoff

   • rights

   • presentation and disclosure

internal control of cash transactions

• Cash Receipts

  • All expected cash was received, accurately recorded, and deposited promptly.

• Cash Disbursements

  • Made only for authorized purposes and properly recorded.

• Cash Balances

  • Maintained at proper levels via forecasting.

  • Helps plan for loans or investing excess cash in a timely manner.

guidelines for achieving internal control over cash

1. Do not permit any one employee to handle a transaction from beginning to end.

2. Separate cash handling (custody) from record keeping.

3. Centralize receiving of cash to the extent practical.

4. Record cash receipts on a timely basis.

5. Encourage customers to obtain receipts and observe cash register totals.

6. Deposit cash receipts daily.

7. Make all disbursements by check or electronic funds transfer, with the exception of small expenditures from petty cash.

8. Have monthly bank reconciliations prepared by employees not responsible for making cash payments or custody of cash. The completed reconciliation should be reviewed promptly by an appropriate official.

9. Monitor cash receipts and disbursements by using software to identify unusual transactions and comparing recorded amounts to budgeted amounts. to the extent practical.

cash and credit card sales

Control over cash sales is strongest when two or more employees (usually a sales clerk and a cashier) participate in each transaction with a customer.

electronic point of sales system

An electronic scanner reads the universal product code on the product, so the salesperson need only scan the code for the register to record the sale at the product’s price, which is stored in the computer. Thus, the risk of a salesperson record sales at erroneous prices is substantially reduced

collections from credit customers

Checks received through the mail are at risk if one employee both receives and deposits them. The checks should be endorsed “for deposit only” and a control listing prepared

direct receipt of funds by financial institutions

Sales proceeds are often received directly by the clients’ financial institution, which then notifies the business of the receipt through a variety of manners, including lockbox systems, credit cards, debit cards, and electronic transfer of funds by customers.

electronic funds transfer EFT systems

These systems process funds-related transactions for customers as an alternative to paying by check

recording cash receipts

The employee responsible for the customers’ accounts ledger enters the details of cash receipts into the computer in batches. The cash receipts program creates a file of cash receipt transactions that is used to update the general and the master file of accounts receivable. The program creates control totals and reports.

checking account disbursements

A principal advantage of requiring disbursement by check is obtaining evidence of receipt from the payee in the form of an endorsement on the check. Internal control: all checks are prenumbered and all numbers in the series are accounted for. Unissued prenumbered checks should be adequately safeguarded against theft or misuse.

internal control over employee reimbursements

When employees incur business expenses on behalf of the company, the company must establish effective controls over employee reimbursements.

internal control aspects of petty cash funds

Internal control over payments from an imprest petty cash fund is achieved when the custodian of the petty cash fund review support from employees seeking reimbursement for the small expenditures on behalf of the company.

monitoring cash transactions

it is important for management to monitor cash receipts and disbursements to achieve effective internal control

audit documentation for cash

Auditors’ working papers for cash typically include a flowchart or a written description of controls

PBC

prepared by client

tick marks

In the preparation and review of audit working papers, auditors use different symbols for conciseness to identify specific steps performed and verified

steps of general pattern of work performed

• use the understanding of the client + environment to consider inherent risks, including fraud, related to cash

• obtain an understanding of internal control over cash

• assess the risk of material misstatement and design audit procedures

whats a part of the control design valuation the lead auditor and management should do?

walkthroughs

purpose of walkthrough

validate the design adequacy of the controls and accuracy of the internal control documentation

types of internal controls

process, shadow, transaction

guidelines for preparation of working papers

• heading with name of client

• clear description of information presented

• date and period covered

• identification of documents examined

• preparer should date + sign