CHAP 10

Sources and Nature of Cash

• General checking acc

  • cash sales, collection of receivables, loans, investments of additional capital typically increase this act

  • Business expenditures decrease it

  • Sometimes a min bal must be maintained under terms of a loan agreement → compensating bal

• Payroll checking acc

  • Transfer made from gen acc

  • E.g: payroll acc

• Petty cash

  • E.g: drivers to pay tolls

• Savings accs

• Cash equivalents — excess $$ that company decide to invest

  • Money market funds

  • Certificates of deposit

  • Savings certificates

  • Investment = any cash that can’t be converted on short notice

Auditor’s POV

• Liquid nature of cash increase risk of fraud

• Normal internal control = bank rec to detect errors in bank and

Outstanding checks

Check recorded (by issuing entity) but bank hasn’t recorded bc payee didn’t hasn’t cashed it yet -- cash out

Effect on books → possible audit adjustment

• books = always low than bank → N adj — timing difference

Deposit in transit (outstanding deposits)

Check/ cash received & recorded (by issuing entity) but bank hasn’t recorded bc of bank processing

Effect on books → possible audit adjustment

• books = always high than bank → N adj — timing difference

Non-sufficient fund

Bounced back checks -- cash in

• Have to change OR reverse entry in book

Effect on books → possible audit adjustment

• books = always higher than bank → N adj — timing difference

• Company have to reverse entry in book and ask new form of pmt

OG entry, adjustment

• dt - cash, a/r

• cr - a/r, cash

Bank fees

• Banks may charge monthly maintenance fees, ATM fees, excessive transaction fees, overdraft fees, insufficient funds fees, and other service charges-- cash out

• Typically, these fees show up on the bank statement, and you need to adjust your books to account for them

Effect on books → possible audit adjustment

• books = always higher than bank → N adj

• Significant → auditor propose adjustment if charges belong to period under audit

Adjustment proposed

• dt - exp

• cr - cash

Interest income

Interest earn from bank-- cash in

Effect on books → possible audit adjustment

• books = always lower than bank → N adj

Adjustment proposed

• dt - cash

• cr - int. income

Errors

You or your bank may make errors

Correcting errors may require an adjustment to your books or a call to the bank to have the error fixed on their end

Effect on books → possible audit adjustment

• books = always lower/ higher than bank → N adj

Audit cash

Purpose

• Understand client & its environment to consider inherent risk (+fraud risk) related to cash

• Understand control over cash

• Asses risk of mat. mis. of cash and design test of control and substantive procedures that

  • a. Substantiate the existence of recorded cash and occurrence of the related transactions

  • b.Establish the completeness of recorded cash

  • c.Verify the cutoff and accuracy of cash transactions

  • d. Determine that the client has rights of recorded cash

  • e.Determine that the presentation and disclosure of cash, including restricted funds (e.g., compensating balances and bond sinking funds), are appropriate

Valuation assertion

• Cash is almost t always at its true value so judgement for valuation is unnecessary

• n/a for A/R since you need to est uncollectible accs

Timing

• More hrs devoted due to high IR

Organizational structure

Cash handling responsibility = treasurer

• dep cash reciepts

• Signing checks

• Investing idle cash

• Maintaining custody of cash

• Forecast cash requirements

Treasurer vs accounting relationship — on slides

• General guidelines for internal control

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

2. Separate cash handling from recordkeeping.

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 promptly.

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 the issuance of checks or custody of cash.

   • The completed reconciliation should be reviewed promptly by an appropriate official

9. Monitor cash receipts and disbursements using management review controls, including implementing data analytics software and by comparing recorded amounts to forecasted amounts.

Cash receipts (internal control)

Cash sales

• Involvement of 2/more employees

• Cash register

  • Visual display of amount of sale shown to customers - printed receipt - accumulation of total day's sales

Credit cards:

• Emp. no access to cash

• Reflected in bank

Electronic Point-of-Sale System:

• Electronic scanner heads universal product code

• Risk of recording erronous amount by emp is reduced

Collections from Credit Customers

• Cash receipts = checks/cash → control listing = all incoming check

• Separate who receive & deposit and who records credit to customer acc

Theft from mail room

• Steal & destroy remittance advice → impossible be check is payable to company & customers may complain

Direct deposit funds by financial institution

• Large volume of cash? → lockbox (post office controlled box by financial institution where they process checks and gives listing to company)

Electronic fund transfers

• fund related transfer pmt instead of check → electronic data interchange (data from one company to another)

Cash disbursements (internal control)

Controls

• Pmt made through check or electronic fund transfer

  • Pre-numbered check

  • Reviewed and mailed by check signer

• Match purchase order & supporting doc w/ vendor’s invoice

  • Supporting doc reviewed by check signer

• Cancellation of supporting docs → perforate term

• Monthly bank rec

  • Employee has no part in handling cash

  • Reviewed by an official

• Voucher system

  • Assembling appropriate supoorting docs to support cash disbursements

    • Determine if all agree (purchase order, receiving report, vendor’s invoice)

    • Accounting employee prepares voucher (official doc for above)

    • tech: matching could be done by computer → prepares exception report

Risk of misstatements

A. Overstatement

• e.g., fictitious check; omission of an outstanding check

B. Other fraud risk

• e.g., duplicate payments, payment of materials not received, overpayments to employee of fictitious employees; payment of personal expenditures of officers

Test of controls

Test controls over accuracy and completeness of:

1. acc reconds and bank rec → select sample & reperform (note other facts like authorizations)

2. Processing cash receipts (must be deposit quickly) → compare mailroom register / register tapes to deposit slip

3. Cash disbursement → check supporting docs (other facts like perforated)

4. Test management review controls → how unusual items identified, investigated, resolved

Lapping fraud

Concealment of a cash shortage by delaying recording of cash receipts → when 1 emp responsible collection & recording

Substantive Test of Details

Test controls cash balances:

a. Analyses of cash balance (GL) to TB → use list of bank clients and their bank info - end bal match?

b. Confirm cash bal. w/ banks → direct communication - confirmation/ agree

c. Bank rec info as of BS date → proof that all cash movements makes sense - like a & b but for whole yr

d. cutoff bank statement→ time after fiscal yr (contains trans after 7 business days) -- auditors receive stmt directly from bank

e.

Proof of cash

more detailed rec info → compares both (books and bank stmt) — missing / different amounts

• Beg bal

• End cash

• Cash receipts during pd

• Cash disbursements during pd

Cutoff bank stmt

Covers a specified number of business days following end onf client’s fiscal yr