A4 M3 Cash Cycle

Fraud Risk Related to the Cash Cycle

Cash is an area with high fraud risk especially when internal control is weak with lapping and kiting being two common cash fraud schemes.

Lapping

Occurs when an employee withholds funds received from a customer for personal use and covers the unrecorded receipt by applying a subsequent customer receipt.

Safeguards Against Lapping

Includes independent comparison of recorded receipts to actual deposits separation of receipts from remittance advices bank deposit matching timely statements customer balance confirmations and lock box systems.

Lock Box System

Guards against lapping by having customers send payments directly to the bank preventing employee access to payments before cash is applied in the general ledger.

Kiting

Occurs when a check drawn on one bank is deposited in another bank without recording the disbursement in the first bank balance until after year-end causing an intentional cash overstatement.

Kiting Detection

Requires preparing a bank transfer schedule where the disbursement date on the check and in the ledger for the disbursing account precedes the receipt date noted by the bank and ledger for the receiving account.

Bank Cutoff Statement (Kiting Verification)

Provides evidence confirming that all deposits in transit and outstanding checks listed on the year-end bank reconciliation cleared in the subsequent period.

Segregation of Duties Cash Cycle

Demands separation of cash handling record keeping bank statement reconciliations petty cash activities and check-writing authority alongside the use of a voucher system.

Auditing Ending Cash Balance Primary Assertions

Tests the completeness valuation and allocation and existence assertions primarily through the standard bank confirmation and the audit of the year-end bank reconciliation.

Standard Bank Confirmation

Sent to all banks with which the client did business during the year regardless of year-end balance to verify balances loans contingent liabilities discounted notes pledged collateral and guarantees.

Bank Reconciliation Audit Procedures

Involves footing the reconciliation and outstanding check list agreeing book balance to general ledger agreeing bank balance to bank confirmation and agreeing deposits in transit and outstanding checks to the cutoff bank statement.

Cutoff Bank Statement

Obtained by the auditor covering the first 10 to 15 days after year-end to verify that reconciling items clear as expected.

PCAOB Issuer Requirement Cash

Requires performing confirmation procedures or otherwise obtaining reliable audit evidence by directly accessing information from knowledgeable external sources.

Auditing Cash Receipts Completeness

Traces a sample of remittance advices to the cash receipts journal and deposit slips.

Auditing Cash Disbursements Completeness

Traces a sample of canceled checks to the cash disbursements journal.

Auditing Cash Cutoff

Verifies cash receipts and cash disbursements recording dates shortly before and after year-end and checks for significant delays between recording dates and bank deposit or clearing dates.

Auditing Cash Receipts Valuation Allocation and Accuracy

Foots remittance advices and entries on deposit slips for sample daily deposits and agrees them to the cash receipts journal and bank statement.

Auditing Cash Disbursements Valuation Allocation and Accuracy

Agrees purchase order receiving report invoice cancelled check and disbursement journal for a sample of voucher packages.

Auditing Cash Receipts Existence and Occurrence

Vouches sample entries in the cash receipts journal to remittance advices deposit slips and the bank statement.

Auditing Cash Disbursements Existence and Occurrence

Vouches sample entries from the cash disbursements journal to canceled checks the voucher package and the bank statement.

Auditing Cash Understandability of Presentation and Classification

Examines a sample of remittance advices and canceled checks to ensure recording in the proper account.

Auditing Presentation and Disclosure Completeness Cash

Ensures required footnote disclosures are included for cash and cash equivalents policy cash restrictions sinking fund requirements and compensating balances.

Auditing Presentation and Disclosure Valuation Allocation and Accuracy Cash

Reads footnotes and related cash information to determine whether the information is accurate and presented at appropriate amounts.

Auditing Presentation and Disclosure Rights Obligations and Occurrence Cash

Compares cash disclosures to other audit evidence to ensure disclosed cash information has actually occurred.

Auditing Presentation and Disclosure Understandability of Presentation and Classification Cash

Reads all cash-related disclosures to ensure they are understandable.