6 cash transactions
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AUDITING:
Cash TransactionsProf Dr Safdar A Butt
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Importance of Cash
Almost all that a company does culminatesin either a cash receipt or a cash payment,in some form or another.Of all the assets, cash is most vulnerableto defalcation or misappropriation.It therefore needs greatest care, bothfrom internal control and external auditpoints of view.
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Forms of Cash Transaction
Receipts, in whatever form like cash,cheques, drafts, bank transfers, etc.Payments through bank, mainly in theform of cheques, or bank transfers.Cash payments, mainly out of petty cash.
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Internal Control over Receipts
Principal objectives of internal control overcash receipts are to ensure that:The company collects all the cash to whichit is entitled;When received, the cash is promptly andcorrectly entered in the records;
Cash is properly safeguarded while it is oncompany premises and it deposited withthe bank without any delay.
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Internal Control Measures
A receipt must be issued for all cash received, inwhatever form it is received.
A summary of daily receipts should be preparedby the cashier. Someone else should check thissummary with bank pay-in slips.
All receipts must be banked intact, daily. If forany reason it is not possible to bank anyparticular days receipts, the cash should behanded over by cashier to some one else.
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Internal Control Measures 2
All receipts and all receipt books must bepre-numbered.Unused receipt books should be kept in asafe and recorded on issue. At no timeshould the cashier have access to morethan one receipt book.
Cashier who receives the cash and issuesthe receipts should not write the cashbook.
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Internal Control Measures 3
Cashier should not be involved in issue of creditnotes or such journal vouchers that write off, orreduce, a debt owed to the company.
As far as possible, there should be separatecashiers for handling receipts and payments. All mail should be opened in a central office andall cheques received should be crossed Account
Payee Only if not already so crossed.Daily list of cheques received in mail should beprepared by the Mail Office.
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Internal Control Measures 4
A senior officer should compare the dailylist from Mail Office with daily banking listor pay-in slips.
Cash handling procedure should beformally documented.Surprise checks should be made on
cashier regularly, but not on fixed dates.There should be adequate physical controlover cash until it is banked.
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Teeming & Lading
Fraud involving pocketing of cash receivedfrom one client and covering it up throughsplitting receipts from other clients.Can be detected if several receipts of aparticular amount are shown within ashort period.Surprise checks by management.
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Internal Control Questionnaire
ICQ on cash receipts should cover:Mail room procedure
Issue of receipts by cashierIssue of receipt books to the cashierProcedure related to banking the receipts
Arrangements for safe-keeping of cashDuties of cashier other than receipts
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Auditing Cash Receipts
Receipts through mail.Receipts across the Counter
Other matters relating to receipts
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Receipts through Mail
Attend mail opening session to ascertainits efficacy and adherence.Trace the items in daily mail register toreceipts issued by the cashier to dailybanking and to cash book.If the above comparison has been donein-house, check if such statements areproperly signed by responsible officers.
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Receipts across the Counter
Test a number of copy receipts with cash bookand trace them to pay-in book and bankstatements.
Check the reconciliation prepared between cashbook and other related records. Verify if the receipts are all in numerical order. All copies of cancelled or spoiled receipts should
be there in the book. Ascertain that date on receipts conforms withthe dates when the receipt book was in use.
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Other Matters
Check the arrangement of physical custody ofreceipt books and record of their issue tocashier.
Check if there are adequate safeguards forkeeping cash on premises, like a safe, keys tothe safe, etc.Check bank reconciliation statements.
Check how the company opens its bankaccounts. Cashiers should not be involved in theprocess of opening bank accounts.
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Internal Control over Petty Cash
Objectives of internal control are: All payments made out of petty cash areproperly authorized.
All payments are properly made andevidence of receipt by the payee is there.
The petty cash book or other records areproperly maintained.
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Internal Control Measures
Use of imprest system.Regular surprise checks.
No authority to cashier to approvepayments.Maximum limit per voucher.
At the time of re-imbursement, all paidvouchers should be removed from pettycashier.
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Internal Control Measures 2
Petty cashier should not handle any othercash transactions or funds.Regular inspection of petty cash book andcomparison with main cash book.Float amount should be reasonable.
Advances to staff against IOUs andpersonal cheques should be discouraged.
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Internal Control Questionnaire
Internal Control Questionnaires on pettycash payments should cover:Review of all floatsPayment procedureRe-imbursement procedure
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Audit of Petty Cash Payments
Vouch a selected number of petty cashvouchers to verify:
Their authority limits.
Reasonableness of amount.Check if reimbursed vouchers are suitablyso marked to prevent double payments.
Carry out surprise cash count. Verify IOUs and personal cheques, inparticular their duration.
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Audit of Reimbursements
Vouch a number of reimbursementvouchers in detail, in respect of:
AuthorizationReasonablenessConformity with other records.
Check castings and other computations inpetty cash book.
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Internal Control overCheque Payments
Internal control objectives are:To ensure that all cheque payments areactually due and valid.To prevent unauthorized payments.To ensure proper record of payments
To ensure that correct accounts aredebited in respect of cheque payments.
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Internal Control Measures
Unused cheques should be kept underlock and key.Cheque payment voucher should beprepared for each payment requiringverification of expense and authorizationfor payment.
All supporting documents must beattached to payment voucher it ispresented for authorization.
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Internal Control Measures 2
Once cheque is prepared, cheque numbershould be recorded on payment voucherand all supporting documents.
Payment approval and cheque signingauthority limits should be clearly defined.
As far as possible all cheques should be
issued as crossed cheques.Blank or post dated cheques should neverbe signed.
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Internal Control Measures 3
Payment procedure should be formalized. A cheque payments schedule is oftenhelpful, e.g. all usual creditors should bepaid on say 15 th of each month.Full advantage should taken of creditand/or discount terms.
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Internal Control Questionnaire
Internal Control Questionnaire should coverthe following aspects of cheque payments:Payment approval process.Cheques writing process.Recording of payments
Bank reconciliation statement
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Audit of Payment Approval
Select some payment vouchers and verify: All supporting documents like invoices, goodreceived notes, etc. are there.
If payment relates to another record, like payrollor petty cash book, compare the paymentvoucher with that record.
Officers with due authority have approved them.Paid documents have been suitably marked withcheque number to avoid double payment.
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Audit of Cheques Issue
Check that cheques have been issued onlyafter due approval of payment voucher.Cheques serial number and date relate tothe appropriate time.Cheque writer does not handle any othercash.Cancelled or spoilt cheques are inpossession of an authorized officer.
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Audit of Cash Book(Payment side only)
Test check additions and balances broughtor carried forward.Test check posting to nominal or creditorsledger.Check transfer to other cash books likepetty cash book.
Compare with bank reconciliationstatement. Verify contra entries in detail.
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Thank youDr S A Butt