23 - 1©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Audit of Cash Audit of Cash BalancesBalances
Chapter 23Chapter 23
23 - 2©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Learning Objective 1Learning Objective 1
Show the relationship of cashShow the relationship of cash
in the bank to the variousin the bank to the various
transaction cycles.transaction cycles.
23 - 3©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Relationships of Cash in the Bank Relationships of Cash in the Bank and Transaction Cyclesand Transaction Cycles
Cash in BankCash in Bank
Capital Stock – CommonCapital Stock – Common
Paid-in Capital in ExcessPaid-in Capital in Excessof Par – Commonof Par – Common
RedemptionRedemptionof stockof stock
RedemptionRedemptionof stockof stock
Issue ofIssue ofstockstock
Issue ofIssue ofstockstock
Dividends PayableDividends Payable
Payment ofPayment ofdividendsdividends
Capital Acquisition And Repayment CycleCapital Acquisition And Repayment Cycle
23 - 4©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Relationships of Cash in the Bank Relationships of Cash in the Bank and Transaction Cyclesand Transaction Cycles
Acquisition and Payment CycleAcquisition and Payment Cycle
Cash in BankCash in Bank
Accounts PayableAccounts PayablePaymentPayment
23 - 5©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Relationships of Cash in the Bank Relationships of Cash in the Bank and Transaction Cyclesand Transaction Cycles
Sales and Collection CycleSales and Collection Cycle
Cash in BankCash in Bank
Accounts ReceivableAccounts Receivable
Gross SalesGross SalesCashCashsalessales
CashCashreceiptsreceipts
Cash Discounts TakenCash Discounts Taken
23 - 6©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Relationships of Cash in the Bank Relationships of Cash in the Bank and Transaction Cyclesand Transaction Cycles
Payroll and Personnel CyclePayroll and Personnel Cycle
Cash in BankCash in Bank
Accrued Wages, Salaries,Accrued Wages, Salaries,Bonuses, and CommissionsBonuses, and Commissions
Withheld Income TaxesWithheld Income Taxesand Other Deductionsand Other Deductions
PaymentPayment
PaymentPayment
Accrued PayrollAccrued PayrollTax ExpenseTax Expense
PaymentPayment
23 - 7©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Cash in the Bank and Transaction Cash in the Bank and Transaction CyclesCycles
• Failure to bill a customerFailure to bill a customer• Billing a customer at a lower price thanBilling a customer at a lower price than called for by company policycalled for by company policy• A defalcation of cash by interception ofA defalcation of cash by interception of cash receipts from customers beforecash receipts from customers before they are recorded, with the accountthey are recorded, with the account charged off as a bad debtcharged off as a bad debt
Misstatements which may not be discoveredMisstatements which may not be discoveredas a part of the audit of the bank reconciliation:as a part of the audit of the bank reconciliation:
23 - 8©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Cash in the Bank and Transaction Cash in the Bank and Transaction CyclesCycles
• Duplicate payment of a vendor’s invoiceDuplicate payment of a vendor’s invoice• Improper payments of officers’ personalImproper payments of officers’ personal expendituresexpenditures• Payment for raw materials that were notPayment for raw materials that were not receivedreceived• Payment to an employee for more hoursPayment to an employee for more hours workedworked• Payment of interest to a related party forPayment of interest to a related party for an amount in excess of the going ratean amount in excess of the going rate
23 - 9©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Cash in the Bank and Transaction Cash in the Bank and Transaction CyclesCyclesMisstatements which are normally discoveredMisstatements which are normally discoveredas a part of the tests of a bank reconciliation.as a part of the tests of a bank reconciliation.
• Failure to include a check that has notFailure to include a check that has not cleared the bank, even though it has beencleared the bank, even though it has been recorded in the cash disbursements journalrecorded in the cash disbursements journal• Cash received by the client subsequent toCash received by the client subsequent to the balance sheet date but recorded asthe balance sheet date but recorded as cash receiptscash receipts in the current yearin the current year
23 - 10©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Cash in the Bank and Transaction Cash in the Bank and Transaction CyclesCycles
• Deposits recorded as cash receipts nearDeposits recorded as cash receipts near the end ofthe end of the year, deposited in the bankthe year, deposited in the bank in the same month, and included in the bankin the same month, and included in the bank reconciliation as areconciliation as a deposit in transitdeposit in transit• Payments on notes payable debited directlyPayments on notes payable debited directly to theto the bank balance by the bank but notbank balance by the bank but not entered in the client’s recordsentered in the client’s records
23 - 11©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Cash in the Bank and Transaction Cash in the Bank and Transaction CyclesCycles• Deposits received by the bank on behalfDeposits received by the bank on behalf of theof the company from credit card agenciescompany from credit card agencies and other vendors making paymentsand other vendors making payments electronically, but not recorded inelectronically, but not recorded in the client’s records.the client’s records.
23 - 12©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Learning Objective 2Learning Objective 2
Identify the major types of cashIdentify the major types of cash
accounts maintained byaccounts maintained by
business entities.business entities.
23 - 13©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
General cash accountGeneral cash account Imprest payroll accountImprest payroll account Branch bank accountBranch bank account Imprest petty cash fundImprest petty cash fund Cash equivalentsCash equivalents
Types of Cash AccountsTypes of Cash Accounts
23 - 14©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Relationship of General Cash to Relationship of General Cash to Other Cash AccountsOther Cash AccountsBranch BankBranch Bank
AccountAccount
CashCashEquivalentsEquivalents
Imprest PayrollImprest PayrollAccountAccount
Imprest PettyImprest PettyCash FundCash Fund
GeneralGeneralCashCash
23 - 15©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Learning Objective 3Learning Objective 3
Design and perform audit testsDesign and perform audit tests
of the general cash account.of the general cash account.
23 - 16©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Identify client business risks affecting cash inIdentify client business risks affecting cash inbank.bank.
Methodology for Designing TestsMethodology for Designing Testsof Details of Balances for A/Rof Details of Balances for A/R
Phase IPhase I
Set tolerable misstatement and assess inherentSet tolerable misstatement and assess inherentrisk for cash in bank.risk for cash in bank.
Assess control risk for cash in bank.Assess control risk for cash in bank.
23 - 17©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Methodology for Designing TestsMethodology for Designing Testsof Details of Balances for A/Rof Details of Balances for A/R
Design and perform tests of controls andDesign and perform tests of controls andsubstantive tests of transactions forsubstantive tests of transactions forseveral cycles.several cycles.
Phase IIPhase II
23 - 18©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Methodology for Designing TestsMethodology for Designing Testsof Details of Balances for A/Rof Details of Balances for A/R
Design and perform analytical procedures forDesign and perform analytical procedures forcash in bank balance.cash in bank balance.
Phase IIIPhase III
TimingTimingItems toItems toselectselect
SampleSamplesizesize
AuditAuditproceduresprocedures
Design tests of details of cash in bank balanceDesign tests of details of cash in bank balanceto satisfy balance-related audit objectives.to satisfy balance-related audit objectives.
23 - 19©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Audit Schedule for a Bank Audit Schedule for a Bank ReconciliationReconciliation
Clawson IndustriesClawson IndustriesBank ReconciliationBank Reconciliation
12/31/0512/31/05
ScheduleSchedule A2A2 DateDatePrepared byPrepared by ClientClient DEDDED 1/10/051/10/05Approved byApproved by SWSW 1/18/051/18/05
Account 101 – General account, First National BankAccount 101 – General account, First National Bank
Balance per bankBalance per bank $109,713$109,713Add:Add: Deposits in transitDeposits in transit 21,117 21,117Deduct: Outstanding checksDeduct: Outstanding checks – 87,462– 87,462Other reconciling items: Bank errorOther reconciling items: Bank error – 15,200 – 15,200Balance per bank, adjustedBalance per bank, adjusted $ 28,168$ 28,168
Balance per books before adjustmentsBalance per books before adjustments $ 32,584$ 32,584Adjustments:Adjustments: Unrecorded bank service chargeUnrecorded bank service charge 216 216
NSFNSF 4,2004,200 – 4,416 – 4,416Balance per books, adjustedBalance per books, adjusted $ 28,168$ 28,168
23 - 20©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Balance-Related Objectives: Balance-Related Objectives: General Cash in the BankGeneral Cash in the Bank
Detail tie-inDetail tie-in CutoffCutoff PresentationPresentationand disclosureand disclosure
ExistenceExistence CompletenessCompleteness AccuracyAccuracy
23 - 21©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Receipt of a bankReceipt of a bankconfirmationconfirmation
Receipt of a cutoffReceipt of a cutoffbank statementbank statement
Tests of the bankTests of the bankreconciliationreconciliation
Existence, Accuracy, and Existence, Accuracy, and CompletenessCompleteness
23 - 22©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Types of Audit Tests Used for Types of Audit Tests Used for General Cash in BankGeneral Cash in Bank
Cash in BankCash in Bank
Ending balanceEnding balance
TOC-TTOC-T + + TOC-BTOC-B + + STOTSTOT + + APAP + TDB + TDB= Sufficient competent evidence per GAAS= Sufficient competent evidence per GAAS
Audited byAudited byTOC-TTOC-T,, STOTSTOT, and , and APAP
Beginning balanceBeginning balance
Cash receiptsCash receipts Cash disbursementsCash disbursements
Audited byAudited byTOC-TTOC-T,, STOTSTOT, and , and APAP
Audited byAudited byTOC-BTOC-B,, APAP, and , and TDBTDB
23 - 23©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Learning Objective 4Learning Objective 4
Recognize when to extend auditRecognize when to extend audit
tests of the general cash accounttests of the general cash account
to test further for material fraud.to test further for material fraud.
23 - 24©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Extended Tests of the Bank Extended Tests of the Bank ReconciliationReconciliation
When the auditor believes that the year-end bankWhen the auditor believes that the year-end bankreconciliation may be intentionally misstated,reconciliation may be intentionally misstated,it is appropriate to perform extended testsit is appropriate to perform extended testsof the year-end bank reconciliation.of the year-end bank reconciliation.
In addition to these tests, the auditor must alsoIn addition to these tests, the auditor must alsocarry out procedures subsequent to the end ofcarry out procedures subsequent to the end ofthe year with the use of the bank cutoff statement.the year with the use of the bank cutoff statement.
23 - 25©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
• All recorded cash receipts were deposited.All recorded cash receipts were deposited.• All deposits in the bank were recorded inAll deposits in the bank were recorded in
the accounting records.the accounting records.• All recorded cash disbursements wereAll recorded cash disbursements were
paid by the bank.paid by the bank.• All amounts that were paid by the bankAll amounts that were paid by the bank
were recorded.were recorded.
Proof of CashProof of Cash
23 - 26©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
– – the balance on the bank statement withthe balance on the bank statement with the general ledger balance at thethe general ledger balance at the beginning of the proof-of-cash periodbeginning of the proof-of-cash period
– – cash receipts deposited per the bank withcash receipts deposited per the bank with the cash receipts journal for a given periodthe cash receipts journal for a given period
Proof of CashProof of Cash
23 - 27©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
– – cancelled checks clearing the bank withcancelled checks clearing the bank with the cash disbursement journal for athe cash disbursement journal for a given periodgiven period
– – the balance on the bank statement withthe balance on the bank statement with the general ledger balance at the endthe general ledger balance at the end of the proof-of-cash periodof the proof-of-cash period
Proof of CashProof of Cash
23 - 28©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
The accuracy of the information on theThe accuracy of the information on theinterbank transfer schedule should be verified.interbank transfer schedule should be verified.
The interbank transfers must be recorded inThe interbank transfers must be recorded inboth the receiving and disbursing banks.both the receiving and disbursing banks.
The date of the recording of the disbursementsThe date of the recording of the disbursementsand receipts for each transfer must be inand receipts for each transfer must be inthe same fiscal year.the same fiscal year.
Tests of Interbank TransfersTests of Interbank Transfers
23 - 29©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Disbursements on the interbank transferDisbursements on the interbank transferschedule should be correctly included in orschedule should be correctly included in orexcluded from year-end bank reconciliationexcluded from year-end bank reconciliationas outstanding checks.as outstanding checks.
Tests of Interbank TransfersTests of Interbank Transfers
Receipts on the interbank transfer scheduleReceipts on the interbank transfer scheduleshould be correctly included in or excludedshould be correctly included in or excludedfrom year-end bank reconciliations asfrom year-end bank reconciliations asdeposits in transit.deposits in transit.
23 - 30©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Learning Objective 5Learning Objective 5
Design and perform audit tests of Design and perform audit tests of
the imprest payroll bank account.the imprest payroll bank account.
23 - 31©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Typically, the only reconcilingTypically, the only reconcilingitems are outstanding checks.items are outstanding checks.
Audit of the Imprest Payroll Bank Audit of the Imprest Payroll Bank AccountAccount
Paycheck for
Dept. of Treasurer
John Doe
Paycheck for
Date
Dept. of Treasure
r
Jane Doe
Date
23 - 32©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Learning Objective 6Learning Objective 6
Design and perform audit testsDesign and perform audit tests
of imprest petty cash.of imprest petty cash.
23 - 33©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Petty cash is a unique account becausePetty cash is a unique account becauseit is often immaterial in amount, yet it isit is often immaterial in amount, yet it isverified onverified on many audits.many audits.
The account is verified primarily becauseThe account is verified primarily becauseof the potential for defalcation and theof the potential for defalcation and theclient’s expectation of an audit reviewclient’s expectation of an audit revieweven when the amount is immaterial.even when the amount is immaterial.
Petty CashPetty Cash
23 - 34©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Audit tests for petty cashAudit tests for petty cash
Internal controls over petty cashInternal controls over petty cash
Audit of Imprest Petty CashAudit of Imprest Petty Cash
23 - 35©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
End of Chapter 23End of Chapter 23