15 Cash and bank Flashcards
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what is the Financial statement assertion objective for Existence
Recorded cash balances exist at the period end
what is the Financial statement assertion objective for Completeness
Recorded cash balances include the effects of all transactions that have occurred
what is the Financial statement assertion objective for Rights and obligations
The entity has legal title to all cash balances shown at the period end
what is the Financial statement assertion objective for Accuracy, valuation and allocation
Recorded cash balances are realisable at the amounts stated
what is the Financial statement assertion objective for Presentation
Disclosures relating to cash are adequate and in accordance with accounting standards and legislation
How are bank balances confirmed? what assertions do they cover
Bank balances are usually confirmed directly with the bank in question.
The audit of bank balances will need to cover completeness, existence, rights and obligations and valuation. All of these assertions can be audited directly by obtaining third-party confirmations from the client’s banks and reconciling these with the accounting records, having regard to cut-off.
The audit objectives linking these assertions are as follows:
Recorded cash balances exist at the year end (existence). Recorded cash balances include the effects of all transactions that occurred (completeness). Year-end transfers are recorded in the correct period (cut-off). Recorded balances are realisable at the amounts stated (accuracy, valuation and allocation). The entity has legal title to all cash balances shown at the year end (rights and obligations
The auditors should decide from which bank or banks to request confirmation, having regard to such matters as
The auditors should decide from which bank or banks to request confirmation, having regard to such matters as size of balance, volume of activity, degree of reliance on internal control and materiality within the context of the financial statements
The auditors should determine which of the following approaches is the most appropriate in seeking confirmation of balances or other information from the bank:
Listing balances and other information, and requesting confirmation of their accuracy and completeness, or Requesting details of balances and other information, which can then be compared with the requesting client’s records
What is the procedure for content of confirmation requests?
(a) The banks will require explicit written authority from their client to disclose the information requested. (b) The auditors’ request must refer to the client’s letter of authority and the date thereof. Alternatively it may be countersigned by the client or it may be accompanied by a specific letter of authority. (c) In the case of joint accounts, letters of authority signed by all parties will be necessary. (d) Such letters of authority may either give permission to the bank to disclose information for a specific request or grant permission for an indeterminate length of time. (e) The request should reach the branch manager at least one month in advance of the client’s year end and should state both that year-end date and the previous year-end date. (f) The auditors should themselves check that the bank response covers all the information in the standard and other responses.
Care must be taken to ensure that there is no window dressing, by auditing cut-off carefully. Window dressing in this context is usually manifested as an attempt to overstate the liquidity of the company by:
(a) Keeping the cash book open to take credit for remittances actually received after the year end, thus enhancing the balance at bank and reducing receivables (b) Recording cheques paid in the period under review which are not actually dispatched until after the year end, thus decreasing the balance at bank and reducing liabilities
AUDIT PLAN: BANK (to confirm completeness, valuation, existence, cut-off and presentation): Give 3 examples
Obtain standard bank confirmations from each bank with which the client conducted business during the audit period. Reperform arithmetic of bank reconciliation. Trace cheques shown as outstanding from the bank reconciliation to the cash book prior to the year end and to the after-date bank statements and obtain explanations for any large or unusual items not cleared at the time of the audit.
AUDIT PLAN: BANK (to confirm completeness, valuation, existence, cut-off and presentation): Give 3 examples part 2
Compare cash book(s) and bank statements in detail for the last month of the year, and match items outstanding at the reconciliation date to bank statements. Review bank reconciliation previous to the year-end bank reconciliation and test whether all items are cleared in the last period or taken forward to the year-end bank reconciliation. Obtain satisfactory explanations for all items in the cash book for which there are no corresponding entries in the bank statement and vice versa by discussion with finance staff.
AUDIT PLAN: BANK (to confirm completeness, valuation, existence, cut-off and presentation): Give 3 examples part 3
Verify contra items appearing in the cash books or bank statements with original entry. Verify by inspecting paying-in slips that uncleared bankings are paid in prior to the year end. Examine all lodgements in respect of which payment has been refused by the bank; ensure that they are cleared on representation or that other appropriate steps have been taken to effect recovery of the amount due.
AUDIT PLAN: BANK (to confirm completeness, valuation, existence, cut-off and presentation): Give 3 examples part 4
Verify balances per the cash book according to the bank reconciliation by inspecting cash book, bank statements and general ledger. Verify the bank balances with reply to standard bank letter and with the bank statements. Inspect the cash book and bank statements before and after the year end for exceptional entries or transfers which have a material effect on the balance shown to be in-hand.
AUDIT PLAN: BANK (to confirm completeness, valuation, existence, cut-off and presentation): Give 3 examples part 5
Identify whether any accounts are secured on the assets of the company by discussion with management. Consider whether there is a legal right of set-off of overdrafts against positive bank balances. Determine whether the bank accounts are subject to any restrictions by enquiries with management. Review draft accounts to ensure that disclosures for bank are complete and accurate and in accordance with accounting standards
Cash balances should be verified if there are m____ or i______are suspected
Cash balances should be verified if there are material or irregularities are suspected
What are auditors most concerned about?
Auditors will be concerned that the cash exists, is complete, and belongs to the company (rights and obligations) and is stated at the correct value
Planning decisions will need to be recorded on the current audit file, including:
The precise time of the count(s) and location(s) The names of the audit staff conducting the counts The names of the client staff intending to be present at each location
What are the following matters which apply to the count itself?
(a) All cash/petty cash books should be written up to date in ink (or other permanent form) at the time of the count. (b) All balances must be counted at the same time. (c) All negotiable securities must be available and counted at the time the cash balances are counted. (d) At no time should the auditors be left alone with the cash and negotiable securities. (e) All cash and securities counted must be recorded on working papers subsequently filed on the current audit file. Reconciliations should be prepared where applicable (for example, imprest petty cash float).
AUDIT PLAN: CASH COUNT (to confirm completeness, valuation, existence and presentation) : Describe some of the items in a cash count.
Count cash balances held and agree to petty cash book or other record: – Count all balances simultaneously – All counting to be done in the presence of the individuals responsible – Enquire into any IOUs or cashed cheques outstanding for a long period of time Obtain certificates of cash-in-hand from responsible officials. Confirm that bank and cash balances as reconciled above are correctly stated in the financial statements.
AUDIT PLAN: CASH COUNT (to confirm completeness, valuation, existence and presentation) : Describe some of the items in a cash count follow up
Obtain certificates of cash-in-hand as appropriate. Verify unbanked cheques/cash receipts have subsequently been paid in and agree to the bank reconciliation by inspection of the relevant documentation. Ensure IOUs and cheques cashed for employees have been reimbursed. Review whether IOUs or cashed cheques outstanding for unreasonable periods of time have been provided for. Verify the balances as counted are reflected in the accounts (subject to any agreed amendments because of shortages and so on) by inspection of draft financial statements.
