AUDIT OF CASH AND BANK BALANCES

Question 1

What are cash receipts in the General Cash Account?

Answer 1

Deposits of money coming into the company

Question 2

What is the General Cash Account used for?

Answer 2

It records most of the company’s cash transactions

Question 3

What are cash disbursements in the General Cash Account?

Answer 3

Withdrawals or payments made by the company for expenses, asset purchases, or other payments.

Question 4

What is an impress payroll account?

Answer 4

A special bank account used only for payroll payments at fixed amount

Question 5

What are the benefits of using an impress payroll account?

Answer 5

It ensures that only payroll transactions affect the account and maintains a consistent balance.

Question 6

What is an impress disbursement account?

Answer 6

A bank account used for various company disbursements, with separate receipts and disbursements processes.

Question 7

What are the benefits of using an impress disbursement account?

Answer 7

It improves control over disbursements

Question 8

What is the purpose of branch bank accounts?

Answer 8

To build local banking relationships

Allow branches to manage their own cash flow

Question 9

What is an imprest petty cash fund?

Answer 9

A small, fixed amount of cash kept on hand for minor expenses

Question 10

What are purchase cards (P-Cards)?

Answer 10

Credit-like cards used for small or miscellaneous purchases

Question 11

What are the advantages of using purchase cards (P-Cards)?

Answer 11

They offer convenience, reduce the need for physical cash, and provide enhanced control through electronic monitoring and restrictions.

Question 12

What is the primary focus of managing an imprest petty cash fund?

Answer 12

Ensuring proper internal controls, such as secure storage, tracking expenditures, and reconciling transactions.

Question 13

What are cash equivalents?

Answer 13

Short-term, highly liquid investments easily convertible to cash with minimal risk of value change. Examples include time deposits, certificates of deposit (CDs), and money market funds.

Question 14

How are cash equivalents reported in financial statements?

Answer 14

They are included with the general cash if they meet the criteria of being short-term, readily convertible to cash, and with minimal risk of value change.

Question 15

What are the dual functions of auditing cash?

Answer 15

1) Audit of cash transactions, including verifying reconciliation and testing transactions.

2) Ensuring accuracy in recording and managing cash inflows and outflows.

Question 16

What issues might not be detected by a bank reconciliation?

Answer 16

1) Failure to bill a customer.
2) Embezzlement.
3) Duplicate payments.
4) Improper payments.
5) Unreceived raw materials.
6) Payroll fraud.
7) Excessive interest payments.

Question 17

What types of audits help detect issues not found by bank reconciliation?

Answer 17

1) Sales and Collection Cycle Audit.
2) Acquisition and Payment Cycle Audit.
3) Payroll and Personnel Cycle Audit.
4) Capital Acquisition and Repayment Cycle Audit.

Question 18

What typical issues are detected by a bank reconciliation?

Answer 18

1) Uncleared checks.
2) Subsequent cash receipts.
3) Deposits in transit.
4) Unrecorded payments.

Question 19

What are the balance-related audit objectives for the general cash account?

Answer 19

1) Existence: Verify the cash balance exists.
2) Completeness: Ensure all cash transactions and balances are included.
3) Accuracy: Confirm the recorded amount is correct.
4) Cutoff: Check transactions are recorded in the correct period.
5) Detail Tie-In: Ensure subsidiary records match the general ledger.

Question 20

Which audit objectives are generally not a concern for cash accounts?

Answer 20

Rights and Classification and Realizable Value are generally not a concern for cash.

Question 21

What are some client business risks related to cash?

Answer 21

1) Inappropriate Cash Management: Poor handling of funds.
2) Funds Held in Trust: Mismanagement of funds held on behalf of others.

Question 22

What risks are associated with cash equivalents and investments?

Answer 22

Risks from market fluctuations and poor investment strategies

Question 23

Why are cash transactions usually very material despite the cash balance itself not always being material?

Answer 23

he transactions affecting the cash balance are highly material, which need a close look into it.

Question 24

What are the focus areas for auditors when auditing cash due to high inherent risk?

Answer 24

Existence
Completeness
Accuracy

Question 25

What are common risks associated with cash management and how can they be mitigated?

Answer 25

Risks: Theft, misappropriation, errors in recording, and fraudulent transactions.

Mitigation Controls:
Segregation of duties.
Proper authorization of transactions.
Independent bank reconciliations.
Review of supporting documentation.

Question 26

Importance of Timely and Independent Bank Reconciliation

Answer 26

Independence: Ensures objectivity and reduces risk of manipulation.

Timeliness: Helps detect and correct errors quickly, ensuring effective control measures.

Question 27

What is the purpose of obtaining a cutoff bank statement?

Answer 27

To verify that all reconciling items (e.g., deposits in transit, outstanding checks) are accurately accounted for and to ensure transactions are recorded in the correct period.

Question 28

What are common reconciling items in a bank reconciliation?

Answer 28

Outstanding checks, deposits in transit, bank errors, and unrecorded transactions.

Question 29

Who should prepare the bank reconciliation to ensure it is effective?

Answer 29

An independent person should prepare the bank reconciliation monthly.

Question 30

What are some common fraud detection procedures for cash receipts?

Answer 30

Confirm accounts receivable, detect lapping, review general ledger entries, compare orders and receipts, and examine approvals for bad debts and sales returns.

Question 31

What is the first step in performing extended tests of the year-end bank reconciliation?

Answer 31

Verify the November bank reconciliation to ensure items are correctly carried over to December.

Question 32

What additional procedures should be performed with a bank cutoff statement?

Answer 32

Obtain a bank statement for a few days after year-end, foot the lists of transactions, verify balances, and review transactions for correct recording.

Question 33

Why is it important to obtain and review a cutoff statement?

Answer 33

To check that transactions are recorded in the correct period

Question 34

List the four primary objectives of a proof of cash.

Answer 34

Ensure all recorded cash receipts were deposited.

Ensure all deposits in the bank were recorded.

Ensure all recorded cash disbursements were paid by the bank.

Ensure all amounts paid by the bank were recorded.

Question 35

What are the substantive tests performed in a proof of cash?

Answer 35

Verify that recorded receipts were deposited.
Confirm that recorded disbursements were paid by the bank.

Question 36

What is the limitation of a proof of cash?

Answer 36

It does not detect fraud involving improper amounts or alterations in checks and receipts, nor does it uncover theft or misstatements in transaction amounts.

Question 37

What is kiting in the context of financial fraud?

Answer 37

Kiting is a fraudulent practice where an individual covers a theft of cash by making interbank transfers and improperly recording these transactions, resulting in an inflated cash balance by recording the same amount in two different accounts.

Question 38

How does kiting work?

Answer 38

A check is drawn from one bank account (Bank A) and deposited into another account (Bank B) just before the balance sheet date. The transfer is timed to ensure the check doesn’t clear Bank A until after the end of the period, thus inflating the cash balance.

Question 39

What is the purpose of creating an interbank transfer schedule in detecting kiting?

Answer 39

The schedule lists all interbank transfers made a few days before and after the balance sheet date to help auditors verify the accuracy and inclusion of these transactions in both bank accounts and accounting records.

Question 40

What should auditors verify on the interbank transfer schedule?

Answer 40

Accuracy: Compare amounts and dates with cash disbursements and receipts records and bank statements.

Inclusion: Ensure all relevant transfers are included.

Question 41

How can auditors check the recording of interbank transfers in both banks?

Answer 41

Ensure that each interbank transfer is recorded in both the sending and receiving banks. For example, if $10,000 is transferred from Bank A to Bank B, both banks should reflect this transaction.

Question 42

What should be checked in bank reconciliations to detect kiting?

Answer 42

Outstanding Checks: Ensure disbursements on the interbank transfer schedule are included as outstanding checks in the year-end bank reconciliation.

Deposits in Transit: Ensure receipts are included as deposits in transit in the year-end bank reconciliation.

Question 43

What are the key steps in verifying interbank transfers for kiting?

Answer 43

Create and Review Schedule: List interbank transfers near the balance sheet date.

Verify Information: Check amounts and dates against records and bank statements.

Check Recording: Ensure transactions are recorded in both accounts and within the same fiscal year.

Verify Reconciliation: Confirm transfers are correctly handled in bank reconciliations.