Chapter 6 Flashcards
Which Assertions Map to the Control?
Two employees open the mail, remittance advice is received, and checks are properly endorsed.
Existence
Stop someone from putting in a check and applying it to someone else’s account. Whatever was recorded actually did occur.
Which Assertions Map to the Control?
A listing of all checks is being prepared and compared to the total of the deposit ticket for the total of checks.
Valuation/Accuracy
Which Assertions Map to the Control?
The total amount of the deposit listed in the bank statement was recorded in the proper period.
Cutoff
Proper Period!!
Presentation/Disclosure:
Is current asset sitting in fixed asset? Is it in the wrong spot on the balance sheet classifications? Also… footnotes
Which Assertions Map to the Control?
Checks are not printed until voucher packets are prepared.
Existence
If this control was broken what would happen? The company could make payment that shouldn’t have been made
Which Assertions Map to the Control?
An employee compares amounts on printed checks with voucher packets prior to submission for signature.
Valuation
Which Assertions Map to the Control?
Only authorized signers are permitted to sign checks.
Existence Occurrence
If you are authorized to sign a check you could create a transaction that shouldn’t have occurred
Which Assertions Map to the Control?
Checks are prenumbered and accounted for.
Completeness
If you realize you have a check that is missing, you have a completeness issue
Cash is relevant to many accounting cycles…
- Sell a good, receive cash
- Enter into a lease, pay cash
- Purchase raw materials, pay cash
Cash Receipt Journal
Debits to cash
Cash Disbursements Journal
Credits to cash
Bank reconciliations
Documents the difference between the cash balance in the general ledger and at the bank(s)
Bank Statements
document of transactions that occurred from the bank’s perspective
Cancelled checks
Scanned images are typically included with bank statements
Used to test for payees, amounts, and dates
When is an assertion considered relevant?
If there is a reasonable possibility it could contain a material misstatement
Inherent risks of Cash
- Cash is often needed to pay debts and invest in the future
- Cash is highly liquid, easily transportable, and not easily identifiable
What are typically relevant assertions for cash?
Existence: management has incentive to show more cash than they really have
Valuation: especially important when a company operates in multiple jurisdictions
Presentation and disclosure: banks have restricted cash balance figures
Treasurer’s Office
function that handles cash (receiving the cash, managing the relationships with banks, determining write-offs)
Controller’s Office
strictly doing the journal entries (system access to creating financials, record debits/credits to customer accounts)
Treasurer and controller should be…
seperate from a control perspective
When cash comes through the door what is the first thing you should do?
Write it down! Remittance List
Individual Customer Accounts Subsidiary
Individual level
Accounts Recievable Control
Summary level
Cash Receipts Process Activities:
- Receive cash and remittance advice in mail
- Prepare remittance listing
- Enter total from remittance listing (or remittance advice) in cash receipts journal
- Prepare deposit slip and deposit cash receipts in bank (intact and daily)
- Record update to subsidiary accounts receivable using remittance advice
- Reconcile remittance listing, subsidiary accounts receivable, and deposit slip daily
Remittance Advice
Account number, your name, how much you owe
Helps the company know who the payment is for
Cash Disbursements Process Activities:
- Voucher packet matched prior to cash disbursement authorization
- Vouchers are marked PAID to show they have been processed and are not paid a second time
- The debit to accounts payable and credit to cash should be done by someone without access to the check-writing function
Voucher packet
Purchase requisition, purchase order, receiving report, invoice
Disbursements are typically authorized by…
the accounts payable department
Cash - Existence
What could go wrong?
The cash balance may not exist in the company’s bank accounts
Cash - Existence
Internal Control
The CFO performs a detailed review of the bank reconciliation on a monthly basis
Cash - Existence
Possible test of control
Randomly select 3 months, look for evidence of the CFO’s detailed review for each bank reconciliation
Reperform a Bank Reconcilliation
Balance per bank
+ Deposits-in-transit
- Outstanding checks
+/- Debit/Credi Memos
= Balance per books
Cash - Existence
Possible substantive test
Randomly select 3 months, reperform the bank reconciliation
How should you get the balance per bank?
Confirm directly with the bank
Deposits-in-transit
- care a lot about existence
Vouch TO cutoff bank statment
Trace FROM cash receipts journal
Outstanding Checks
- care a lot about completeness
Trace checks cleared FROM cutoff bank statment
Vouch TO cash disbursements journal
Debit/Credit Memos
Inspect bank credit/debit memo and audit for reasonableness. Examine relevant supporting documentation
Balance per books
Foot the entire reconciliation for mathematical accuracy
Trace the amount to the trial balance
Cutoff bank statement
A partial period bank statement
Does a credit or debit memo increase your personal cash and which one would increase the bank’s cash?
Credit memo: increases your personal cash
Debit memo: increases the bank’s cash
How should you think about debit and credit memos to not get confused?
Go buy clothes, you return something, the cashier says “I’m going to credit your account”
Think about it from the bank’s perspective (they are issuing the memo)
Foot
Add everything up to make sure they add up correctly
What would you test for Deposit in Transit and Outstanding Checks?
- Deposits in transit (existence is more important) Traced from reconcilliation
- Outstanding checks (completeness is more important) Traced from cut-off bank statement
Standard Bank Confirmation Inquiry
- Rare for a bank to respond to a paper request for confirmation
- Must be mailed under auditor’s own control
Electronic Confirmation Requests
- Many banks now only complete confirmation requests electronically through a third-party intermediary
- Used to confirm deposit balances and loan balances (used for existence and completeness assertions for liabilities)
What assertion is relevant to confirmations?
Existence
Cash - Valuation
What could go wrong?
The cash balance that is held in foreign countries may not have been translated properly
Cash - Valuation
Internal Control
The treasurer reviews the cash translation adjustment calculation monthly and independently checks that the appropriate spot rate has been used for each foreign currency
Cash - Valuation
Possible Test of Control
Randomly select 3 months, look for evidence of the treasurer’s check of spot rate
Cash - Valuation
Possible Substantive Test
Randomly select 3 months of cash translation adjustment calculations and match each foreign currency spot rate to rates from third-party pricing services
Which of the following would the auditor consider to be an incompatible operation if the cashier receives remittances?
a) The cashier prepares the daily deposit
b) The cashier makes the daily deposit at a local bank
c) The cashier posts the receipts to the accounts receivable subsidiary ledger
d) The cashier endorses the checks
c) The cashier posts the receipts to the accounts receivable subsidiary ledger
Custody and reporting function should be separate
Which of the following is least indicative of fraudulent activity?
a) Numerous cash refunds have been made to different people at the same post office box address
b) Internal auditors cannot locate several credit memos to support reductions of customers’ balances
c) The bank reconciliation has no outstanding checks or deposits older than 15 days
d) Three people were absent the day the auditors handed out the paychecks and have not picked them up four weeks later
c) The bank reconciliation has no outstanding checks or deposits older than 15 days
No outstanding checks or deposits older than 15 days is a great thing
Immediately upon receipt of cash, a responsible employee should
a) Record the amount in the cash receipts journal.
b) Prepare a remittance listing.
c) Update the subsidiary accounts receivable records.
d) Prepare a deposit slip in triplicate
b) Prepare a remittance listing.
