S13.1 - Cash Ch16 Flashcards
What classifies as cash reported in the F/S?
Currency on hand and cash on deposit in bank accounts, including certificates of deposit, time deposits, and savings accounts
What classifies as cash equivalents reported in the F/S?
Short-term, highly liquid investments that are readily convertible to cash or so near their maturity that there is little risk of change in their value.
Examples: Treasury bills and money market funds
It is frequently combined with cash for presentation on the F/S
What are affected by controls over cash?
The reliability of the entity’s controls over cash affects:
The nature and extent of the auditor’s tests of details
Substantive Analytical Procedures – Cash
What is the auditor’s use of substantive analytical procedures for auditing cash typically limited to? (2)
And why?
- Comparisons with prior years’ cash balances
- Comparisons with budgeted amounts
Because cash accounts have a residual nature
Substantive Analytical Procedures – Cash
How can the limited applicability of substantive analytical procedures on cash be offsetted? (2)
(1) More tests of controls and/or substantive tests of transactions for cash receipts and disbursements
(2) More tests of the entity’s bank reconciliations.
Test of Details of Balances for Cash
Existence
What is an example of tests of details account balances?
Confirm bank account balance with the financial institution
Example Tests of Details Account Balances for Cash
Completeness and accuracy, valuation, and allocation (1 main, split in 5)
What is an example of tests of details account balances?
Test the bank reconciliation for each account:
- Reconciliation and outstanding cheque listing
- Trace balances per book to the general ledger
- Obtain standard bank confirmation, trace the balance per bank to the bank reconciliation
- Obtain cutoff bank statement
- Trace deposits in transit, outstanding cheques, and other reconciling items to cutoff bank statements
Example Tests of Details Account Balances - Cash
Completeness and accuracy, valuation, and allocation
In addition to bank reconciliation for each account, what should the auditor do if the control risk is set at high or fraud is suspected? (3)
- Perform extended bank reconciliation procedures
- Perform proof of cash
- Test for kiting (Kiting is fraud that overstates cash by recording a bank deposit before the withdrawal clears from the original account. Auditors test it by tracing interbank transfers across period-end)
To audit a cash account, the auditor should obtain these 3 items:
Copy of bank reconciliation (doc)
Bank confirmation (yes this is the amount)
Cutoff bank statement
Cutoff bank statement
What period is normally covered by the cutoff bank statement?
The 7- to 10-day period after the date on which the bank account is reconciled.
For reconciliation purposes, any item should have cleared the entity’s bank account during the 7- to 10-day period.
What are 3 fraud-related audit procedures?
- Extended bank reconciliation procedures:
(Re-verifies outstanding checks (do they clear after year-end?)
Confirms deposits in transit (did they really hit the bank after year-end?)
Compares book vs. bank balances more carefully than usual) - Proof of cash:
( Ensure all cash receipts and disbursements were deposited and cleared of the entity’s bank account
and
ensure that no bank transactions have been omitted from the entity’s accounting records) - Test for kiting:
(ensure withdrawals and deposits show up in the correct period with interbank transfer schedule)
Auditing a Payroll or Branch Imprest Account
How is done the audit of any imprest cash account such as payroll or a branch account ?
It follows the same basic audit steps discussed under the audit of the general cash account.
Imprest account is a small cash account maintained by a company used to pay for small incidental or routine expenses
Auditing petty cash
What are the 4 main points with petty cash?
- Usually not material
- Potential for defalcation
- Rarely perform substantive tests
- Document controls
What are the 5 disclosure issues for cash?
Accounting policy for defining cash and cash equivalents
Restrictions on cash (sinking fund requirement for funds allocated by the entity’s board of directors for special purposes)
Contractual obligations to maintain compensating balances
Cash balances restricted by foreign exchange controls
Letters of Credit
What about cryptocurrencies? (4)
Under IFRS, they are NOT cash, cash equivalents, or financial instruments
They are either Inventory or Digital Assets (A class of Intangible Assets) depending on the reporting entity’s business model and intent
IFRS treats them as Indefinite Life Intangible Assets (Measured at Cost) and tested for impairment annually (FV) and can only be written down and never written up
New standards in US GAAP treats them at Fair Value Measurement thru P&L
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