Specific Audit Areas - Cash

Question 1

Typical Form of Bank Reconciliation:

1. Cutoff Bank Statements - approximately 10 days after year-end, to test the reconciling items on the year-end bank reconciliation.(this must be from management to the entity financial institution to provide information to the entity auditors)

Balance per bank

Add: Deposits in transit (Verify that items listed as deposits in transit on the bank reconciliation have been processed as deposits on the cutoff bank statement)

Less: Outstanding Checks (Look for checks processed with the cutoff bank statement and having a date prior to year-end; trace those items to the client’s list of outstanding checks for completeness.)

= Adjusted balance

Balance per Books

Add: Interest and other direct deposits

less: Service charges and other direct withdrawals

= Adjusted Balance

1. Confirm directly with the bank the balance according to the bank statement (usually confirm two separate bank-related matters:
   
   1. (1) cash balances with emphasis on the existence assertion; and
   2. (2) liabilities to the bank with emphasis on the completeness assertion)

If the client understates their outstanding checks they would overstate that cash position, so we are sensitive to the issue of completeness with respect to outstanding checks.

Question 2

Auditing Cash: Addressing Kiting

What is Kiting? (Balance is lifted up up up)

Refers to an overstatement in the cash position at year-end as a result of recording the receipt part of a transfer while failing to record the disbursement part of the transfer as of year-end thus leading to an overstatement of a cash balance.

How exactly is this done?

Lets say in December 31 you record a transaction of transfering the receipt of $20 form one bank (capital one -> chase) the cause for kiting is if you record the receipt of cash but NOT the disbursement which leads to an overstatement in the cash balance

In other words,

Kiting is an overstatement of the true cash balance at year-end caused by recording the receipt, while failing to record the disbursement, associated with a transfer between cash accounts.

Note, this can also be vice versa, example (If the auditor chooses to perform any specific audit procedures for an immaterial account, such as petty cash, analytical procedures are usually sufficient, such as simply comparing the current year’s general ledger balance to the prior year’s general ledger balance.)

How do we address “Kiting”?

It requires a client to do a procedure of testing a schedule of inter-bank transfer” regarding transfer between bank accounts. (usually the last few days of December and the first few days of Jan)

The auditor would then look to see if the cash receipt journal matches with the cash disbursement journal in the same proper period.

Inquiry on management: restrictions on cash balances. If there is a minimum balance requirement for cash, then that restriction should be disclosed.

• We would also document on the management representation letter.

Question 3

What procedure would an auditor most likely perform in auditing the statement of cash flows?

Answer 3

Making certain that the amounts on the statement of cash flows reconcile with other financial statement amounts.

Question 4

Under which of the following circumstances would an auditor be most likely to intensify an examination of a $500 imprest petty cash fund?

Answer 4

If reimbursement occurs twice each week

Note:

Petty cash funds is most frequently used for small expenditures and one would not expect to find an amount of $500 being reimbused twice weekly. So The auditor would be likely to intensify an examination of the petty cash fund if this situation occurred.

Question 5

What is the problem with counting cash on hand and why does the auditor exercise contorl over all cash and other negotiable assets to prevent what?

Answer 5

Substitution.

Note:

The liquidity of these assets makes substitution (changing the form of the assets and thereby double counting them) possible.

Question 6

An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to

Answer 6

Verify reconciling items on the client’s bank reconciliation.

Note:

Cutoff bank statement will include canceled checks and deposit slips for the period immediately following year-end. Therefore, auditor is able to test whether the reconciling items at year-end have been handled properly.

Question 7

What would result in a cash transfers of a misstatement of cash at December 31, 2005?

Answer 7

If the “DISBURSEMENT RECORDED in BOOKS” not equal “RECEIPT RECORDED in BOOKS.”

Question 8

The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to

Answer 8

Corroborate information regarding deposit and loan balances. The form explicitly states that the CPAs do not request, nor expect, the financial institution to conduct a comprehensive, detailed, search of its records for other accounts

Question 9

The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may

Answer 9

Be unaware of all the financial relationships that the bank has with the client.

Question 10

Note: If the disbursement per bank has a 1/5* then that means that it is an outstanding check (Means the check was written in December but cleared in January)

Question 11

Once satisfied that the balance sheet and income statement are fairly presented in accordance with generally accepted accounting principles, an auditor who is examining the statement of cash flows would be most concerned with details of transactions in

Answer 11

Notes payable. (the auditor would examine notes payable (a noncurrent account) to determine financing and investing activities that occurred (i.e., by examining changes in the noncurrent accounts)

Note:

Each transaction involving notes payable is generally considered a financing and investing activity which requires disclosure.

Question 12

When a cash shortage occurs due to a concealment of transporting funds from one locationt to another or by converting negotiable assets to cash. What is vital because of this situtation and why?

Answer 12

Simultaneous verification.

Why?

Because by simultaneously verifying cash, securities, and other related items, any concealment of cash shortages will be exposed. If a transfer from another account is made to conceal a cash shortage, a shortage in the transferred item will result and this will be identified.

Question 13

To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine

Answer 13

Cutoff bank statement.

Year-end bank statement.

Bank confirmation.

note:

General Ledger only contains client cash balance

Question 14

What set of information does the auditor usually confirm in one form?

Answer 14

Cash in bank and collateral for loans.

Question 15

Regarding the disbursement date and receipt date what would indicate “Kiting”?

Answer 15

When the receipt date per bank is recorded prior to the year-end, but its disbursement is recorded after year-end.

For example: Receipt date per bank is Dec 31, but the disbursement per bank is Jan 3

Question 16

When examining a client’s statement of cash flows for audit evidence, an auditor will rely primarily upon

Answer 16

Cross-referencing to balances and transactions reviewed in connection with the examination of the other financial statements.Since audit tests have already been performed on balance sheet and income statement accounts.

Question 17

In relation to the disbursement date per books and receipt date per books what would show that there is a mistatement of cash?

Answer 17

If the disbursement date per book do not match the receipt date per book, there is a mistatement of cash transfer.