Chapter 17: Audit of cash and cash equivalent

Question 1

Why do we need to understand the different types of cash ?

Answer 1

Because the auditing approach to each varies

Question 2

What are the 5 types of cash and cash equivalents?

Answer 2

1)General cash account
2)Imprest payrolll account
3)Branch bank account
4)Imprest petty cash fund
5)Cash equivalents

Question 3

What is the general cash account?

Answer 3

Primary bank account for most organization.

Question 4

What is the purpose of the general cash account?

Answer 4

To make payments and record cash received from operations. Virtually, all cash receipts/disbursements flow through this account at some time

Question 5

What is the imprest payroll account?

Answer 5

Bank account to which exact amount of payroll for pay period is transferred (or fixed balance kept) from general cash account

Question 6

What is the purpose of imprest payroll account?

Answer 6

May be used to pay employee remittances to Canada Revenue Agency, helps improve control over cash, reduce time to reconcile bank accounts

Question 7

What is a branch bank account?

Answer 7

A separate bank account maintained at a local bank by a branch of a company (general acc or imprest type)

Question 8

What is the purpose of a branch bank account?

Answer 8

to make more rapid deposits/payments at local level, build business relationships with local banks

Question 9

What is an imprest petty cash fund?

Answer 9

Funds of cash maintained within company for small cash payments (fixed balance = small)

Question 10

What is the purpose of Imprest petty cash fund?

Answer 10

Small cash balance for purposes that can be paid more conviniently/quickly by cash

Question 11

What is a cash equivalents?

Answer 11

ST, highly liquid investment that have a known value & insignificant risk of change in value (where bank overdrafs are in normal use)

Question 12

What is the purpose cash equivalents?

Answer 12

To manage fluctuating cash balances so that cash is available for ST operating needs.

Question 13

Is the cash account significant?

Answer 13

Yes, in almost every audit because of the nbr of transactions)

Question 14

What are the classes of transactions related to cash?

Answer 14

1)Revenue
2)Acquisition/payment
3)HR/Payroll

Question 15

What are the risks of misappropriation of assets concerning the cash balance? (3)

Answer 15

1)Payments in cash could be stolen and not recorded
2)Management could pass personal payments as business expenses
3)Bank accounts can be hacked and cash/blank cheques could be stolen

Question 16

What are the risks of fraudulent financial reporting concerning the cash balance? (3)

Answer 16

1)Funds received as debt financing could be revenue
2)cash overstated to cover theft/losses
3)Cash equivalents incorrectly classified as marketable securities

Question 17

To determine Inherent risk and determine significant risk in cash balance, what must you understand ? (3)

Answer 17

1)Impact of seasonality on cash balance
2)Cash management policies and budgeting practices
3)Risks from clients investment policies/strategies as well as management controls that mitigate these risks

Question 18

What are other factors to determine significant/inherent risks? (5)

Answer 18

1)Consider if client has any CF problems in timely basis (difficulty meeting payroll/tax obligations)
2)Consider if client has any debt covenants
3)Gradually aging AR
4)poorly managed inventory
5)Inability to take advantage of discount in AP

Question 19

What are 2 important factors in assessing control risk for cash?

Answer 19

1)General control environment (management attitude)
2)Nature of treasury management

Question 20

What are the 4 important points to understand internal control?

Answer 20

1)I.C effectiveness over cash balances varies significantly for diffirent companies
2)Most important IC = banl reconciliations
3)IC over cash receipts/disbursments = important for assessing control risk
4)Individuals who are super users/have incompatible functions granted to them using computer systems could result in high CR

Question 21

What is EDI?

Answer 21

Electronic data interchange

Question 22

What is EFT?

Answer 22

Electronic funds transfer

Question 23

What are the 2 electronic cash transations?

Answer 23

Electronic data interchange (EDI) and Electronic funds transfer (EFT)

Question 24

What are 2 key controls related to cash?

Answer 24

1)Controls over transaction cycle affecting the recording of cash receipts/disbursements
2)Independant bank reconciliations

Question 25

What is an independant bank reconciliation?

Answer 25

A monthly BR = difference between cash balance in general ledger and genral bank account

Question 26

A carefully done bank reconciliation includes? (9)

Answer 26

1)Compare cancelled cheques/electronic bank records of payment with cash disbursments journal for data, payee, amount 2)Examine cancelled cheques/electonic bank records for signature, endorsments, cancellation 3)Compare deposits in bank with recorded cash receipts for date, customer, amount 4)Account for numerical sequence of cheques, investigate missing ones 5)Reconcile all items causing differences between book/bank balance 6)Reconcile total debits on bank statement with total cash disbusements journal 7)reconcile total credits on bank statement with total in cash receipts journal 8)Review month-end interbank transfers for propriety and proper recording 9)Follow up on outstanding cheques and stop payment notices

Question 27

By which cycle is cash not affected by?

Answer 27

Inventory/distribution

Question 28

When are cash transactions audited ?

Answer 28

Throught transaction cycle test

Question 29

Why do we need substantive procedures for cash? (3)

Answer 29

1)Not all cash accounts are on general ledger 2)Cash is misstated due to errors in bank reconciliation 3)Cash misstated due to improper cutoff

Question 30

Why is using substantive analytical procedure less important in cash?

Answer 30

Because cash doesn't have a predictable relationship with FS items (still compare balances)

Question 31

What is an essential substantive tests of details of Transactions in cash? (assertion)

Answer 31

testing cutoff (cash receipts/disbursments)

Question 32

What is the test of details for bank reconciliation?

Answer 32

Starting point for verification of balance in general bank accounts account is obtaining a bank reconciliation

Question 33

What are the procedures to test bank reconciliation? (6)

Answer 33

1)Verify that math is accurate 2)Trace balance on cutoff statement to balance per bank on BR 3)Trace cheques included with cutoff bank statement to the list of outstanding cheques on BR/cash disbursements journal 4)Investigate all significant cheques/payments included on outstanding cheque list that have not cleared bank on cutoff statement 5)Trace deposits in transit to subsequent bank statement 6)Account for other reconciling items on bank statement and BR (errors, service charge, corrections)

Question 34

How do you confirm the cash balance?

Answer 34

From a direct receipt at auditor's location of a confirmation from every bank. Audit team should send confirmations directly to bank and recieve standard bank confirmation form.

Question 35

How do you perform the proof to confirm cash balance for the cutoff assertion in the month follwing the BS ? (3)

Answer 35

1)Footing all cancelled cheques, electronic payments, debit memos, deposits, credit memos 2)Checking to see that bank statement balance when footed totals are used 3)Review items inlcuded in footing to make sure they were cancelled by bank in proper period

Question 36

What are the 2 procedures to adress the presentation assertion (TofD) ?

Answer 36

1)Review minutes and loan agreements for any restrictions on cash 2)Confirm existence of any compensating balance agreements with bank

Question 37

When must you design fraud procedures for cash? (2)

Answer 37

1)When there are inadequate controls, especially improper segregation of duties between handling cash/recording cash 2)When there is a lack of independant prepared BR

Question 38

What must you consider when designing procedures for uncovering fraud in cash? (4)

Answer 38

1)Consider nature of deficiencies in IC 2)The type of fraud that is likely to result from deficiencies 3)The potential materiality of the draud 4)The audit procedure that is the most effective in uncovering fraud

Question 39

What are the 5 procedures to uncover fraud in cash receipt area?

Answer 39

1)Confirmation of AR 2)Test performed to detect lapping 3)Review of general ledger entries in cash account for unusual items 4)Comparison of customer orders to sale and subsequent cash receipts 5)Examination of approvals and supporting documentation for bad debts and sales returns and allowances

Question 40

When do you do an extended test of BR?

Answer 40

When you believe that BR may be intentionally misstated

Question 41

How do you do an extented test of the BR?

Answer 41

Verify if all transactions included in journals for the last month of the year were correctly included/excluded from BR and to verify whether all items in BR were correctly included

Question 42

When do you prepare proof of cash?

Answer 42

Where RMM in cash = high or when there are suspicious cash transactions. When client has material IC weaknesses in cash

Question 43

What is a proof of cash?

Answer 43

A colum working paper to reconcile bank's records of client's beginning balance, cash deposits, cleared cheques, ending balance for period with client's records

Question 44

What does proof of cash includes? (4)

Answer 44

1)Reconciliation of balance on bank statement with general ledger at beg of proof-of-cash period 2)Reconciliation of cash receipts deposited with receipts journal 3)Reconciliation of cancelled cheques/electronic payments clearing the bank with cash disbursements journal 4)Reconciliation of balance on bank statement with general ledger at end of proof-of-cash period

Question 45

Auditors use proof of cash to determine whether the following happened: (4)

Answer 45

1)All recorded cash receipts were deposited 2)All deposits in bank were recorded in accounting record 3)All recorded cash disbursments were paid by bank 4)All amounts that were paid by bank were recorded

Question 46

What is kiting?

Answer 46

Transferring money from one bank to another and improperly recording transaction, which overstates cash. Day before bank statement, cheque is drawn on one bank account and immediately deposited in a second account for credit

Question 47

What is the test of Interbank Transfers ?

Answer 47

Listing all bank transfers made a few days before/after bank statement date and trace each to the accounting records for proper recording

Question 48

How do you use data analytics for cash fraud?

Answer 48

Help sort through data and drill down