CH 2: AUDIT OF CASH AND CASH EQUIVALENTS System

TERMS Control Risk risk that internal controls cannot prevent, detect or correct
Petty Cash cash on hand maintained in different departments or business material misstatement that could occur on financial
Fund locations for small amount of disbursements and expenditures statements
Demand amounts of cash maintained in bank in form of savings and Proof of Cash expanded bank reconciliation which normally includes atleast
Deposit checking accounts which are unrestricted for withdrawal two periods
Undeposited checks payable to the entity but not yet presented in the bank Kiting means to conceal cash shortage due to theft
Checks for encashment or direct deposit in the accounts
Bank Drafts form of of contract or commitments of banking institution to Employee covering the cash shortage by transferring money
advance funds on demand by the party to whom the draft was from one bank account to another and recording the
directed transactions improperly on the client's books
Money Orders good as cash with the same nature as bank drafts, but this item
of cash is drawn from authorized institution like post offices CLASSIFICATIONS

Accounts in cash items of other foreign countries maintained most of the Items Classification Details
Foreign time in the bank must be converted in Philippine peso at year Coins, currency,
Other Current or
Currencies end checks, demand if restricted
Noncurrent Asset
Right of offset characteristic of banking arrangements that the bank balance deposits, etc.
often fluctuates from in form of coins, currency,
Cash
being positive to overdrawn and checks
Petty cash and other if advances or IOU's
Receivables
exist when there is an agreement between the bank and the working funds postdated checks
depositor to offset any overdraft to other bank accounts with Expense if unreplenished expense
positive balance Prepaid Expenses if unused postage stamps
Compensating amount maintained by the depositor in the bank as minimum Customers postdated
Balance cash balance as included Receivables - Trade AR in current asset
checks
in the agreement between the bank and the depositor Cash advances to
Cash held for the purpose of meeting short-term cash commitments Nontrade Receivables current asset
employees
Equivalents rather than for investment Foreign currencies Cash Unrestricted: current asset
or other puproses Current or Noncurrent
Cash Budget plan of cash activities that projets the inflows and outflows of Restricted
Asset
cash Deposits in bank Cash unrestricted: current asset
Cash Control means of the management to safeguard its cash balance Short-term papers Cash equivalents current asset in C & CE
with maturity of 3 mos CASH CONTROL SYSTEM
or less from Elements Receipts Disbursements
acquisition Assignment of Specific employees are Specific employee
Short term papers Responsibility designated as cashier or approved purchased
with maturity of more accountants documents for payment
Short-term investments investment in current asset
than 3 mos but less
than 1 year Executives examine
Unused postage approvals and then sign
Prepaid Expense current asset
stamps checks
Cash (deduction) if repayable on demand Reliable and Spend training programs Disbursement is
Bank overdrafts Could be offset if right of offset is present Competent Personnel for employees entrusted to high level
Current liability Otherwise employees with
Cash not legally restricted establishment of
Compensating
Non-cash as short-term treasury department
Balance Restricted
or long-term investment Documents and Customers who paid in Suppliers issued an
Cash in Bank with Records mail should be included invoice due for payment
Long-term investment noncurrent asset
special purpose in the remittance advice and checks are pre-
showing the amount of numbered. Bank
CASH ITEMS AND CLASSIFICATIONS cash received. Bank statement shows the
- Cash on hand statement shows the payment made during
o coins, currency, checks for deposit and encashment receipts for specific date the period.
- Cash in bank and customers received
o savings deposit, current account, and checking account an official receipt upon
- Working funds - Bank Drafts payment.
- Demand Deposits - Money Orders Authorization Only authorize personnel Large disbursements
- Undeposited Checks - Accounts in Foreign Currency grant exceptions, shall be authorized by
approved check receipts those charge in
CASH EQUIVALENT above a certain amount governance. The
- commercial paper - time deposit and allow customer to controller and
- money market instrument - treasury bills purchase on credit treasurer examined the
transactions and ensure
that:
1. Invoice is compared
 with purchase order and 3. Most liquid asset
request. 4. Prone to theft
2. Invoice is compared CONTROL RISK ASSESSMENT FOR CASH
with receiving report, - if inherent risk is high, auditors would assess if the internal control is
and strong, so that they can tick the control risk as low
3. Amount recorded in is - auditors cannot modify the control risk that the client has
amount in the invoices - level of control risk depends on how strong and effective the internal
examined. control in place is
Separation of Duties Cashiers and mailroom Employees who handle - segregation of duties and authorization are usually the most important
employees who handle checks do not have internal controls for cash
cash do not have access access to accounting
to the accounting records. Accountant OTHER INFORMATION
records. Accountants do who • Cash is one of the most important assets of the company
not handle cash records disbursements • Cash has high inherent risk
does not handle cash o As it is subject to employee theft and management fraud
Electronic and other Cash is stored in vaults Blank checks are stored • Cash budget is a major component of cash planning system
Controls and in banks. Receipts in vault and controlled
are matched with by official with no AUDIT ASSERTIONS FOR CASH
remittance advices and accounting duties. Paid
Existence - whether cash recorded actually exists in real life
with the bank deposit in checks are punched to
- major concern that auditors have with cash
the bank statement. avoid double payment.
- cash reported in the SFP actually exist at year end
PRIMARY INHERENT RISKS OF CASH
Completeness All cash items that should have been included in the
cash balance must have been recorded
1. Cash could be manipulated and stolen by management and employees.
Valuation Cash reported shows the true economic value (face
2. Cash is susceptible to error due to high transactions and volume as either
value)
income or expenses tend to be related to cash
Rights and The company has title to cash as of the end of the
3. Not all cash transactions are recorded due to error or fraud.
Obligation reporting period
4. Money laundering due to the cash can be easily transferred from one
Presentations and Cash has been properly classified and sufficient
location to another.
Disclosures disclosures were made in the notes to FS
REASONS FOR INHERENT RISK
1. High volume of activity
2. Ease of transferability
SUBSTANTIVE PROCEDURES FOR CASH BALANCE AND AUDIT o auditor should confirm all bank accouts held by the company in
ASSERTIONS banking institution including those that were closed during the
EXISTENCE year under audit
1. Cash count o Observations to be made in performing a bank confirmation:
2. Confirmation of bank balances a. Ask for the list of all bank accounts maintianed by the client
3. Examiantion of interbank account transfers b. Ask the client to prepare the confirmation letter using the
4. Perform analytical procedures company's letterhead
c. Check for the accuracy of the confirmation letter prepared by
Cash Count the management
o made to all cashiers or custodians d. Replies hsould be directly received by the auditor and update
o might be conducted throughout the year either before or after the the related working paper
reporting period e. Communicate and further investigate any discrepancies with
o Observations to be made in performing cash count: recorded balance and replies from banks
a. A cash count is made on a surprise and irregular interval basis.
b. Examine all checks that could probably use to hide COMPLETENESS
discrepancise, inquire with managements policies regarding 1. Examine client's bank reconciliation as of year-end, including cash-in-
authorization and handing of cash transit accounts to verify the proper reconciliation of bank statements and
c. The count shall be made in the presence of the management general ledger accounts.
representative to ensure that any discrepanciees are not 2. Prepare proof of cash
made by the auditor 3. Perform cash cut-off test
d. Determine the total accountability of the custodian
e. Determine the amount accounted for by listing each item in Review of Bank Reconciliation
the fund. o typically prepared on a monthly basis
f. Ensure that the custodian will acknowledge the amount o auditor should ask for a copy of bank reconciliation statement
counted and sign the count sheet as evidence of return of made by the management
funds o After obtaining, auditor will:
g. Compare the accountability and accounted for to determine a. Verify the cash balance recorded in the book by tracing in the
any shrotage and overage cash receipts and cash disbursements journal
b. Trace to the confirmation replies from bank or copy of bank
Bank Confirmation statement for the balance per bank account
o primarily the procedure for the existence and rights and c. Recomppute the ending balance of cash in both book ad bank
obligations assertions related to reported cash balance d. Identify any reconciling items per book or per bank and obtain
any supporting documents
 e. Reconciling items per bank statement can be verified by the end of the reporting period has been included on the
obtianing a bank cutoff statement schedule
f. Reconciling items per book would normally verify from a bank
statement provided and examine related documents Test for Lapping
g. Determine by analytical procedures and inquiry any errors a. Obtaining a cut-off bank statement and checking the proper listing
made by either book or bank for the period covered. No of outstanding checks and deposits in transit on bank
adjustment to be made in the books for bank errors. reconciliation
h. Proposed adjustment to reflect the book reconciling items b. Checking the details of customer payments listed in bank
i. After adjustments are made, balance per book and bank must deposits in comparison to details of customer payments in daily
be equal. remittance list or other record f detail postings
c. Comparing the cheques listed on a sample of deposit slips from
Proof of Cash the reconciliation month to the detail of customer credits listed on
o if auditor believes internal control over cash is poor and review of the day's posting to customer accounts receivable
bank reconciliation is not enough to provide reasonable
assurance RIGHTS AND OBLIGATION
o to reconcile not only the account balance but also the account - Examine standards bank confirmations and read the minutes of the board
transactions of directors' meeting to determine whether any restrictions have been
o does not prove correctness of cash balance but a way of detecting placed on cash
unauthorized cash receipts and disbursements
o essentially a fraud detection procedure VALUATION AND ALLOCATION
o Used to identify: - Test appropriate valaution of cash and cash equivalents in foreign
▪ Cash receipts and disbursements recorded in the currencies by recomputation using the closing rate
accounting record but not in the banks - Auditor should:
▪ Cash deposits and check payments are recorded on the o Obtian independent source for the year end foreign exchange rate
bank statement but not in the accounting records o Recompute the converted peso value of the foreign currency
account
Test of Kiting o Compare the computed value to the amount of conversion made
o Kiting is detected by preparing an interbank transfer schedule by the client
which is usually obtained if there are numerous bank transfers o Proposed adjustment if the difference is material
a. Verify the accuracy of the information by comparing the
disbursements and receipts to cash book. PRESENTATION AND DISCLOSURE
b. Compare the dates of transfers on the schedule with the bank - cash presented and disclsoed properly in accordance with PAS 7
statement, noting that all transfer a few days before and after
 - Review FS and perform analytical procedures to determine whether cash receipts journal
accounts are classified and disclsoed in accordance with practicable Accuracy (Valuation) Examine remittance advice and verify that discounts
reporting standards taken were appropriate

ANALYTICAL PROCEDURES ON CASH ASSERTIONS FOR CASH PAYMENTS

- may also be done by the auditor to substantiate the reasonableness of Completeness All cash payment made are recorded
cash balance at year as presented in the FS
- in performing analytical procedure, auditor may: Reconcile cash payments per books with cash
1. Compare the current year end balance to prior year ends balance and payments per bank
investigate any unexpected changes in the account
2. Review and recompute interest received on bank deposits, interest Prepare or test bank reconciliation
rate may be inquired directly from the management or can be found in Occurrence Recorded cash payments occurred
the confirmation replies form the bank
3. Investigate any unusual fluctuation and significant differences Examine paid checks for appropriate endorsements

ASSERTIONS FOR CASH COLLECTIONS Examine documents underlying payments

Completeness All receipts of cash and checks are recorded Classifications Cash payments transaction has been recorded in the
proper accounts
Verify by reconciling daily listings of cash receipts and
Check accuracy of accounts on invoices by reference to
validated deposit slips to cash receipts journal chart of accounts
Occurrence Record receipts present actual collections of cash from
customers

For sample entries in cash receipts journal, trace to the

prelisting of cash receipts and to remittance advice

For sample entries, reconcile daily deposit to validate

deposit slips
Classifications Cash receipt transactions have been recorded in the
proper accounts

Review account coding for a sample of entries in the