Audit of Cash & Bank

Audit of Cash & Bank
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 1

Objectives
At the end of this session you should be able to:
• Identify the auditor’s primary concerns regarding cash
• Describe the purpose of a bank reconciliation
• Perform audit test on the bank reconciliation statement
and design and perform other audit tests of the general
cash account
• Describe kiting and procedures performed by the auditor
to detect it

What are the auditor’s primary
concerns with regard to cash?
•Existence
•Completeness
•Accuracy
•Cut-off
•Valuation
•Classification

Financial Statement
Assertions
Classification:
Cash in the bank correctly classified
Existence:
Cash in the bank as stated on the
reconciliation exists.
Completeness:
Existing cash in the bank is recorded.

Financial Statement
Assertions
Accuracy :
Cash in the bank as stated on the
reconciliation is accurate.
Cutoff:
Cash receipts and cash disbursements
transactions are recorded in the proper
period.

Major Types of Cash Accounts
 General cash account

 Imprest accounts (payroll)
 Branch bank account
 Imprest petty cash fund
 Cash equivalents

Relationship of General Cash to
Other Cash Accounts
Branch Bank Imprest Payroll
Account Account
General
Cash
Cash Imprest Petty

Equivalents Cash Fund

Methodology for Designing Tests
of Balances for Cash in the Bank
Identify client business
risks affecting cash Phase Ia
in bank
Set tolerable misstatement
and assess inherent Phase Ib
risk for cash in bank
Assess control
risk for Phase Ic
several cycles
Design and perform

tests of controls and
substantive tests of Phase II
transactions for
several cycles

Design and perform

analytical procedures Phase III
for cash in bank
Design tests of Audit procedures

details of cash in Sample size
bank to satisfy Phase III
balance-related Items to select
audit objectives Timing
Common test of cash balance
1. Test of controls on bank reconciliation
(properly-prepared, independent bank
reconciliation is an essential IC over
cash)
2. Substantive test of details on bank

reconciliation

Actions involved in bank reconciliation
1. Compare cancelled cheques with cash disbursement records
for date, payee and amount
2. Examine cancelled cheques for signature, endorsement and
cancellation
3. Compare deposit in the bank with recorded cash receipts for
date, customer and amount
4. Account for the numerical sequence of cheques
5. Reconcile all items causing a difference between the GL and
bank balance. Verify appropriateness
6. Reconcile total debits on bank statement with total in cash
disbursement records
7. Reconcile total credits on BS with total in cash receipt records
8. Review month end interbank transfers
9. Follow up outstanding cheques & stop payments
Audit Procedures for Bank
Reconciliation
Procedure involve the following:
 Receipt of a bank confirmation
 Receipt of a cutoff bank statement
 Tests of the bank reconciliation

What will not be detected by a bank
reconciliation?
Misstatements which may not be discovered as a part of the
audit of the bank reconciliation:
 Failure to bill a customer

 An embezzlement of cash by interception of cash receipts before
they are recorded, with the account charged off as a bad debt
 Duplicate payment of a vendor’s invoice
 Improper payments of officers’ personal expenditures
 Payment for raw materials that were not received
 Payment to an employee for more hours worked
 Payment of interest to a related party for an amount in excess of
the going rate

What will not be detected by a bank
reconciliation?
Misstatements which may not be discovered as a part
of the audit of the bank reconciliation:
• unrecorded cheques that have not cleared the bank

(possible kiting)
• unrecorded deposits that have not cleared the bank
• cheques written for incorrect amounts

What bank reconciliation will help the auditor
determine?
Misstatements which are normally discovered as a
part of the tests of a bank reconciliation:
1. whether all client cash receipts have been deposited

2. whether all bank deposits have been recorded in
client cash receipts records
3. whether all client cash payments have been paid by
the bank
4. whether all bank payments have been recorded in
client cash payments records

Substantive ToD of bank
reconciliation
1. Verify mathematically accuracy
2. Trace balance per period end bank statement
to reconciliation
3. Trace balance per GL to balance on
reconciliation
4. Trace balance per confirmation to balance per
reconciliation
5. Trace o/s cheques on recon to cut-off bank
statement or cash disbursement journals noting
dates
Substantive ToD of bank
reconciliation
6. Trace o/s deposits on recon to cut-off bank
statement or cash receipt journals noting dates
7. Account for other reconciling items

Audit Schedule for a Bank
Reconciliation
Clawson Industries Schedule A-2 Date
Bank Reconciliation Prepared by Client DED 1/10/10
12/31/09 Approved by SW 1/18/10
Account 101 – General account, First National Bank
Balance per bank $109,713

Add: Deposits in transit 21,117
Deduct: Outstanding checks – 87,462
Other reconciling items: Bank error – 15,200
Balance per bank, adjusted $ 28,168
Balance per books before adjustments $ 32,584

Adjustments: Unrecorded bank service charge 216
NSF 4,200 – 4,416
Balance per books, adjusted $ 28,168
Sample - Cancelled Cheque

Fraud procedures
1. Extended test of bank reconciliation
2. Proof of cash
3. Test of inter bank transfer

Cash Audit Procedures
Review the minutes of the board of directors
meetings and enquire of management regarding
any cash requirements or restrictions from debt
agreements.

Count (physical examination) all cash on hand at
the client’s premises. If cash is located in multiple
places, count cash simultaneously to avoid double
counting.

Review cutoff of cash receipts and

disbursements.

Account for the numeric sequence of cancelled
cheques. Investigate missing cheques.
Ace Company 6462

Ace Company 6461
Ace Company 6459
Ace Company 6458 ?

Ace Company 6457
NATIONAL BANK

Investigate any cheques made out to cash or
bearer.
Ace Company 6458
CASH
NATIONAL BANK

Investigate any cheques that were returned by the
bank because the client account had insufficient
funds.
Ace Company 6458
NATIONAL BANK

Review and recalculate translations of foreign
currencies.

Trace a sample of entries from cash receipts journal to AR
subsidiary ledger
cash receipts journal ___a/r subsidiary

description _ $$ _ customer _ $$ _
May 23, 2004 ABC Vending 78,660
ABC Vending 23,000 5/23/04 payment 23,000
balance 55,660

subsidiary ledger and to bank statements

balance 55,660
Bank Statement
5/31/04
Deposits:
5/23 $23,000

subsidiary ledger to bank statements to deposit slips.

balance 55,660
Bank Statement
5/31/04
Deposit
Deposits: Slip
5/23/04
5/23 $23,000
23,000
Trace a sample of entries from cash payments journal to AP
subsidiary ledger
cash payments journal a/p subsidiary

description _ $$ _ vendor _ $$ _
January 23, 2004 MGB Corp 8,780
a/p payment to 1/23/04 payment 4,300
MGB Corp. 4,300 balance 4,480

Trace a sample of entries from cash payments journal to a/p
subsidiary ledger to bank statement

MGB Corp. 4300 balance 4,480
Bank Statement
1/31/04
Deposits:
Payments:
1/26 $4300
Trace a sample of entries from cash payments journal to AP
subsidiary ledger to bank statement to cancelled cheques.

MGB Corp. 4300 balance 4,480
Bank Statement
1/31/04
Deposits: Ace Company 4512
1/23/04
MGB Corp. 4300
Payments:
NATIONAL BANK
1/26 $4300
Review monthly client-prepared bank
reconciliations.

Confirm all cash balances held by third parties,

such as banks and other financial institutions.
possibly through
use of the standard
bank confirmation

What is kiting?

What is kiting?
Kiting is an irregularity whereby an overstatement of
cash is created by a cash transfer between bank
accounts.
The deposit is
recorded in cash receipts but
the disbursement is not re-
corded in cash disbursements.

Kiting example
On 12/31, Ace’s bookkeeper writes a $5,000 cheque on the

National Bank and deposits the cheque in the Canadian Bank
account.
National Ace Co. 12/31

Canadian
Ace Co. 5000
National

Kiting example
• On 12/31, Ace’s bookkeeper writes a $5,000 cheque on the
National Bank and deposits the cheque in the Canadian Bank
account.
• The bookkeeper records the deposit in the cash receipts journal
but does not record the cheque in the cash payments journal.
• He also fails to list the cheque as outstanding on the National
Bank reconciliation.
cash receipts journal cash payments journal

description _ $$ _ description _ $$ _
Dec. 31, 2004 Dec.31, 2004
Misc. revenue 5000 - no activity -

On 12/31, Ace’s bookkeeper writes a $5,000 cheque
on the National Bank and deposits the cheque
in the Canadian Bank account.
National will not be aware of the cheque until

National notification from Canadian, probably during the
first few days of January.
As a result of the deposit, Canadian Canadian

will increase Ace’s account on 12/31.
As a consequence, the bank records will reflect a

$5,000 cash overstatement for a few days until the
cheque clears. December bank statements will also
support this overstatement.
From an internal control
perspective, why does kiting occur?
inadequate
segregation of
duties between
accounting and
cash custody

What effect is changing technology
having on the likelihood of kiting?
Kiting is becoming
less likely because
the “float” is
shrinking; i.e.,
cheques clear banks
faster than in the
past.
What audit procedures may detect
kiting?
tests related to
the cutoff bank
statement and
schedule of
bank transfers
Procedures to detect kiting
Obtain a bank cutoff statement directly from the
bank.
A bank cutoff
statement is prepared soon after the
balance sheet date.
Most items that were outstand-

ing at year-end have cleared
when the cutoff statement
is prepared (cheques, deposits).
Obtain a bank cutoff statement directly from the bank.
Trace all cheques, deposits, and other cash changes

from the cutoff statement to cash receipts and
disbursements records, paying particular attention to
dates and amounts.

Prepare a schedule of bank transfers showing all
transfers between the client’s bank accounts during
the last week of the audit period and the first week of
the subsequent period.
The schedule should

be prepared using cash receipts
and payments journals, year-end
reconciliation, year-end bank
statement, and cutoff bank
statement.
Interbank Transfers
The accuracy of the information on the

interbank transfer schedule should be verified.
The interbank transfers must be recorded in

both the receiving and disbursing banks.
The date of the recording of the disbursements

and receipts for each transfer must be in
the same fiscal year.

Interbank Transfers
Disbursements on the interbank transfer

schedule should be correctly included in or
excluded from year-end bank reconciliation
as outstanding checks.
Receipts on the interbank transfer schedule

should be correctly included in or excluded
from year-end bank reconciliations as
deposits in transit.

Proof of Cash
A proof of cash is a working paper

prepared by the auditor to reconcile the
bank’s record of the client’s beginning
balance, cash deposits, cleared cheques,
and ending balance for the period with the
client’s records.

Proof of Cash
 All recorded cash receipts were deposited

 All deposits in the bank were recorded in
the accounting records
 All recorded cash disbursements were
paid by the bank
 All amounts that were paid by the bank
were recorded

Proof of Cash
Includes the following reconciliation tasks:
1. The balance on the bank statement with the general

ledger balance at the beginning of the proof-of-cash
period
2. Cash receipts deposited per the bank with the cash
receipts journal for a given period
3. Cancelled checks clearing the bank with those
recorded in the cash disbursements journal for a given
period
4. The balance on the bank statement with the general
ledger balance at the end of the proof-of-cash period

End

Audit of Cash & Bank

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Audit of Cash & Bank

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 1

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 2

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 3

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 4

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 5

 General cash account

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 6

Cash Imprest Petty

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 7

Design and perform

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 9

Design and perform

Design tests of Audit procedures

2. Substantive test of details on bank

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 11

 Receipt of a cutoff bank statement

 Tests of the bank reconciliation

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 13

 Failure to bill a customer

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 14

• unrecorded cheques that have not cleared the bank

• unrecorded deposits that have not cleared the bank

• cheques written for incorrect amounts

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 15

1. whether all client cash receipts have been deposited

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 16

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 18

Balance per bank $109,713

Balance per books before adjustments $ 32,584

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 22

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 23

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 24

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 25

Review cutoff of cash receipts and

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 26

Ace Company 6462

Ace Company 6459

Ace Company 6458 ?

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 27

Ace Company 6458

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 28

Ace Company 6458

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 29

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 30

cash receipts journal ___a/r subsidiary

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 31

cash receipts journal ___a/r subsidiary

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 32

cash receipts journal ___a/r subsidiary

cash payments journal a/p subsidiary

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 34

cash payments journal a/p subsidiary

cash payments journal a/p subsidiary

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 37

Confirm all cash balances held by third parties,

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 38

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 39

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 40

On 12/31, Ace’s bookkeeper writes a $5,000 cheque on the

National Ace Co. 12/31

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 23 - 41

cash receipts journal cash payments journal