Cash

Audit Procedures

Assertions & Objectives

ManagementCash• Exists• Include all transactions that

should be presented• Represents rights of the

entity• Valued appropriately• Presented and disclosed

properly within the financial statements

Audit• Existence or occurrence• Completeness• Rights and obligations• Valuation or allocation• Presentation and disclosure

Approach to audit

• Nature – using persuasive procedures (bank account confirmation)

• Timing – perform procedures at the balance sheet date (cut-off)

• Extent – test more extensively (increase sample size) DUE TO:1. Detection risk2. Control risk3. Inherent risk

CASHAudit Procedures

Substantive Tests: Cash Balance

Assertions Procedures

Existence, rights valuation

valuation

1. Confirm year-end cash balance with all banks and other depositories

2. Verify mathematical accuracy of recorded cash balance:• Foot cash journals• Trace totals to the general ledger and to year-end

bank reconciliations prepared by client• Test cash on hand as necessary

ExistenceCompletenessValuation

3. Test cut-off• Obtain cut-off bank statements directly from

banks

Assertions Procedures

ExistenceCompletenessValuation

3. Test cut-off (continued)• Obtain cut-off bank statements directly from

banksa. Verify accuracy of cut-off bank statementsb. Examine information and trace to

reconciling items in year-end bank reconciliation and to entries in cash journals

c. Consider necessity of preparing proof of cash

• Reconcile recorded cash balance with returned bank confirmations

• Examine intercompany and interbank transfer near year end

Presentation and disclosure 4. Review financial statements to determine whether:• Cash balance are properly classified and

described• Disclosures are adequate

Confirm cash balances

• Standard form to confirm account balance with financial institutions

Verify mathematical accuracy

• Recompute totals in cash journals and client-prepared bank reconciliations

• Trace cash journal totals to postings in general ledger

• Counts cash on hand (petty cash)

Test cut-off

• Test if cash receipts and disbursements are recorded in the proper accounting period

Cash journalsGeneral ledger

Bank reconciliationsVS

Year-end bank statementsCut-off bank statements

Returned bank confirmations

BANK RECONCILIATION

LO 10 Explain common techniques employed to control cash.

Reconciliation of Bank Balances

Schedule explaining any differences between the bank’s and the company’s records of cash.

Reconciling Items:

1. Deposits in transit.

2. Outstanding checks.

3. Bank charges and credits.

4. Bank or Depositor errors.

Time Lags

LO 10

Reconciliation of Bank Balances

LO 10 Explain common techniques employed to control cash.

Cash 542Nov. 30

Office expense 18

Accounts receivable 220

Accounts payable

180Interest revenue

600

Illustration: Journalize the adjusting entries at November 30 on the books of Nugget Mining Company.

LO 10 Explain common techniques employed to control cash.

The reconciling item in a bank reconciliation that will result in an adjusting entry by the depositor is:

a. outstanding checks.

b. deposit in transit.

c. a bank error.

d. bank service charges.

Review Question

LO 10 Explain common techniques employed to control cash.

FINANCIAL STATEMENT PRESENTATION AND DISCLOSURE

Issues related to Cash

A financial asset—also a financial instrument.

Financial Instrument - Any contract that gives rise to a

financial asset of one entity and a financial liability or

equity interest of another entity.

What is Cash?

► Most liquid asset.

► Standard medium of exchange.

► Basis for measuring and accounting for all other items.

► Current asset.

LO 1 Identify items considered cash.

What is Cash?

Examples: coin, currency, available funds on deposit at the bank, money orders, certified checks, cashier’s checks, personal checks, bank drafts and savings accounts.

Short-term, highly liquid investments that are both

LO 2 Indicate how to report cash and related items.

Reporting Cash

(a) readily convertible to cash, and

(b) so near their maturity that they present insignificant risk of changes in interest rates.

Examples: Treasury bills, commercial paper, and money market funds.

Cash Equivalents

When material in amount:

Segregate restricted cash from “regular” cash.

Current assets or non-current assets

Restricted Cash

Examples, restricted for: (1) plant expansion, (2) retirement of long-term debt, and (3) compensating balances.

When a company writes a check for more than the

amount in its cash account.

LO 2 Indicate how to report cash and related items.

Bank Overdrafts

Generally reported as a current liability.

Offset against cash account only when available cash is

present in another account in the same bank on which

the overdraft occurred.

LO 2

Illustration 7-3

Summary of Cash-Related Items