Chapter 16-Auditing - 1 /InvestingProcess AuditingCash...

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1 Chapter 16-Auditing the Financing/Investing Process Auditing Cash - Cash -currency on hand and cash on deposit in bank accounts, includes CDs, time deposits, and  savings accounts  - Cash-equivalents- short-term, highly liquid investments readily convertible to cash and have  little risk of change in their value (ex. T-bills, commercial paper, money market funds)  -Main source of cash receipts revenue process - Other sources of cash: 1. Sale of property, plant, and equipment  2. Proceeds from issuing long-term debt or capital stock  Main sources of cash disbursements purchasing and human management processes   -Auditor’s assessment of control risk for transactions processed through revenue & purchasing  processes strongly affects nature and extent of testing for ending cash balance  -Ex . If control risk is below max. for both processes auditor can reduce substantive testing of the  cash balances  Types of Bank Accounts - Procedures for speeding up collection of cash receipts and delaying the payment of cash  disbursements allow the entity to earn interest or reduce the cost of cash borrowings 
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2 Types of bank accounts used: General Cash Account  Imprest Cash Account  Branch Account 1. General Cash Account  -Main cash account for most entities  -Main source of cash receipts is from the revenue process and main source of disbursements is  from the purchasing and management of human resource management processes  -Cash account can be used for receipts and disbursements from other bank accounts maintained  by the entity  2. Imprest Cash Account  -Contains a certain amount of money and is used for limited purposes  -Used for disbursing payroll and div. checks  -Minimizes time needed to reconcile general cash account  -For payroll purposes, the payroll account acts as a clearing account for payroll payments,  facilitates the disbursement of cash, and maintains adequate control over cash  3. Branch Accounts  -Separate accounts at local banks that have branches in these local areas allow each branch to pay  local expenses and to maintain a banking relationship in the local community 
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3 -For control, bank should submit periodic cash reports to headquarters and entity’s management  should monitor cash balances in branch accounts  Control Risk Assessment-Cash -Reliability of client’s controls over cash receipts and disbursements affects nature and extent of  auditor’s test of details  Examples of controls over cash receipts and disbursements: -Incoming checks must be restrictively endorsed “for deposit only” and daily cash receipts are 
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