ACCT_3444_Chapters_16_and_17 - Accounting 3444 Lecture 9...

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Accounting 3444 Lecture 9: Chapters 16 and 17– Application of the Auditing Process: Cash and Payroll Lecture 8 Recap: Chapter 14 and 15 – Auditing Revenue Discussed Revenue Recognition Control objectives, segregation of duties, control procedures, tests of controls Substantive procedures Confirmations In Class Chapter 14 and 15 Wrap up Questions: Chapter 14: 14- 30(omit Part A) Chapter 15: 15-23 Chapter 16– Auditing of Cash Balances Auditing Cash – What is Cash? - The line item “cash” includes: o Currency on hand o Cash on deposit in all bank accounts (including certificates of deposit, time deposits and savings accounts) - May also include “cash equivalents”, which are short-term, highly liquid investments that are readily convertible into cash or are so close to maturity that there is little risk of change in their value (ex. T-bills, commercial paper, money market funds, may also include demand loans) Types of Bank Accounts - General cash accounts – principal cash account used by the organization - Imprest cash accounts – contains a stipulated amount of money and the account is used for limited purposes (for example disbursing payroll and dividend cheques). 1
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- Branch accounts – used by companies with branches in multiple locations. Each branch is able to pay local expenses and maintain a banking relationship in the local community. Why is Cash Critical to Auditing? Virtually all accounting transactions that flow through the organization pass through the cash account Sources of Cash (Cash Receipts): - Cash receipts from the sale of goods/services - Sale of property, plant and equipment - Proceeds from issuing long-term debt or capital stock Uses of Cash (Cash Disbursements): - Purchasing inventory and supplies - Payment of payroll expenses - Purchase of property, plant and equipment - Payment on long-term debt and repurchase of stock ***Note: Chapters 8&9 discussed internal control issues relating to cash (see tables 8-6 and 9-6 for assertions, possible misstatements, control procedures and tests of controls for cash receipt and disbursement transactions). Audit Approach: - Analytical procedures are not very useful, as cash does not have a predictable relationship with other accounts - Extensive tests of controls and/or substantive tests of transactions for cash receipts and cash disbursements are performed - Extensive tests of the entity’s bank reconciliations are performed Internal Controls 2 Categories of Controls for Cash 1. Controls over the transaction cycles- Dealt with in cycle work 2. Controls over the Bank Reconciliation – our focus Bank Reconciliation shows the difference between the cash balance in the books and the cash balance in the bank Reconciliations should be performed on a timely basis 2
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Should be performed by someone who does not handle the cash or perform recording of the cash Should be reviewed by a responsible person (Accounting manager) on a timely basis Substantive Tests of Details of Transactions and Balances
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