Chapter 6 Audit of Cash Accounting 4081Chapter 6.

Chapter 6

Audit of Cash

Accounting 408 1Chapter 6

Accounting 408 Chapter 6 2

1. Substantive Tests –General Concepts

Audits are performed by dividing the f/s into smaller segments or components

Transaction cycles Groups of repetitive transactions

Examples Revenue Cycle

relating to sales, shipping, receivables, and collections Acquisition Cycle

referring to purchases, payables, and payments Production Cycle

relating to manufacturing products and storage Also, payroll, investing, financing

Assertions, Objectives, Evidence and Procedures



1. Substantive Tests –General Concepts

Combining CR assessments accounts affected by a single

transaction cycle accounts affected by more than one

transaction cycle


1. Substantive Tests –General Concepts (con’t)

Approaches for substantive tests tests of details of balances tests of details of transactions overstatement errors understatement errors

Designing substantive tests nature timing extent


1. Substantive Tests –General Concepts (con’t)

Types of substantive tests tests of details

of transactions of balances effectiveness depends on type of test used and sample size

substantive analytical procedures usually less effective than tests of details usually lower in cost can enhance effectiveness by

more reliable procedure (e.g., comparing ratios to industry average instead of just comparing account balance to prior year account balance, regression analysis)

more reliable expectations, (more predictable relationships) (e.g., obtained from independent sources, independence level of internal sources)

effectiveness of internal control (i.e., source data is more reliable) less effective procedure if data used is subject to management

discretion (e.g., maintenance expense, advertising expense)


2. Cash - Internal Control Internal control over cash receipts

general rules for handling cash separate functions: receiving cash,

depositing cash, recording the transactions, reconciling

controls over cash sales, payments received through the mail

documents and records: remittance advice, cash receipts list, daily cash summary, deposit slip


2. Cash - Internal Control Internal control over cash

disbursements steps: pay from approved voucher,

control check signing, mail payment, cancel voucher, record cash payment

documents and records: paid voucher file, cash disbursements journal

2. Cash - Internal Control

Cash key control activities Information processing

voucher packet (Purchase requisition, purchase order, receiving report, invoice) matched prior to cash disbursement authorization

deposits reconciled to amounts credited to accounts receivable ledger bank reconciliation

Physical controls over the security of assets deposit cash and checks daily and intact lock box account dual custody over cash unused checks secured check imprinting machine

Segregation of duties separate authorization, custody, recording, reconciliation

Reconciliations



3. Cash - Substantive Tests Cash

Bank confirmation Cutoff bank statement Bank reconciliation Four-column proof of cash Interbank transfer schedule Cash cutoff tests Count cash on hand

Exhibit 6.8Bank Confirmation


Proof of Cash



3. Cash - Substantive Tests

Cash Existence and Occurrence

confirmation, cutoff tests, cash count, reconciliation

Rights and Obligations confirmation, cash count, reconciliation

Completeness analytical procedures, confirmation, cutoff

tests, cash count


3. Cash - Substantive Tests

Cash Valuation

little problem, confirmation, cash count Presentation and Disclosure

compare statement presentation to GAAP compensating balances, overdrafts, lines

of credit, loan guarantees

Chapter 6 17

Review Questions for Discussion Chapter 6

6.106.116.15

Accounting 408

6.166.176.19

Chapter 6 Audit of Cash Accounting 4081Chapter 6.

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Transcript of Chapter 6 Audit of Cash Accounting 4081Chapter 6.