AUDIT

PROCEDURES FOR
CASH
What are the auditor’s
primary concerns with
regards to cash?
Major Cash Assertions

o EXISTENCE
-Are all recorded cash accounts exist at a given date?
o COMPLETENESS
-Areall cash transactions and account balances that should be
presented have been included in the financial statements?
PRESENTATION AND DISCLOSURE
-Are all components of the financial statements and other
transactions and events are accurately classified, clearly
described, and disclosed?
Major Cash Assertions

OCCURRENCE & CUT-OFF

-Are all cash transactions occurring during the period have been
recorded in the financial statements in the proper period?
VALUATION, ACCURACY & CLASSIFICATIONS
-Are all cash and related accounts have been included in the
financial statements at accurate amounts, classified properly?
 How does the auditor
examine these assertions?
Cash Audit Procedures

o CONFIRMATION
-Primary audit procedure used in auditing cash
balances

 Steps in Confirmation
1. Client’s Permission
2. Confirmation Letter
3. Review and reconciliation of the reported balances and
confirmed balances
Cash Audit Procedures

o FOREIGN CURRENCY TRANSLATION

-This test is included for companies that hold cash
denominated in foreign currency.
 Steps in FCT
1.Recalculation of Cash Balance using exchange rate in effect at
12/31
2.If not materially different with company’s figure, document and
proceed with audit
3.If materially different, determine if company’s rate is reasonable
Cash Audit Procedures

o RECONCILIATION
-Recalculation and testing the underlying information in the
company’s bank reconciliations
-To bridge the gap between book and bank balance

 Steps in Reconciliation
1. Obtaining and reviewing the bank statements & related
information
2. Recalculation and reconciliation
Cash Audit Procedures

o CLASSIFICATION
-Test for the correct classification of cash
-Examination of agreements to ensure proper
classifications
 Steps in Classification
1.Gather Related Information
2.Examination of Contractual agreements
Cash Audit Procedures

o INQUIRY
-Asking few questions to employees and management
regarding cash balances
 Steps in Inquiry
1.Identify Respondents or persons to be asked
2.Review gathered data and identify its implications
Cash Audit Procedures

CASH COUNT
-Count all cash on hand at the client’s premises. If
cash is located in multiple places, count cash
simultaneously to avoid double counting.
Additional Cash Audit Procedures

1. Account for the numeric sequence of cancelled

cheques. Investigate missing cheques.
2. Review cutoff of cash receipts and disbursements.
3. Review monthly client-prepared bank reconciliations.
4. Investigate any cheques made out to cash or bearer.
5. Investigate any cheques that were returned by the
bank because the client account had insufficient funds.
 Additional Cash Audit Procedures

6. Trace a sample of entries from cash receipts journal to a/r subsidiary

ledger
7. Trace a sample of entries from cash receipts journal to a/r subsidiary
ledger to bank statements
8. Trace a sample of entries from cash receipts journal to a/r subsidiary
ledger to bank statements to deposit slips.
9. Trace a sample of entries from cash payments journal to a/p subsidiary
ledger
10. Trace a sample of entries from cash payments journal to a/p subsidiary
ledger to bank statement
What is KITING?
Kiting

also called check kiting, is a fraudulent

scheme that uses checks to embezzle
money from a business. Kiting is usually
committed by a bookkeeper or someone else
with access to company checks and the
ability to forge checks, but it can also be
used by the company.
Kiting

is an irregularity whereby an
overstatement of cash is created by a
cash transfer between bank accounts.
Why commit Kiting?

 Kiting is sometimes used when a

company is facing an overdrawn
checking account.
Why does Kiting Occur?

inadequate segregation of duties

between accounting and cash
custody.
 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 Canadian
CHEQUE
 Kiting Example
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 -
Kiting Example

National will not be aware of the cheque

until notification from Canadian, probably
during the first few days of January.
As a result of the deposit, Canadian will
increase Ace’s account on 12/31.
Kiting Example

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.
What audit procedures can detect
Kiting?

1. Obtain a bank cutoff statement directly

from the bank.
2. 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.
 What audit procedures can detect
Kiting?

3. 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.
4. Obtain or prepare a year-end bank
reconciliation or proof of cash for each client
bank account.