Auditing the Financing/Investing Process: Cash and Investments

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Chapter Sixteen
Auditing the Financing/Investing Process
Cash and Investments
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Cash and the Effect of Other Business Processes
Cash reported in the financial statements
represents currency on hand and cash on deposit
in bank accounts, including certificates of
deposit, time deposits and savings accounts.
Cash equivalents are frequently combined with
cash for presentation in the financial
statements. Definition Short-term, highly
liquid investments that are readily convertible
to known amounts of cash or which are subject to
an insignificant risk of changes in value.
Examples Treasury bills, commercial paper, and
money market funds.
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Cash and the Effect of Other Business Processes
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Types of Bank Accounts
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The Effects of Controls
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Substantive Analytical Procedures Cash
This limited use of substantive analytical
procedures is normally offset by (1) extensive
tests of controls and/or substantive tests of
transactions for cash receipts and disbursements
or (2) extensive tests of the entitys bank
reconciliations.
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Substantive Tests of Details of Transactions and
Balances
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Balance-Related Assertions
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Auditing the General Cash Account
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Bank Reconciliation Working Paper
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Cut-off Bank Statement
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Tests of the Bank Reconciliation

• The auditor uses the following audit procedures
  to test the bank reconciliation
• Test the mathematical accuracy and agree the
  balance per the books to the general ledger.
• Agree the bank balance on the reconciliation with
  the balance shown on the bank confirmation.
• Trace the deposits in transit on the bank
  reconciliation to the cut-off bank statement.
• Compare the outstanding cheques on the bank
  reconciliation with the cancelled cheques in the
  cut-off bank statement for proper payee, amount
  and endorsement.
• Agree any charges included on the bank statement
  to the bank reconciliation.
• Agree the adjusted book balance to the cash
  account lead schedule.

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Fraud-Related Audit Procedures
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Extended Bank Reconciliation Procedures
In some instances, the year-end bank
reconciliation can be used to cover cash
defalcations. This is usually accomplished by
manipulating the reconciling items in the bank
reconciliation. For example, suppose a client
employee was able to steal 5,000 from the
client. The clients cash balance at the bank
would then be 5,000 less than reported on the
clients books. The employee could hide the
5,000 shortage in the bank reconciliation by
including a fictitious deposit in transit.
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Proof of Cash
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Tests for Kiting
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Auditing a Payroll or Branch Imprest Account
The audit of any imprest cash account such as
payroll or a branch account follows the same
basic audit steps discussed under the audit of
the general cash account.
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Auditing Petty Cash Fund
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Disclosure Issues for Cash
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Disclosure Issues for Cash
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Disclosure Issues for Cash
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Investments
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Control Risk Assessment Investments
Here are some of the more important assertions
for investments.
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Segregation of Duties
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Substantive Procedures for Testing Investments
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Tests of Details Investments

• Existence
• The auditor should perform one or more of the
  following procedures when gathering evidence for
  existence
• Physical examination
• Confirmation with the issuer
• Confirmation with the custodian
• Confirmation of unsettled transactions with the
  broker-dealer
• Confirmation with the counter-party
• Reading executed partnership or similar
  agreements

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Tests of Details Investments

• Valuation and Allocation
• The auditor must also determine if there has been
  any permanent decline in the value of an
  investment security. Accounting standards provide
  guidance for determining whether a decline in
  value below amortized cost is other than
  temporary.

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Tests of Details Investments

• Valuation and Allocation
• Here are some factors that may indicate an
  other-than-temporary impairment of investment
  value (IAS 39)
• Significant financial difficulty of the issuer or
  obligor.
• A breach of contract, such as a default or
  delinquency in interest or principal payments.
• The lender, for economic or legal reasons
  relating to the borrowers financial difficulty,
  granting to the borrower a concession that the
  lender would not otherwise consider.
• It becoming probable that the borrower will enter
  bankruptcy or other financial reorganization.
• The disappearance of an active market for that
  financial asset because of financial
  difficulties.
• Observable data indicating that there is a
  measurable decrease in the estimated future cash
  flows from a group of financial assets since the
  initial recognition of those assets, although the
  decrease cannot yet be identified with the
  individual financial assets in the group,
  including adverse changes in the payment status
  of borrowers in the group and national or local
  economic conditions that correlate with defaults
  on the assets in the group.
• Permanently Impaired Write down to new carrying
  amount

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Tests of Details Investments

• Disclosure Assertions
• Marketable securities need to be properly
  classified as held-to-maturity, trading and
  available-for-sale.
• Held-to-maturity securities and individual
  available-for-sale securities should be
  classified as current or non-current assets based
  on whether management expects to convert them to
  cash within 12 months.
• All trading securities should be classified as
  current assets.

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End of Chapter 16