Lecture Auditing and assurance services (Second international edition) Chapter 16 Auditing the financinginvesting process

Chapter 16 Auditing the financinginvesting process Cash and investments. In this chapter, the learning objectives are Understand the relationship of the various business processes to cash, know the different types of bank accounts, know tests of details of transactions used to audit cash, be able to explain tests of details of account balances used to audit cash.

Auditing the Financing/Investing Process:

Cash and Investments

Chapter Sixteen

Cash and the Effect of Other Business

Examples: Treasury bills, commercial paper, and money

Cash and the Effect of Other Business

Processes

Types of Bank Accounts

In order to maximize its cash position, an entity

implements procedures for accelerating the collection

of cash receipts and delaying the payment of cash disbursements, to the extent delay is appropriate

General

Cash

Account

Imprest Cash Accounts

Branch Accounts

Types of Bank Accounts

The Effects of Controls

The reliability of the client’s controls over cash affects the nature and extent of the auditor’s tests of details.

Controls for

Cash Receipts

Controls for Cash Disbursements

Completion of

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 entity’s

bank reconciliations

Because of the residual nature of the cash account, the auditor’s use of substantive analytical procedures for auditing cash is limited to

Because of the residual nature of the cash account, the auditor’s use of substantive analytical procedures for auditing cash is limited to

comparisons with prior years’ cash balances.

comparisons with prior years’ cash balances.

comparisons with budgeted amounts

comparisons with budgeted amounts

Substantive Tests of Details of Transactions

and Balances

Balance-Related Assertions

Auditing the General Cash Account

Copy of Bank Reconciliation

Bank Confirmation

Cut-off Bank Statement

To audit a cash account, the auditor should obtain these

items.

Bank Reconciliation Working Paper

Cut-off Bank Statement

Date of Last Bank Reconciliation

7 to 10 Days

A cut-off bank statement normally covers the 7-

to 10-day period after the date on which the bank

account is reconciled

For reconciliation purposes, any item should have cleared the client’s bank account during the

7- to 10-day period

Tests of the Bank Reconciliation

The auditor uses the following audit procedures

to test the bank reconciliation:

1 Test the mathematical accuracy and agree the balance per the books

to the general ledger.

2 Agree the bank balance on the reconciliation with the balance shown

on the bank confirmation.

3 Trace the deposits in transit on the bank reconciliation to the cut-off bank statement.

4 Compare the outstanding cheques on the bank reconciliation with the cancelled cheques in the cut-off bank statement for proper payee, amount and endorsement.

5 Agree any charges included on the bank statement to the bank

reconciliation.

6 Agree the adjusted book balance to the cash account lead schedule.

Fraud-Related Audit Procedures

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 client’s cash balance at the bank would then

be €5,000 less than reported on the client’s books The employee could ‘hide’ the €5,000 shortage in the bank reconciliation by including a fictitious

deposit in transit.

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 client’s cash balance at the bank would then

be €5,000 less than reported on the client’s books The employee could ‘hide’ the €5,000 shortage in the bank reconciliation by including a fictitious

deposit in transit.

Proof of Cash

Tests for Kiting

Auditing a Payroll or Branch Imprest

The audit of any imprest cash account such as payroll or a branch

audit steps discussed under the audit of the general cash account

Auditing Petty Cash Fund

Usually not

material.

Potential for defalcation.

Seldom perform substantive tests.

Document controls.

Disclosure Issues for Cash

Disclosure Issues for Cash

Disclosure Issues for Cash

Common Stock Preferred Stock

Debt Securities Hybrid Securities

Control Risk Assessment –

Investments

Here are some of the more important assertions for investments

Occurrence

and Authorization

Completeness

Accuracy and Classification

Segregation of Duties

Substantive Procedures for Testing

Investments

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

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.

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 borrower’s 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

Permanently Impaired = Write down to new carrying amount

Tests of Details – Investments

Disclosure Assertions

 Marketable securities need to be properly classified as maturity, trading and available-for-sale.

held-to- 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.

End of Chapter 16