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    Substantive Procedures-Cash

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    Ell V
    This document outlines substantive audit procedures for auditing cash balances and transactions. It discusses using analytical procedures like comparing cash balances to prior years and investigating outstanding checks. It also describes tests of details, including tracing samples of cash receipts and payments, cut-off tests around year-end, and confirming bank balances. The document provides guidance on materiality considerations for cash, inherent risks, initial procedures, and tests of cash balances, transactions, and cut-off, as well as presentation and disclosure requirements.

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    Substantive Procedures-Cash

    Uploaded by

    Ell V
    143 views3 pages
    This document outlines substantive audit procedures for auditing cash balances and transactions. It discusses using analytical procedures like comparing cash balances to prior years and investigating outstanding checks. It also describes tests of details, including tracing samples of cash receipts and payments, cut-off tests around year-end, and confirming bank balances. The document provides guidance on materiality considerations for cash, inherent risks, initial procedures, and tests of cash balances, transactions, and cut-off, as well as presentation and disclosure requirements.

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    This document outlines substantive audit procedures for auditing cash balances and transactions. It discusses using analytical procedures like comparing cash balances to prior years and investigating outstanding checks. It also describes tests of details, including tracing samples of cash receipts and payments, cut-off tests around year-end, and confirming bank balances. The document provides guidance on materiality considerations for cash, inherent risks, initial procedures, and tests of cash balances, transactions, and cut-off, as well as presentation and disclosure requirements.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    143 views3 pages

    Substantive Procedures-Cash

    Uploaded by

    Ell V
    This document outlines substantive audit procedures for auditing cash balances and transactions. It discusses using analytical procedures like comparing cash balances to prior years and investigating outstanding checks. It also describes tests of details, including tracing samples of cash receipts and payments, cut-off tests around year-end, and confirming bank balances. The document provides guidance on materiality considerations for cash, inherent risks, initial procedures, and tests of cash balances, transactions, and cut-off, as well as presentation and disclosure requirements.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    Substantive Procedures Lary Lou Ventura

    (1) Analytical procedures

    Since cash does not have a predictable relationship with other financial statement accounts
    because of its residual nature, therefore, the auditor’s use of analytical procedures for auditing cash
    balances is limited to:
    (a) Compare with prior years’ cash balances and to budgeted amount.
    (b) Identify receipts of the next accounting period and investigate the long outstanding
    cheques, determine whether they should be reflected in the balances at year end period.

    (2) Test of details of cash transactions

    Audit Objectives Substantive Procedures


    1. Occurrence /  Select samples of cash receipts from cash book and trace to
    Existence remittance advices, pay-in slips, and bank statement.
     Select samples of cash payments from cash book and trace to payment
    vouchers (with supporting documents) and bank statements.
     Scan through the entries and trace all the unusual items, like contra
    items, stopped payment items and cancelled cheques, to support
    documents and authorization.
    2. Completeness  Trace a sample of remittance advices and pay-in slip to cash receipt
    journal.
     Trace a sample of payment vouchers (with supporting documents) to
    cash book.
    3. Accuracy  Agree the total of cash receipts and payments to general ledger.
    4. Valuation  Compare a sample of remittance advices with amount in cash
    receipts recorded in the cash book.
     Compare a sample of (cancelled) cheques with amounts in cash
    recorded in the cash book.
    5. Cut-off  Compare the dates for recording a sample of cash transactions with the
    dates of cash deposited in bank or cheques sent.
    6. Classification  Examine a sample of cash receipts and payments transactions for
    proper classification.

    (3) Test of details of cash balances

    Audit Objectives Substantive Procedures


    1. Occurrence,  Agree balance on bank confirmation with bank reconciliation and cash
    completeness book.
    and valuation  Trade deposits in transits, outstanding cheques and other reconciling
    items to cut-off bank statements.
    2. Accuracy  Check calculation of bank reconciliation and agree with book balance
    on cash book and general ledger.
    3. Cut-off  For cash receipts, observe cash count for the last day of the year end and
    trace deposits to cash receipts journal and cut-off banks statement.
     For cash disbursement, record the last cheque issued at the year-end date
    and trace to cash payments in the cash book; and trace outstanding cheques
    on bank reconciliation and investigate any cheque clearing after a long delay.
    4. Classification,  Review board of directors’ minutes, bank letter, loan agreement or other
    presentation and documents for any restrictions on cash.
    disclosure  Ensure bank loans and overdrafts are not offset against positive bank
    balances in the financial statements.
    Lary Lou Ventura
    CASH: Materiality and Risk

    Materiality
     Amount of cash flowing thru the accounts over a period over time
     Cash is vital to the survival of the business as a going concern (i.e. Liquidity)
     Material in a qualitative way even if not material in a quantitative way

    Inherent Risk
     High volume of transactions
     Nature of cash – susceptible to theft

    OVERALL AUDIT STRATEGY


    (1) Concentrate on verifying ENDING BALANCE of CASH
     Cash cut-off tests
     Tracing bank transfers
     Counting cash on hand
     Confirming certain balances and other arrangements with banks
     Reviewing bank recon
     Obtaining and using subsequent period bank statements
     Determining the adequacy of management’s disclosures for cash balances

    (2) Always keep in mind the POSSIBILITY of THEFT regardless of the amount of ending balance
    of cash
    (3) Acceptable detection risk in verifying cash balances is SET AS LOW.

    DESIGNING SUBSTANTIVE PROCEDURES


    A. Initial Procedures
    (1) Trace opening balances for cash to previous year’s working papers
    (2) Review activity in general ledger accounts for cash and investigate entries that appear
    unusual in amount or source
    (3) Obtain entity-prepared summaries of cash, verify mathematical accuracy, and determine
    the agreement with the general ledger
    (4) Obtain copies of all bank recons for the year and audit the figures

    B. Analytical Procedures
    Since cash does not have a predictable relationship with other financial statement
    accounts because of its residual nature, therefore, the auditor’s use of analytical
    procedures for auditing cash balances is limited to:
    (1) Compare with prior years’ cash balances and to budgeted amount.
    (2) Identify receipts of the next accounting period and investigate the long outstanding
    checks, determine whether they should be reflected in the balances at year end period.

    C. Tests of Details of Transactions


    (1) Perform cash cut-off tests
    (a) Observe that all cash received by the end of reporting period is included in cash and
    that no receipts of the subsequent period are included
    (b) Review documentation such as daily cash summaries, duplicate deposit slips, and
    bank statements covering several days before and after the year-end date to
    determine proper cut-off.
    (c) Observe the last check issued and mailed on the last day of the financial year and
    trace to the accounting records to determine the accuracy of the cash payments
    cutoff
    (d) Compare dates on checks issued for several days before and after the year-end
    date to the dates on which the checks were recorded

    (2) Trace bank transfers before and after the end of the reporting period to determine that
    each transfer is properly recorded as a payment and a receipt in the same accounting
    period
    Lary Lou Ventura
    D. Tests of Details of Balances
    (1) Confirm bank balances (addresses mainly the existence assertion)
    Importance of Bank Confirmation:
     Direct confirmation gives auditor independent, 3rd party evidence
     Bank letter may reveal details of security, borrowings and contingent liabilities
    w/c needs to be disclosed in the FS
     Info obtained assists auditor by providing external evidence in relation to
    matters such as the existence, completeness and valuation of assets and
    liabilities.
     May enable auditor to perform additional tests if there are discrepancies

    (2) Confirm other arrangements with banks (addresses disclosure assertion)


     BOE held by bank for collection, bills discounted with recourse, guarantees of
    loans to 3rd parties and unused facilities

    (3) Verify bank reconciliations as appropriate (addresses valuation assertion)


    (a) Check mathematical accuracy and compare with general ledger
    (b) Verify the bank balance per bank confirmation with the bank balance per
    reconciliation
    (c) Trace OC and DIT on the bank recon to the subsequent period’s bank statement
    (d) Verify any bank charges or errors on the reconciliation with the bank statement or
    other supporting documentation

    When does the auditor perform the bank recon? when


     The client has not prepared one
     The client’s recon has some significant unreconciled items
     There is lack of segregation of duties in the preparation of bank recon

    (4) Obtain and use the subsequent period’s statements to verify bank recon items and look
    for evidence of window dressing
    (5) Count cash on hand (undeposited cash receipts and change funds)

    E. Presentation and Disclosure


     Compare statement presentation with applicable accounting standards
     Cash should be correctly identified and classified in the SFP
     There should be appropriate disclosure of arrangements with banks such as line of
    credit, compensating balances and contingent liabilities
     Bank overdraft is normally reported as a current liability

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