OPAUD M11 - Finance Function Audit (Part 3)

Module 11:
Auditing the
FINANCE FUNCTION PART 3
(Cash and Investments)
John John J. Dorega, CPA

Far Eastern University
Institute of Accounts, Business and Finance
TOPICS
Part 1
Audit of Cash
Part 2
Audit of Investments
Part 1
Auditing Cash
Process of Cash
Types of Bank Accounts
1. General cash account

The principal cash account.
Cash receipts from revenue process
Cash disbursements for purchasing and
HR management processes.
May also be used for cash receipts and
disbursements from other bank accounts.
For small entities, the only cash account
maintained.
2. Imprest cash account
Contains a stipulated amount of money.
Used for limited purposes.
Frequently used for disbursing:
a) Payroll
Contains a minimum balance for
disbursing payroll.
b) Dividend checks.
Contains a minimum balance for
disbursing dividends.
3. Branch account
Contains cash accounts of each branch that
operates in a certain location.
Used to pay local branch expenses.
Used to maintain a banking relationship in
the local community.
3. Branch account - continued
Manner of operations As Branch payment
function:
a) A minimum balance is maintained for
branch payments.
b) A periodic cash report is submitted to
headquarters.
c) It receives a check or transfer from
general account.
3. Branch account - continued
Manner of operations As General Cash
function:
a) Serves as a general cash account by
recording:
Cash receipts
Cash disbursements
b) Must submit periodic cash reports to
headquarters for monitoring purposes.
Summary of Internal Control
1. Cash receipts should be deposited
intact that is the same amount and
form as they are received.
(Completeness)
2. Daily cash receipts are to be reconciled

with postings to the accounts
receivable subsidiary ledger.
(Completeness)
3. Incoming checks are to be
a) restrictively endorsed
b) Stamped For deposit only to the
companys bank account.
(Completeness)
4. All disbursements should be authorized

and made by check except those
involving small amounts which should
be paid from petty cash fund.
5. Outgoing checks are to be signed only
when all documents included in the
voucher packet have been
independently approved.
(Authorization)
6. Both receipts and disbursements

should be properly accounted for in the
records. (Accuracy and completeness)
7. Monthly bank reconciliation should be
prepared monthly by client personnel
who are independent of handling and
recording cash receipts and
disbursements. (Accuracy and
completeness)
8. There should be separation of personnel
duties for:
a) Receiving cash
b) Recording receipts
c) Depositing cash collections
d) Reconciling bank account
e) Authorizing disbursement
f) Disbursing cash
Petty Cash Fund Internal Control
1. Should be
maintained on an
imprest basis by an
independent
custodian.
2. Should be Petty Cash custodian does

have other cash related functions to
perform, another supervisory person
(like Controller) should review the
petty cash activity.
3. Pre-numbered petty cash vouchers
should be used for withdrawing cash
from the fund.
4. A limit should be placed on the size of
reimbursements made from the PCF.
5. Periodically, the PCF must be

reimbursed from the general cash
account for the amount of the vouchers
in the fund.
6. Accounts Payable Clerks should review
the vouchers for propriety before
replenishing the petty cash fund.
7. Someone independent of the cash

functions should conduct surprise counts
of the petty cash fund.
8. The petty cash (actual cash and all the

supporting vouchers and receipts) is
normally kept in a locked drawer or box.
Petty Cash Fund Audit Test
1. Gain understanding controls over petty
cash fund.
2. The focus is both on the transactions

processed through the fund during the
period and the balance in the fund.
3. Select a sample of petty cash

reimbursements and examine the
propriety of the items paid for by the
fund.
4. Test the balance in the petty cash fund
by counting it.
Sample Petty Cash Book
DEBIT CREDIT
Distribution of Expenses
Sample PCF Replenishment Report
Sample PCF Count Sheet
Problem:
As part of your internal audit of Manila Company,
you made a surprise count of petty cash fund on
January 2, 2014. Its compositions are as follows:
Items Amount
Currency 12,000
Coins 2,000
Petty Cash Vouchers:
Gasoline for delivery trucks 3,200
Office supplies expense 2,600
Delivery expense 3,200
Office equipment repairs 6,000
Loan to office employees 4,000
Problem - continued
Items Amount
A check drawn by the Manila Company payable 14,000
to the order of Cory Pot, the petty cash
custodian
An employees check returned by bank as an 2,000
NSF check
Unclaimed wages placed in a separate box 4,500
The petty cash general ledger has an imprest

balance of P 50,000.
Problem Petty Cash Count
Explanation Sub-Total Total
Currency 12,000
Coins 2,000
Petty Cash Vouchers:
Gasoline for delivery trucks 3,200
Office supplies expense 2,600
Delivery expense 3,200
Office equipment repairs 6,000
Loan to office employees 4,000 19,000
Replenishment check 14,000
Employees NSF check 2,000
Total PCF per count 49,000
Total PCF per general ledger 50,000
PCF Shortage (1,000)
Problem Sample Petty Cash Audit Issues
No. Audit Issue

1 Employees advances from the petty cash fund
is allowed.This is evidenced by a loan to office
employee amounting to P 4,000, and by an NSF
check of employee amounting to P 2,000.
2 Unclaimed wages amounting to P 4,500 is
being kept by the petty cash custodian.This
may be used to cover up any shortages in the
petty cash fund.
Part 1
Auditing Investments
Investments Consideration
1. This may include

a) Equity securities
Investment in Ordinary shares
Investment in Preference shares
b) Debt securities
Investment in Bonds
c) Hybrid securities
Convertible bonds
Convertible stocks
2. The auditors approach may vary
depending on the size of
investment and the amount of
investment activity, particularly
financial audit.
a) Reliance strategy internal control
related.
b) Substantive strategy
Control Risk Assessment
1. Management assertion
OCCURRENCE AND AUTHORIZATION
Purchase and sale of investment is properly
initiated by authorized individuals.
Adequate documentation transaction
validity.
Commitment of resources must be
approved by the BOD or by an
executive, or investment committee (if
any) who are authorized for it.
COMPLETENESS
Must have adequate controls to ensure
that all security transactions are recorded.
Maintenance of security ledgers that
records all securities owned by the
client.
Regular reconciliation of subsidiary ledgers
to general ledger.
Periodic review of securities owned by
independent personnel (receipts of
dividends and interests)
EXISTENCE (Substantive Test)
Perform the following:
a) Physical examination.
b) Confirmation with issuer.
c) Confirmation with the custodian.
d) Confirmation of unsettled transactions
with the broker-dealer.
e) Confirmation with the counterparty.
f) Reading executed partnership or
similar agreements.
Sample Working Paper for Investment Format
Name Class & Serial DATE RATE Other

Description No. relevant
Maturity Registratn Interest Dividend information
ACCURACY AND CLASSIFICATION
Must have controls to ensure proper
classification and accurate pricing for
financial statement purposes.
Must have adequate custodial procedures

to safeguard against theft.
Safe deposit box
Must have procedures for periodic

inspections by independent individual
(other than custodial and accounting
functions)
4. Segregation of Duties
No. This must be Segregated to Possible fraud
1. Initiation Final approval Fictitious transaction
function function can be made.
Securities can be stolen.
2. Valuation Acquisition Securities values can be

monitoring function improperly recorded or
function not reported to
management.
No. This must be Segregated to Possible fraud
3. Maintaining Making entries Concealment of any
the securities in the GL defalcation that would
ledger function normally detected by
function reconciliation of SLs
and GL accounts.
4. Custodial Accounting Concealment of theft of

function function securities.
Summary of Related Controls
1. Purchases and sales should be made
only on proper authorization.
2. Access to securities should not be

vested in one person only.
3. Custodianship of investment securities

and the accounting for securities should
be separated.
Summary of Related Controls
4. Securities must be physically controlled
in order to prevent unauthorized usage
and they must be registered in the
name of the owner.
5. Revenues received from investments

periodically should be reconciled with
the amounts that should be received.
Thank your for listening!

OPAUD M11 - Finance Function Audit (Part 3)

Uploaded by

Copyright:

Available Formats

OPAUD M11 - Finance Function Audit (Part 3)

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

OPAUD M11 - Finance Function Audit (Part 3)

Uploaded by

Copyright:

Available Formats

Module 11:

John John J. Dorega, CPA

1. General cash account

2. Daily cash receipts are to be reconciled

4. All disbursements should be authorized

6. Both receipts and disbursements

2. Should be Petty Cash custodian does

5. Periodically, the PCF must be

7. Someone independent of the cash

8. The petty cash (actual cash and all the

2. The focus is both on the transactions

3. Select a sample of petty cash

The petty cash general ledger has an imprest

No. Audit Issue

1. This may include

Name Class & Serial DATE RATE Other

Must have adequate custodial procedures

Must have procedures for periodic

2. Valuation Acquisition Securities values can be

4. Custodial Accounting Concealment of theft of

2. Access to securities should not be

3. Custodianship of investment securities

5. Revenues received from investments

You might also like