ST.

ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306
AUDIT AND ASSURANCE: CONCEPTS
AND APPLICATIONS 2
(WEEK 1 HANDOUT)
 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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WEEK 1: AUDIT OF CASH BALANCES

Since cash generally has a higher degree of inherent risk, more audit time is devoted to the audit of the account than is indicated by its peso amount.
The amount of cash flowing in and out of the cash account is frequently larger than for any other account in the financial statement. Furthermore, the
susceptibility of cash to defalcation is greater than for other types of assets because most other assets must be converted to cash to make them
usable.

The following misstatements which result in the improper payment of or failure to receive cash may be uncovered through the tests of controls and
substantive tests of transactions:
1. Failure to bill a customer
2. Billing a customer at a price lower than called for by company policy
3. Abstraction of cash receipts from customers before they are recorded
4. Duplicate payment of a vendor's invoice
5. Improper payments of officers' personal expenses
6. Payment for merchandise or goods that were not received
7. Payment to an employee for more hours than he or she has worked
8. Payment of interest to a related party for an amount far exceeding the going rate

The first three misstatements could be uncovered as part of the audit of the revenue and cash receipts cycle, the next three in the audit of the
acquisition and payment cycle, and the last two in the tests of the payroll and personnel cycle and the financing and investing cycle, respectively.

Entirely different types of misstatements are normally discovered in applying substantive test of details of balances. Examples are:
1. Cash received by the client subsequent to the statement of financial position date but recorded as cash receipts in the current year
2. Deposits recorded as cash receipts near the end of the year, depositedin the bank in the same month but still reported as a deposit in
transit in the bank reconciliation
3. Understatement of the outstanding checks in the bank reconciliation
4. Payments on notes payable debited directly to the bank balance by the banks but not entered in the client's records

The appropriate methods for discovering the preceding misstatements by testing the client's bank reconciliation will become clearer as we proceed.
At this point, it is important only that the reader distinguish between tests of controls and substantive tests of transactions that are related to the cash
account and tests that determine whether the book balance reconciles to the bank balance.

To blend the conceptual and procedural aspects of substantive tests for cash balances as well as for other accounts, the audit program presented is
keyed to and discussed in the context of the financial statement assertions discussed later.

AUDIT OBJECTIVES AND PROCEDURES

An audit program of representative year-end substantive testing procedures in the examination of cash is presented in Figure 11-1.

Student Name: ___________________________________________

Student No: _____________________________________________

Program and Section: _____________________________________

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 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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Discussion of Substantive Audit Procedures

1. Obtain analysis of cash balance and reconcile to the general ledger.
-This schedule will typically list the bank, the account number, account type (current, savings, time deposit) and the year-end balance per
books. This balance will then be traced and reconciled to the general ledger as necessary.

2. Confirm balances as of the statement of financial position date.

-A direct approach in proving existence of cash is to confirm amounts on deposit by communicating with financial institution officials. Figure
11-2 illustrates a standard bank confirmation form that may be used to this purpose. To assist the financial institution in completing the
form, information identifying accounts, loans and their balances are typed by the auditor. Other information such as additional accounts,

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 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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loans, may be provided by the financial institution. Bank confirmation request should be (a) sent to all banks in which the client has an
account, (b) signed by the client, (c) mailed by the auditor, and returned directly to the auditor.

3. Perform cash count procedures for cash on hand

-Existence of undeposited collections, petty cash funds and other funds may be verified by conducting a surprise count of these funds.
Figure 11-3 illustrates a cash count sheet that the auditor may use.

In conducting the cash count the auditor should follow these procedures:
i. Control all cash and negotiable instruments held by the client until all funds have been counted.
ii. Insist that the custodian of the cash be present throughout the count.
iii. Obtain a signed receipt from the custodian on return of the funds to the client.
iv. Ascertain that all undeposited checks are payable to the order of the client either directly or through endorsement. Figure 11-4
illustrates the working papers to determine the adjusted balance of Petty Cash Fund.

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 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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4. Obtain (prepare) bank reconciliations as of the statement of financial position date.

-If client provides the auditor with the reconciliation of the balance per the bank statement at the statement of financial position date with
the balance per the company's accounting records, he should examine such in detail to satisfy himself that is has been properly prepared.
A careful review of the client's reconciliation is important because a cash shortage may be concealed by omitting a check from the
outstanding checks list or by purposely making an error in addition on the reconciliation.

The examination of the client-prepared bank reconciliation should also include:

i. Tracing bank balances to bank confirmation responses
ii. Verifying the validity of the reconciling items
iii. Scanning the bank statements for erasures and alteration

Figures 11-5, 11-6, and 11-7 illustrate the forms of bank reconciliation. The forms most frequently used by auditors are those shown in Figure 11-5
(Bank to Books) and Figure 11-7 (Adjusted balances).

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 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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5. Trace all transfers occurring between banks near year-end.

-Tracing bank transfers isan effective procedure to disclose overstatement of cash balances resulting from kiting. Kiting is an irregularity
involving transfer of cash between banks, check drawn on one bank is deposited in another, several days (called the float period) usually
pass before the check clears the bank on which it is drawn. During the period, the amount of the check is included in the balance on
deposit at both banks. The bank balances are temporarily overstated to conceal a cash shortage or meet short-term cash needs.

Figure 9.8 illustrates kiting. Kiting can be prevented by segregation of functions; it can be detected by (a) obtaining and using a bank cutoff
statement and as mentioned (b) tracing bank transfers.

6. Obtain a cutoff bank statement containing transactions several days subsequent to the statement of financial position date.
-A cutoff bank statement is a statement covering a specified number of business days (usually 7 to 10) following the end of the client's
fiscal year.

This statement should be sent directly by the bank to the auditor. Upon receipt of the statement, the auditor should
a. Trace all prior year dated checks to the outstanding checks listed on the bank reconciliation.
b. Trace deposits in transit on the bank reconciliation to deposits on the cutoff statement.
c. Scan the cutoff statement and enclosed data for unusual items.

7. Prepare proof of cash and reconcile cash transactions occurring during a specified period as they are recorded by the bank and the client.
-A proof of cash is a simultaneous reconciliation of bank transactions and balances with corresponding data per books for a "specified time
period. A proof of cash is a substantive test that is generally prepared only when internal control over the recording of cash receipts and
disbursements is considered weak. This is essentially a fraud detection procedure which may be used for the last month of the year or for
selected months during the year.

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 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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Figures 11-9, 11-10, and 11-11 illustrate the Proof of Cash working papers.

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 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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8. Verify the client's cutoff of cash receipts and cash disbursements.

-If a cash count can not be done on the statement of financial position date to verify the accuracy of the client's cutoff of cash receipts, the
auditor can trace the deposits in transit on the year-end bank reconciliation to the credits on the bank statement on the first business day of
the new year. To ensure an accurate cutoff of cash disbursement, the auditor should determine the number of the last check prepared on
each bank account on the statement of financial position date and verify whether all checks up to this number have actually been mailed.
For cash receipts, the auditor should verify the number of the last official receipt and cash sales invoice used on the statement of financial
position date.

9. Review bank statements and banks' replies to confirmation letters.

-The auditor should review any bank overdrafts and note the existence of any funds that may be subject to withdrawal restrictions in order
to determine the effect(s) (if any) on financial statement presentation.

10. Verify existence of cash in bank under receivership, cash in foreign banks or in foreign currency.
-This can be done through examination of minutes, loan agreements and confirmations.

11. Investigate any checks representing large or unusual payments to related parties.
-Any large or unusual checks payable to directors, officers, employees, affiliated companies should be carefully reviewed to determine if
whether the transactions were properly authorized, recorded and adequately disclosed in the financial statements.

12. Evaluate proper financial statement presentation and disclosure of cash.

-Review financial statements to make sure:
a. material savings accounts and certificates of deposit are disclosed separately from cash in the bank,
b. cash adequately restricted disclosed, to certain and uses and compensating balances are
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 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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c. bank overdrafts are included as current liabilities.

ILLUSTRATIVE AUDIT CASES

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 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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 ST. ANTHONY’S COLLEGE

Business Education Department

San Jose de Buenavista, 5700 Antique

In SAC, we care!
Tel. No. (036) 5409238; 5400898; 5409971 Tel. No.: (036) 5409196

Website: www.sac.edu.ph Email: [email protected]; [email protected]

APC 306 – AUDIT AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

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