BANK AND

CASH CYCLE
(Controls)

Auditing Notes 13th Edition:

Chapter 10: Pages 10/3 – 10/26; 10/41 – 10/43
Chapter 11: Pages 11/3 – 11/16
Chapter 13: Pages 13/2 – 13/17
Chapter 09: Pages 9/91 – 9/91

Ms. Nasiphi Tantsi

LEARNING OUTCOMES

Explain the nature and purpose of the bank and cash cycle;

Demonstrate an understanding of a typical transaction in the bank and cash cycle;

Identify and describe the major general ledger accounts affected by the bank and cash cycle;

Explain the accounting treatment required for some of the transactions in the bank and cash cycle;

List and describe each of the bank and cash cycle's functional areas / functions; with specific reference to the purpose, main activities, and persons involved;

Demonstrate an understanding of the information system used in the bank and cash cycle; name and describe the documents and records utilised in the bank
and cash cycle and the purpose of each;

Describe the flow of transactions in the bank and cash cycle through the information system, including its relation to source documents and accounting
records and its relation to classes of transactions and events, and balances;
LEARNING OUTCOMES
Identify and describe the risks affecting the account balances, classes of transactions and events in the financial statements in the bank and cash;
Describe the control objectives for the bank and cash cycle;

Demonstrate an understanding of how internal controls may assist in achieving the control objectives in the bank and cash cycle;
Categorise and link business risks to control objectives;

Describe the internal control activities for the bank and cash cycle;

Describe and recommend the activities, responsible parties, documents and records, risks and manual controls applicable to each of the functional areas /
functions of the bank and cash cycle;

Categorise and link control activities to control objectives;

Analyse internal control systems in order to identify and explain weaknesses in the control system of the bank and cash cycle and recommend improvements
by describing the required internal controls;

Recommend a manual system of internal controls for the bank and cash cycle, that will achieve the cycle's control objectives; and
Apply any of the above-mentioned in a case study.
Nature and Purpose

Receiving Paying of Paying of related

cash from salaries and expenses to 3rd Payments to
parties e.g., UIF, our suppliers
customers wages to our
Sars, Medical aid
employees
etc.

Auditing notes page 10/3, 11/3 & 13/2

Typical Transaction

Credit Sales
= Credit Purchases
Receive =
Payment Make Payment
+
Issue Receipt AN 11/3 – 11/4
AN 10/3 -10/5

Salaries
=
Make Payment

AN 13/3 – 13/4

Cash Sale Cash Purchase

= =
Receive Payment Make Payment
+
Issue Receipt AN 11/3 – 11/4
AN 10/41

Auditing notes page 10/3 – 10/5; 10/41;11/3 - 11/4; 13/3 – 13/4.

Major General Ledger Accounts

Salaries /
Debtors Wages

Sales

Creditors
/ Liabilities
Expense
Documents

Remittance Remittance
Bank Independent
Register/ Advice Statement
Deposit record of Supplier
Receipt Customer (For of Supplier
slip sale invoice
Remittance payments)
Advice (POP)

General Pay slip

Creditor’s Payroll Wage
Ledger Pay Packets /
Ledger Journal
Salary
Advice

Monthly Cash Cash

Unclaimed Debtor’s Bank
schedule Receipts Payments
wage Ledger Reconciliation
for Journal Journal
register
deductions

Auditing notes page 10/5 – 10/6, 10/20 – 10/22, 10/41 – 10/43, 11/4 – 11/5, 13/4 – 13/5, 13/13 - 13/17
Risks

FRAUDULENT
FINANCIAL
REPORTING

Payroll and
Acquisitions and Revenue and
personnel
payments cycle receipts cycle
cycle

UNDERSTATING UNDERSTATING UNDERSTATING

FICTITIOUS FICTITIOUS

Auditing notes page 10/41 – 10/43, 10/55 – 10/56, 11/39 – 11/40 & 13/2, 13/13 – 13/17, 13/35 – 13/36
Risks

Misappropriation of
Assets

Selling of goods at Invalid Adjustments

Theft of cash Theft of goods Not paying VAT unauthorised reduced
on sales to debtors
prices

Ordering of goods for Making fictitious Accepting bribes from Theft of goods at Theft of goods at
personal use payments to creditors suppliers receiving stage receiving stage

EFT payments to Illegal employment

Theft of cash Fictitious employees Employee benefits
invalid bank accounts practices

Auditing notes page 10/41 – 10/43, 10/55 – 10/56, 11/39 – 11/40 & 13/2, 13/13 – 13/17, 13/35 – 13/36
Control Objectives

Risks

Validity Completeness Accuracy

Authorised No omissions Correct

Occurred

Auditing notes page 10/20 - 10/22, 10/41 - 10/43, 11/16, 13/13 – 13/17
Valid? Complete? Accurate?

Typical Transactions

Credit Sales
= Credit Purchases
Receive =
Payment Make Payment
+
Issue Receipt AN 11/3 – 11/4
AN 10/3 -10/5

Salaries
=
Make Payment

AN 13/3 – 13/4

Cash Sale Cash Purchase

= =
Receive Payment Make Payment
+
Issue Receipt AN 11/3 – 11/4
AN 10/41

Auditing notes page 10/20 – 10/22, 10/41 - 10/43, 11/16, 13/13 – 13/17
Control Activities

Approval and authorisation: Levels of authorisation

Segregation of duties: Incompatible duties performed by different employees

Isolation of responsibility: Signatures

Physical controls: Protecting assets – control / restrict access, safeguarding

Comparisons and Reconciliation: Identify, investigate, resolve differences

Access controls: Passwords, user profiles

Custody controls: Unused / blank documents

Document design: Accuracy and completeness of information

Performance reviews: Analysis

General and automated application controls: IT system

Auditing notes page 10/20 – 10/22, 10/41 - 10/43, 11/16,13/13 – 13/17

Manual system – internal control activities

Receipts / Cash Sales

Cashier (Cashier)

Payment
preparation Deductions:
and payout Payment

Auditing notes pages 10/20 - 10/22 ; 10/41 -10/43 ; 13/13 – 13/16 & 13/17 + 9/91 – 9/92
Manual system – internal control activities

Receipts / Cashier

People: Documents:
• Cashier • Remittance Register
• Independent 2nd Possible Risk:
• Remittance Advice
person • Receipt
• Cash received not banked
(Supervisor) • Bank Deposit slip
• Management • Bank Statement

Auditing notes page 10/20

Manual system – internal control activities

Recording of receipts

People:

• Clerk
Possible Risk: Documents:
• Supervisor
• Independent • Deposits not recorded • Bank deposit slip
person timeously or at all • Cash receipts journal
• Senior financial • Inaccurate recording of • Debtors’ ledger
employee deposits • General ledger
• Financial • Crediting to wrong debtor • Receipt
accountant • Overstated recording • Bank reconciliation
(fictitious) • Bank statement

Auditing notes page 10/21 – 10/22

Manual system – internal control activities

Cash sales (Cashier) Principles:

• Physical safeguards
• Independent record of
sale
• Independent record not
Documents: alterable
• Independent record
sequentially numbered
• Record of sale • Cash not allowed to
• Daily summary accumulate
of cash sales • On Transfer: count,
• Reconciliation reconcile, document,
• Bank deposit sign
slip • Cash should be banked
regularly (Daily)

Auditing notes page 10/41-10/43

Manual system – internal control activities

Cash
Cash Sales
sales (Cashier)
(Cashier)

Auditing notes page 10/41 – 10/43

Manual system – internal control activities

Payment preparation Possible risks:

• Payment to fictitious
creditors
• Payment of incorrect
amounts
Documents: • Unauthorised payments
• Remittance • Discounts lost due to
advice late payments
• Supplier invoice
• Statement of
supplier
• Supporting
documentation
• Creditor’s
ledger

Auditing notes page 11/16

Manual system – internal control activities

Payment preparation
and payout
Documents:
People:

• Head of payroll • Wage packet

Possible Risks: • Wage journal
• Two signatories
• Two wage • Incorrect or unauthorised • Reconciliation Payroll
department wage amount requested • Request for payment
members • Incorrect cash placed in the • Payslips
• Section head wage packet • Batch register
• Independent • Theft/cash stolen • Unclaimed wage
paymaster • Wages paid to non- register
• Section employees • Deposit sli
foreman • Misappropriation of • Independent
• Independent unclaimed wages reconciliation
person

Auditing notes page 13/13 - 13/16

Manual system – internal control activities

Deductions:
Payment and
recording
Documents:
People:

• One employee • General ledger

Possible Risks: • Payroll (wage journal)
• Supervisor
• Signatories • Penalties due to non- • Cash payment journal
• Financial payment, late payment or • Return form
accountant short-payment • Monthly schedule
• Criminal/Civil case due to
non-payment
• Incomplete amounts paid
• Inaccurate amounts pai
• Return forms incorrectly
completed

Auditing notes page 13/17

EFT Payments – internal control activities

Preventative Controls: Electronic Fund

Transfers (EFT’S)

Detective Controls:

Preventative Controls:
• All EFT payments should be documented on pre-printed, • Confirmation of EFT payments
sequenced EFT payment vouchers. printed, matched to EFT payment
• Each EFT payment voucher - authorised by two employees voucher and attached
(independent of making payment) • Senior manager access list of
• EFT payment vouchers - sequenced checked, verified supporting payees on payee file &
documentation before being authorised. reconcile to audit trail of
• EFT payment vouchers – once-off payments: banking details payees added/removed
verified independently. • Security violations logged and
• Financial manager – log onto banking website, SMS followed up
• Another senior employee - enter password (not known to FM) • Cash book reconciliation
• PIN & passwords strictly confidential – FM should not leave cell regularly performed, by
phone lying about someone independent of
• Limit on amount transferred – 24-hour period payment process
• Limit on each single EFT payment amount
• Terminal shut down – 3 unsuccessful attempts & period inactivity
• Ability to access Internet – restricted to PCs employees needed
for the task

Auditing notes page 9/92

How study unit could be examined:
Weakness vs Recommendations vs Risks

Weaknesses are control activities that are not in place or not working as they should (“no / not”).
If a weakness is written with a “should / must / etc.”, it is incorrect– NO MARKS WILL BE GIVEN.
This represents a control activity and not a weakness.
You need to identify the weakness by writing it in a negative format– if you write it in a positive format or a
recommendation format– NO MARKSWILL BE GIVEN.
Example:
The scenario states: “The order clerk issued one (1) internal sales order (ISO).” •
The ISO was not issued in multi-copy / There is only one (1) ISO issued and not two (2). CORRECT •
The order clerk issued only one (1) ISO / there is only one (1) ISO. INCORRECT (not provided in the negative
format).
The order clerk must issue more than one (1) copy of the ISO. INCORRECT (this is a recommendation, not a
weakness)
How study unit could be
examined:
Recommendations are things that SHOULD / MUST be implemented
Recommendations are the actions the entity SHOULD implement to
overcome / address the weakness and the reason why it overcomes /
addresses the weakness.
Example: The scenario states: "The order clerk issued one (1) internal sales
order (ISO).”
The order clerk should issue more than one (1) copy of the ISO so that all the
relevant departments will receive an ISO. CORRECT
How study unit could be
examined:
Explanation means to further explain the weakness by possible risks.
These risks are from the business’ point of view– possible consequences because of a
weakness / what would happen if the weakness is there. What could happen….Might… It is
not a recommendation / an improvement (which are control activities).
Example:
The scenario states: "The order clerk issued one (1) internal sales order (ISO).”
• Orders might not be acted upon at all, resulting in a loss of sales and customer goodwill.
CORRECT • The order clerk should issue more than one (1) copy, otherwise orders might not
be acted upon at all. INCORRECT (this is a recommendation, and not an explanation).
Questions?