Auditing & Assurance Concepts

and Applications

CHAPTER 3
AUDIT OF CASH
Question 1

Substantive procedures are designed to

A
Which of the following is a detect material misstatements
true statement?
Substantive procedures do not vary based on
B the extent and results of the control testing
performed

Substantive procedures are comprised of

C
tests of details and tests of controls
Question 1

Substantive procedures are designed to

A
Which of the following is a detect material misstatements
true statement?
Substantive procedures do not vary based on
B the extent and results of the control testing
performed

Substantive procedures are comprised of

C
tests of details and tests of controls
Question 2

The assessed level of risk will not affect the

A procedures performed or the types of audit
Which of the following is evidence to obtain
true regarding the
assessed level of risk and For significant RoMMs or fraud risks, less
the audit evidence that can B persuasive and reliable audit evidence
be obtained? should be obtained

The type of audit evidence to obtain

C depends upon the procedures performed
and the assessed level of risk
Question 2

The assessed level of risk will not affect the

A procedures performed or the types of audit
Which of the following is evidence to obtain
true regarding the
assessed level of risk and For significant RoMMs or fraud risks, less
the audit evidence that can B persuasive and reliable audit evidence
be obtained? should be obtained

The type of audit evidence to obtain

C depends upon the procedures performed
and the assessed level of risk
ASSERTIONS USED BY THE AUDITOR:
​Assertions about account balances at period end:

Rights and The entity holds or controls the rights to

obligations assets and liabilities are the obligations of the
company.
Existence Assets, liabilities and equity interests exist.
Completeness All assets, liabilities and equity interests that
should have been recorded have been
recorded.
Bank account
Valuation and Assets, liabilities and equity interests are
Cash on hand
allocation included in the financial statements are
appropriate amounts and any resulting
valuation and allocation adjustments are
appropriately recorded.
ASSERTIONS USED BY THE AUDITOR:
​Assertions about classes of transactions and events for the period under audit:

Completeness All transactions and events that should have

been recorded have been recorded.

Occurrence Transactions and events that have been

recorded have occurred and pertain to the
entity.

Cut-off Transactions and events

Bank account have been recorded
in the correct accounting period.
Cash on hand

Accuracy Amounts and other data relating to recorded

transactions and events have been recorded
appropriately.

Classification Transactions and events have been recorded

in the proper accounts.
ASSERTIONS USED BY THE AUDITOR:
​Assertions about presentation and disclosures:

Occurrence and Disclosed events, transactions and other

rights and matters have occurred and pertain to the
obligations entity.

Completeness All disclosures that should have been included

in the financial statements have been
included.

Classification and Financial information is appropriately

Bank account
understandability presented and described,
Cash on hand and disclosures are
clearly expressed.

Accuracy and Financial and other information are disclosed

valuation fairly and at appropriate amounts.
Auditing Cash
 Discuss audit objectives
for cash receipt and
disburse transactions

Identify appropriate
audit procedures in the
OBJECTIVES examinate cash account
balances and
transactions

Illustrate and apply audit

of cash
What is cash?
CHAPTER 3 - AUDIT OF CASH

What is cash?

Types

Timing differences

Recording

Documentation

13
CHAPTER 3 - AUDIT OF CASH

Q: Where is cash held?

Bank account

Cash on hand
CHAPTER 3 - AUDIT OF CASH

Q: Where is cash held?

Answer

Bank account

Cash on hand
CHAPTER 3 - AUDIT OF CASH

Q: What are the types of cash recorded

in a cash account balance?

Cash on hand
Cash in bank account(s)
Cash equivalents
CHAPTER 3 - AUDIT OF CASH

Q: What are the types of cash recorded

in a cash account balance?
Answer

Cash on hand
Cash in bank account(s)
Cash equivalents
CHAPTER 3 - AUDIT OF CASH

Q: How do you know how much money you

have in your bank account?

Bank Statement

Cash account balance

CHAPTER 3 - AUDIT OF CASH

Q: How do you know how much money you

have in your bank account?
Answer

Bank Statement

Cash account balance

CHAPTER 3 - AUDIT OF CASH

Q: There are often differences between

what an entity has in its cash records and
what is on the bank statement. Why do you
think these differences may arise?

Timing
CHAPTER 3 - AUDIT OF CASH

Q: There are often differences between

what an entity has in its cash records and
what is on the bank statement. Why do you
think these differences may arise?
Answer

Timing
CHAPTER 3 - AUDIT OF CASH

Q: Have you ever…

Consider this

• deposited money into a bank

account?
• issued a cheque?

• made an electronic payment?

CHAPTER 3 - AUDIT OF CASH

Q: When did these transactions reflect in

your bank statements? Were they reflected
immediately or was there a delay?

• Deposit

• Cheque

• Electronic payments
CHAPTER 3 - AUDIT OF CASH

Q: When did these transactions reflect in

your bank statements? Were they reflected
immediately or was there a delay?

Answer

• Deposit – once processed by bank

• Cheque – once received and deposited by

recipient
• Electronic payments – depends on nature of
payment
 CHAPTER 3 - AUDIT OF CASH
​Deposits

COMPANY A BANK

Company A
records P100 16th June
deposit on 16th
June

The bank records deposits

the next working day.
This deposit only
appears on the
bank statement
on 17th June.

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 CHAPTER 3 - AUDIT OF CASH
​Cheques

Company A Company B does

writes a cheque not encash the
for P100 to cheque until 15th
Company B on June
2nd June

Company A Payment appears

records P100 on the bank
payment on 2nd statement 16th
June June

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 CHAPTER 3 - AUDIT OF CASH
​Electronic payments – By the bank

The bank records P50 of Company A does not receive Company A then recognises
account fees directly their monthly bank statement the fee in their cash
Company A’s bank account on or check online banking until accounting on
30th June 2nd July 2nd July

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 CHAPTER 3 - AUDIT OF CASH
​Electronic payments – By the entity

Company A
sends P100 via
electronic
transfer to
Company B on
15th June The bank does not process the payment
until 17th June

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CHAPTER 3 - AUDIT OF CASH

Q: What does the entity do when they

identify differences?
CHAPTER 3 - AUDIT OF CASH

Q: What does the entity do when they

identify differences?

Answer

Prepare bank reconciliation

Frequency dependent on bank

activity level
CHAPTER 3 - AUDIT OF CASH
​What are bank reconciliations?

Session 2

Prepared by the
entity

Understanding and identifying

reconciling items is key

General ledger Bank reconciliations Identifies timing

versus
differences
bank statement
 CHAPTER 3 - AUDIT OF CASH
​Example bank reconciliation

Balance per bank 100,000

Reconciling items: (90,000)

Additive items: 10,100 Additive items
Deposit in transit 10,000
Items which increase the
Bank fee not recorded 100 balance per bank
Subtractive items: (100,100)
Electronic Fund Transfer (20,000)
Outstanding Cheques (80,000) Subtractive items

Bank interest/fees not recorded (100) Items which decrease the

balance per bank
Balance per entity 10,000

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 CHAPTER 3 - AUDIT OF CASH
​Accounting for cash

A debit always increases the value of an asset

A credit always decreases the value of an asset

If an entity spends some cash, If an entity receives some cash,

they CREDIT their cash they DEBIT their cash
balance balance

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 CHAPTER 3 - AUDIT OF CASH

How do we audit cash?

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 CHAPTER 3 - AUDIT OF CASH
​Auditing cash

Bank Confirmations and

Statements Cash Reconciliation

Primary procedure is bank confirmation. All bank Perform the cash / bank reconciliation by
confirmations are sent out and monitored agreeing the balance per the general ledger to
directly by the auditor. Once received, the bank the bank confirmation or bank statement
confirmation replies are compared to the balance received, and documenting the reconciling
in the general ledger. items identified. The adjusted balance per
bank is compared to the general ledger and
When bank confirmation reply is not received,
alternative procedure is bank statements any differences noted.
checking versus general ledger

Reconciling items

Test of detail procedures performed on

reconciling items identified as part of the cash
reconciliation, additive and substantive.
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 CHAPTER 3 - AUDIT OF CASH
​Example of auditing cash

Bank reconciliation
Bank confirmation Balance per bank 100,000
or statement Reconciling items: (90,000)
Additive items 10,100
Subtractive items (100,100)
Bank Reconciliation Balance per entity 10,000
testing

General ledger
Reconciling item testing
Supporting
documentation
/other evidence
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 CHAPTER 3 - AUDIT OF CASH
​Example of auditing cash

When reviewing bank

confirmation letters, you
may notice loans or other
non-cash items. Ensure you
classified correctly where
anything other than cash/
bank accounts on a letter is
recorded.

For foreign currency bank account

balances, the balance per entity in the
bank reconciliation needs to be
recalculated by applying the rates from
an independent source to agree to the
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 CHAPTER 3 - AUDIT OF CASH
​Common issues and errors

A reconciling item may be due to an Incomplete bank confirmations

error or a misposting made by the received or confirmations not
entity or the bank – they are not received from banks
always legitimate

Not all bank accounts recorded are Foreign currency bank

under the control of the entity – be accounts are translated
careful with group accounts! incorrectly.

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 CHAPTER 3 - AUDIT OF CASH
​Bank confirmation template

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 CHAPTER 3 - AUDIT OF CASH
​Bank confirmation template

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 Any Questions?

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 CHAPTER 3 - AUDIT OF CASH
​Cash on Hand Reconciliation

Cash on Hand Reconciliation

Perform the testing procedures for any cash on hand

balances.

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 CHAPTER 3 - AUDIT OF CASH
​Cash on hand confirmation template

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 CHAPTER 3 - AUDIT OF CASH
​Key learning points

Key audit evidence when testing cash are

bank statements and bank confirmations

All items included in the bank

confirmation should be reviewed and
clearly documented in our testing

A bank reconciliation is re-performed to

identify reconciling items for further
testing

Reconciling items can arise as a result of

timing differences and or error

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