AP-2:  Audit Program for Cash

Company           Balance Sheet Date     

 
          The company has the following general ledger accounts that are classified in the cash caption of
the balance sheet.
General Ledger Bank Authorized
  Account Number   Description   Account Number   Check Signer  
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 

Audit Program for Cash

Company            Balance Sheet Date       

Audit N/A Workpaper

Objectives Performed Index
Audit Procedures for Consideration by
  FINANCIAL STATEMENT ASSERTIONS    
E/O     Existence or occurrence.               V/A          Valuation or allocation.
C          Completeness.                              P/D          Presentation and disclosure.
R/O     Rights and obligations.

  AUDIT OBJECTIVES    

     A.     Cash exists and is owned by the client (assertions E/O and
R/O).
       B.     Cash balances reflect a proper cutoff of receipts and    
disbursements (assertions E/O, C, and V/A).
       C.     Cash balances as presented in the balance sheet properly    
reflect all cash and cash items on hand, in transit, or on deposit
with third parties (assertions E/O, C, and P/D).
       D.     Cash balances are properly classified in the financial    
statements, and any restrictions on the availability of funds are
properly disclosed (assertions R/O and P/D).
  IDENTIFICATION CODES    

The letters preceding each of the above audit objectives, i.e., A, B,

etc., serve as identification codes. These codes are presented in the
left column labeled Audit Objectives when a procedure
accomplishes an objective. If the alpha code appears in a bracket,
e.g., [A], [B], etc., the audit procedure only secondarily
accomplishes the objective. If an asterisk precedes a procedure, it
is a preliminary step or a follow up step that does not accomplish
an objective.
  BASIC PROCEDURES    
A      1.     Using the standard AICPA bank confirmation form,    
request confirmation as of the audit date for each bank account.
Also request confirmation of material cash in savings institutions,
certificates of deposit, and compensating balances. Retain copies
of all confirmations in the workpapers. Mail second requests if
necessary.
  Practical Considerations:    

¯     A sample standard bank confirmation form is provided at CL-

3.
  ¯     If the client only has a few bank accounts, confirmations    
should generally be sent for every account. However, if the client
has one or two primary accounts and numerous secondary accounts
that have minimal activity, confirmations might only be requested
for the primary accounts. For the accounts not confirmed, the bank
balance shown on the bank reconciliation can simply be agreed to
the bank statement.
  ¯     In addition to the standard bank confirmation form to confirm    
deposit accounts (for example, checking accounts, savings
accounts, or certificates of deposit) the auditor should consider
separately confirming details of existing cash-related matters such
as the following with the appropriate official of the financial
institution responsible for the client’s account:
  ¯¯     Compensating balance requirements or restrictions on    
 withdrawals of funds (see sample letter at CL-30).

¯¯     Automatic investment services.

¯¯     Cash management services.

¯¯     Certificates of deposit held in safekeeping (see additional

procedures section).
  ¯     Normally, account numbers or certificate of deposit numbers    
to be confirmed should be listed. Bank account numbers are often
incorrectly listed, thus you may want to check these before
mailing.
  ¯     Retain a copy of your bank confirmation request in case a    
second mailing is necessary. In lieu of a second mailing, consider
whether a phone call to the bank may be more effective. “The
Confirmation and Correspondence Control” at CX-24 can be used
to monitor the status of confirmations.
  ¯     Inefficiencies can be avoided by relying on alternative    
procedures for confirmations not received. Rather than incur
significant time trying to follow up on nonresponses (or incorrect
responses) for secondary accounts, the auditor might elect to
simply agree the bank balance per the bank reconciliation to the
bank statement.
*      2.     Determine those bank accounts for which subsequent    
period cutoff bank statements may be necessary and request from
the bank(s) by letter that such cutoff statements be mailed directly
to our (auditors’) post box.
                   
  Acct. Name & No.      Bank Address      Cutoff Period   
           
             
     
           
             
     
           
             
     
           
             
     
           
             
     
           
             
  

   
  Practical Considerations:    

¯     CL-4 provides a sample letter.

  ¯     Normally, a small business will have one primary bank    
account used for general receipts and disbursements for which a
cutoff may be requested. Other accounts may not have sufficient
transaction volume to necessitate testing by using a cutoff bank
statement.
  ¯     If possible, procedures that use cutoff bank statements should    
be timed to allow the return of the statement without interruption
of the client’s normal operations.
A, B, C,      3.     Obtain copies of each account’s bank reconciliation for the    
[D] workpapers and perform the following procedures:
       a.     Trace the bank balance on the reconciliation to the    
standard bank confirmation received from the bank (or the balance
per bank statement for any accounts not confirmed).
       b.     Trace the reconciled book balance to the general ledger,    
trial balance, or lead schedule as applicable.
       c.     Test the clerical accuracy of the reconciliation and detail    
supporting schedules.
       d.     Review the cash receipts and disbursement ledgers for    
each bank account for a reasonable period (normally five business
days before and after the balance sheet date) or perform other
appropriate procedures to identify interbank transfer checks and
deposits, then visually determine recording in proper period.
Specifically determine that:
       (1)     Transfers between each ledger were recorded in the same    
period, i.e., all before-year end transfers were recorded in each
ledger before year end, and vice-versa for post-year end transfers.
       (2)     Transfers not clearing the bank in the same accounting    
period as they were initiated are properly reflected as reconciling
items on bank reconciliations.
            Note:    If interbank transfers during this period are too    
numerous to make a visual determination feasible, consider an
additional procedure to prepare a transfer schedule.
       e.     Review the nature and extent of the reconciling items    
(primarily deposits in transit and outstanding checks) for
reasonableness. For bank accounts with unusual items or a large
volume of reconciling items, perform the following procedures
using a cutoff or subsequent month bank statement:
       (1)     Compare the beginning bank balance on the cutoff bank    
statement to the bank reconciliation. Investigate any differences.
       (2)     Trace deposits in transit per the bank reconciliation to    
deposits in the cutoff bank statement noting reasonableness of the
time period between book and bank recording.
       (3)     Inspect selected canceled checks returned with the cutoff    
bank statement. Trace checks dated before the balance sheet date to
the list of outstanding checks.
       (4)     Inspect the dates that checks cleared the bank. Investigate    
any large or unusual outstanding checks that cleared with the
cutoff statement, but took a long time to clear, and/or outstanding
checks that did not clear (still outstanding). Such checks may be
more properly designated accounts payable if they were dated
before year end, but not mailed until after year end.
       (5)     Determine the propriety of other reconciling items as    
deemed necessary.
  Practical Considerations:    

¯     These procedures should be performed for accounts that have

significant activity or unusual items. For most small businesses,
these procedures will only be necessary for the main operating
account.

¯     In recent years, some banks have abandoned the practice of

returning canceled checks to the client with the monthly bank
statement. Such banks may send the auditor canceled checks or
copies of such checks with the cutoff statement if the client makes
a special request to appropriate bank personnel well in advance of
the cutoff period. The auditor might confirm the details of
disbursements with payees listed in the client’s records as an
alternative to examining a canceled check.
       f.     For savings account balances and certificates of deposit, tie    
confirmation amounts to general ledger amounts. Consider the
possibility of unrecorded interest or substitution of certificate
numbers.
  Practical Considerations:    

¯     Audit inefficiencies often occur because of poorly prepared

bank reconciliations. Have the client clearly document the
following:
  ¯¯     The date and deposit slip total for each deposit in transit.    

¯¯     The check number, date written, payee, and amount of each
outstanding check in lieu of the frequently received adding
 machine tape.

¯¯     The nature and cause of each major reconciling item,

including the date the item first appeared.
  ¯     For some small businesses, the nature and extent of    
reconciling items, i.e., deposits in transit and outstanding checks,
in most bank accounts are insignificant; accordingly, additional
procedures are unnecessary. This would be true for most small
imprest payroll bank accounts. However, the nature and extent of
reconciling items in the general account normally require
additional procedures.
D      4.     Review the confirmation(s) received from the bank or    
other financial institutions along with loan and debt agreements,
corporate minutes, and inquiries of management and determine
whether:    (Coordinate this work with your debt and contingency
procedures in other program areas.)
       a.     Accounts are subject to withdrawal restrictions.    
       b.     There are related guarantees, endorsements and/or letters    
of credit, including guarantee arrangements for related parties.
       c.     There are amounts designated for special purposes.    
       d.     Amounts are restricted in any manner, including minimum    
balance requirements of loan agreements or debt service funds
established by debt indentures, or compensating balances
maintained for or by related parties.
       e.     Amounts are appropriately classified as cash, cash    
equivalents, or other short-term investments.
*      5.     After performing all appropriate procedures, return cutoff    
bank statements and obtain a receipt from the client evidencing
their return.
*      6.     Consider the need to apply one or more additional    
procedures. The decision to apply additional procedures should be
based on a consideration of whether information obtained or
misstatements detected by performing substantive tests or from
other sources during the audit alter your judgment about the need
to obtain a further understanding of control activities, the assessed
level of risk of material misstatements (whether caused by error or
fraud), and on an evaluation of whether the basic procedures have
been sufficient to achieve the audit objectives. Attach audit
program sheets to document additional procedures.
  Practical Considerations:    

¯     Certain common additional procedures relating to the

 following topics are illustrated following this program:

¯¯     Cut-off bank statement not received.

¯¯     Interbank transfers.

¯¯     Material cash on hand.

¯¯     Certificates of deposit.

¯¯     Inadequate segregation of duties over cash disbursements.

¯¯     Accounts closed during the year.

¯¯     Proof of cash.

  ¯     Practitioners may refer to PPC’s Guide to Fraud Investigations    
for more extensive fraud detection procedures if it is suspected that
the financial statements are materially misstated due to fraud.
*      7.     Consider whether procedures performed are adequate to    
respond to identified fraud risk factors. If fraud risk factors or other
conditions are identified that require an additional audit response,
consider those risk factors or conditions and the auditor’s response
in connection with the performance of Step 11 in AP-1b.
  Practical Consideration:    

¯     Specific responses to identified fraud risk factors are addressed

in individual audit programs. In connection with evaluation and
other completion procedures in AP-1b, the auditor considers the
need to perform additional procedures based on the results of
procedures performed in the individual audit programs and the
cumulative knowledge gained from performing those procedures.
*      8.     Consider whether the results of audit procedures indicate    
reportable conditions in internal control and, if so, add to the memo
of points for the communication of reportable conditions. (See
section 1504 for examples of reportable conditions, and see CX-18
for a worksheet that can be used to document the points as they are
encountered during the audit.)
  CONCLUSION: We have performed procedures sufficient to    
achieve the audit objectives for cash, and the results of these
procedures are adequately documented in the accompanying
workpapers. (If you are unable to conclude on any objective,
prepare a memo documenting your reason.)
 Additional Audit Procedures for Cash
Beginning Balance in Initial Audit
Company          Balance Sheet Date       

Audit Objectives N/A Workpaper

Audit Procedures for Consideration Performed by Index
  Instructions:    Additional procedures will be necessary in an initial audit.    
These procedures are applied to opening balances and differ depending
whether you are relying on your review of a predecessor’s work or placing no
reliance on a predecessor’s audit. (Section 1803 discusses considerations
when replacing a predecessor auditor, including a discussion of what the term
reliance means when used in this program.) These procedures may be applied
in conjunction with the basic procedures applied to the ending balance. The
asterisks preceding the procedures indicate that they are an intermediate step
in achieving audit objectives for the ending balance.
*      1.     If a predecessor’s audit of the prior period’s financial statements is to    
be relied on:
       a.     Scan the predecessor’s cash workpapers and determine whether the    
predecessor confirmed each bank account and tested the client’s
reconciliations and cash cutoff.
       b.     Investigate large or unusual reconciling items that had not cleared at    
the time the predecessor audited cash.
*      2.     If no reliance on a predecessor’s audit is planned or possible:    
       a.     Scan copies of the client’s reconciliations of each bank account made    
at the close of the prior period.
       b.     Trace balances in the reconciliations to bank statements and the    
general ledger.
       c.     Trace large or unusual reconciling items to subsequent bank    
statements and consider the need for additional investigation.
  Practical Considerations:¯     Watch for indications of an improper cutoff,    
i.e., recording cash disbursements of the current period as transactions of the
prior period to improve the current ratio of the prior period’s financial
statements.
  ¯     If the client’s reconciliations for the prior period were poorly prepared,    
request that they be redone in the same format as requested for the current
period. (See practical considerations for basic procedure 3.)
       
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