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Chapter Sixteen
Auditing Financing Process:
Cash and Investments

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Cash and the Effect of Other

Business Processes
“Cash” reported in the financial statements
represents currency on hand and cash on deposit
in bank accounts, including certificates of deposit,
time deposits and savings accounts.
“Cash equivalents” are frequently combined with cash
for presentation in the financial statements.
Definition: Short-term, highly liquid investments that
are readily convertible to known amounts of cash or
which are subject to an insignificant risk of changes in
value.
Examples: Treasury bills, commercial paper, and money
market funds.

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Cash and the Effect of Other

Business Processes

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Types of Bank Accounts

Types of Bank
Accounts

General Cash Imprest Cash Branch

Account Accounts Accounts

In order to maximize its cash position, an entity

implements procedures for accelerating the
collection of cash receipts and properly
delaying the payment of cash disbursements.
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Substantive Analytical Procedures—

Cash Because of the residual nature of
the cash account, the auditor’s
use of substantive analytical
procedures for auditing cash is
limited to . . .

comparisons with
comparisons with
prior years’ cash
budgeted amounts.
balances.

This limited use of substantive analytical procedures is normally offset by

(1) extensive tests of controls and/or substantive tests of transactions for
cash receipts and disbursements or (2) extensive tests of the entity’s
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Substantive Tests of Details of

Transactions and Balances

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The Effects of Controls

Controls for
Controls for Cash
Cash Receipts Disbursement
s

The reliability of the client’s

controls over cash affects
the nature and extent of the
auditor’s tests of details.

Completion of
Monthly Bank
Reconciliation
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Balance-Related Assertions

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Auditing the General Cash Account

Copy of Bank To audit a cash

Reconciliation account, the auditor
should obtain these
items.
Bank
Confirmation

Cutoff Bank
Statement

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Bank Reconciliation Working Paper

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Cutoff Bank Statement

Date of Last 7 to 10
Bank Days
Reconciliation

A cutoff bank statement normally covers the 7- to 10-day

period after the date on which the bank account is
reconciled.

Any reconciling item should have cleared the client’s

bank account during the 7- to 10-day period.

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Tests of the Bank Reconciliation

The auditor uses the following audit procedures to
test the bank reconciliation:
1. Test the mathematical accuracy and agree the balance per the books
to the general ledger.
2. Agree the bank balance on the reconciliation with the balance shown
on the bank confirmation.
3. Trace the deposits in transit on the bank reconciliation to the cutoff
bank statement.
4. Compare the outstanding cheques on the bank reconciliation with the
cancelled cheques in the cutoff bank statement for proper payee,
amount and endorsement.
5. Agree any charges included on the bank statement to the bank
reconciliation.
6. Agree the adjusted book balance to the cash account lead schedule.
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Fraud-Related Audit Procedures

Extended Bank
Reconciliation
Procedures

Proof of Cash

Tests for Kiting

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Proof of Cash

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Tests for Kiting

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Auditing a Payroll or Branch Imprest

Account

The audit of any imprest cash account

such as payroll or a branch account
follows the same basic audit steps
discussed under the audit of the general
cash account.

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Obtain an Understanding of Internal

Control
The auditor should obtain an understanding of each of
the five components of internal control in order to plan
the audit. This knowledge is used to:

Consider factors
Identify types of
that affect the risk
potential
of material
misstatements
misstatement

Design tests of Design substantive

controls procedures

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Auditing Petty Cash

Usually not
material.

Potential for
defalcation.

Seldom perform
substantive
tests.

Document
controls.

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Disclosure Issues for Cash

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Disclosure
Issues for
Cash

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Disclosure Issues for Cash

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Investments

Common Stock Preferred Stock

Debt Securities Hybrid Securities

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Control Risk Assessment—Investments

Here are some of the

Occurrence more important
and
Authorization assertions for
investments.
Completeness

Accuracy and
Classification

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Segregation of Duties

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Substantive Procedures for Testing

Investments

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End of Chapter 16

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