Cash and Financial Management Assertions
Investments When auditors test cash, what management assertion/s are
they MOST interested in?
CHAPTER 10 Existence
WHAT ABOUT THE OTHERS: E-C-R-V-P?
Completeness YES, but remember
"conservatism"
Rights & Oblig. Yes, MAYBE IT IS "restricted"
Valuation Probably not
Presentation & discl. Yes, if restricted, need to
present and disclose as such
Bob Anderson, UCSB Intro CHAPTER
& Chapter 10-1 Bob Anderson, UCSB Intro & Chapter 10-2
CASH CONTROLS Cash Controls
Generally two broad categories: Why are cash controls important?
Cash is most susceptible asset to theft.
Because ultimately everything culminates in cash,
(1) Cash receipts consequently other problems frequently manifest
(2) Cash disbursements themselves as unknown "reconciling items" when the
bank reconciliation is performed.
What do you think are the two most important cash
controls to have?
Segregation of duties (forces collusion)
Check signing authority (have to get the cash out of
the bank in order to steal it!
Bob Anderson, UCSB Intro & Chapter 10-3 Bob Anderson, UCSB Intro & Chapter 10-4
1
Internal Control Over --Cash Potential Misstatements--Cash Receipts
Receipts
Recording fictitious cash receipts
Failure to record receipts from cash sales
Cash sales
Involvement of two or more employees
Failure to record cash from collection of accounts
Cash Registers
receivables
Electronic point of sales systems Early (late) recognition of cash receipts
Collections of receivables
Initial listing of cash receipts CAN BE ANYTHING IN THERE!
Custody and depositing of cash receipts Bank reconciliation will pick it up
Maintenance of customer account records That is why I have always viewed the bank rec. as a critical
Reconciliation of customers' ledgers with control item to an audit.
accounts I have found lots of errors and irregularities via review of the
bank reconciliation. Its an underrated item- in my humble
Mailing monthly statements to customers opinion.
Collection activity and past-due accounts
Bob Anderson, UCSB Intro & Chapter 10-5 Bob Anderson, UCSB Intro & Chapter 10-6
Internal Control--Cash
Potential Misstatements--Cash
Disbursements
Disbursements
Inaccurate recording of a purchase or
Segregation of duties disbursement
Payment by check or electronic funds transfer
Duplicate recording and payment of
Match of purchase order and receiving documents
with vendor's invoice purchases
Review of supporting documents by authorized check Unrecorded disbursements
signer
Cancel of supporting documents
Authorized check signer should mail checks
Don't pay an unauthorized vendor/ vendor approval
process
Bank involvement
Bob Anderson, UCSB Intro & Chapter 10-7 Bob Anderson, UCSB Intro & Chapter 10-8
2
Objectives for the Audit Cash
Substantive Tests for Cash Balances
Consider the inherent risks related to cash, Obtain analyses of cash balances and reconcile to general
including fraud risks ledger
Consider internal control over cash transactions Send standard confirmation forms to financial institutions
Substantiate the existence of recorded cash Obtain reconciliations of bank balances and consider
reconciling bank activity (need a bank statement)
Establish the completeness of recorded cash
Obtain bank cutoff statement
Determine that the client has rights to recorded Count cash on hand (only if material)
cash Verify the client's cutoff of cash transactions
Establish the clerical accuracy of cash schedules Analyze bank transfers occurring around year-end
Determine that the presentation and disclosure Investigate payments to related parties
of cash, including restricted funds, are appropriate Evaluate financial statement presentation and disclosure
Bob Anderson, UCSB Intro & Chapter 10-9 Bob Anderson, UCSB Intro & Chapter 10-10
Management Assertions
10-8
Illustration of Schedule of Bank Transfers to
When auditors test INVESTMENTS, what management
Detect Kiting assertion/s are they MOST interested in?
Existence & Valuation (if recorded at fair value)
WHAT ABOUT THE OTHERS: E-C-R-V-P?
Bank Accounts Date of Disbursement Date of Receipt
Check No. From To Amount Books Bank Books Bank
5897 General Payroll $ 30,620 12/28 1/3 12/28 12/28 Completeness YES, but remember
6006 General Branch 4 24,018 1/2 1/4 12/30 12/30
"conservatism"
6029 Branch 2 General 10,000 1/3 1/5 1/3 12/31
Rights & Oblig. Yes, MAYBE IT IS "restricted"
Presentation & discl. Yes, if restricted, need to
present and disclose as such
Bob Anderson, UCSB Intro & Chapter 10-11 Bob Anderson, UCSB Intro & Chapter 10-12
3
Objectives for the Audit of Financial Controls Over Financial
Investments Investments
Establishment of formal investment policies
Consider the inherent risks, including fraud risks Review and approval of investment activities by the
investment committee of the board of directors
Consider internal control over financial investments
Separation of duties among employees
Determine the existence of recorded financial investments
Authorizing purchases and sales
and that the client has rights to the investments
Having custody of the securities
Establish the completeness of recorded financial
Maintaining records
investments
Detailed records of all securities owned and the related
Determine that the valuation of financial investments is in revenue from interest and dividends
accordance with GAAP
Registration in the name of the company
Establish the clerical accuracy of schedules of Periodic physical inspection of securities
investments
Determination of accounting for complex instruments by
Determine that the presentation and disclosure of competent personnel
financial investments are appropriate
Bob Anderson, UCSB Intro & Chapter 10-13 Bob Anderson, UCSB Intro & Chapter 10-14
Potential Misstatements--Financial Considerations in Auditing
Investments Derivatives and Securities
Misstatement of recorded value of
investments Specialized skills may be needed to
Unauthorized investment transactions evaluate:
Incomplete recording of investments Information systems
Service organization controls
Inadequate disclosure of the nature of
Application of complex accounting principles
investment activities
Estimates of fair values
Inherent and control risks for speculation and
hedging activities
Bob Anderson, UCSB Intro & Chapter 10-15 Bob Anderson, UCSB Intro & Chapter 10-16
4
Substantive Tests of Financial
Considerations in Auditing
Investments
Derivatives and Securities--Cont. Obtain an analysis of investment and related accounts and
reconcile to ledger
May present the entity with a high degree of Inspect securities on hand and review agreements
business risk (e.g., risk of losses) underlying derivatives
Confirm securities and derivative instruments held by
May involve complex accounting and valuation
others
methods Vouch selected investment transactions, and verify the
Rules for maintaining acquiring and maintaining a client's cutoff of investment transactions
Review investment committee minutes and reports
derivative as a hedge are complex
Perform analytical procedures
May be difficult to identify because they may be Compute revenue from securities
acquired without an outlay of assets until a future Inspect management's documentation of intent to classify
date derivative transactions as hedges
Evaluate method of accounting for investments
Test valuation of investments
Evaluate the financial statement presentation and
disclosure
Bob Anderson, UCSB Intro & Chapter 10-17 Bob Anderson, UCSB Intro & Chapter 10-18
5
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