Cash and Financial Management Assertions Investments

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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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