BM4116_Lecture 5_Cash (Student).ppt

Lecture 5: Auditing Cash & Bank Balances BM4116 Audit & Assurance  Learning Objectives 1. Understand and describe the audit assertions for cash and bank balances. 2. Apply appropriate audit procedures to be performed with respect to the bank reconciliation...

Lecture 5: Auditing Cash & Bank Balances BM4116 Audit & Assurance  Learning Objectives 1. Understand and describe the audit assertions for cash and bank balances. 2. Apply appropriate audit procedures to be performed with respect to the bank reconciliation statement 3. Describe the bank confirmation circularisation process 4. Describe the necessary audit procedures to be performed upon receiving the bank confirmation  WHERE IS CASH IN THE FINANCIAL STATEMENTS? Source: Sembcorp Industries Annual Report 2021, Pg 51 Source: Sembcorp Industries Annual Report 2021, Pg 55 Statement of Cash Flows Movement of cash and cash equivalents are shown in the statement of cash flows Statement of cash flows shows activities from which cash is received (cash inflow) and activities on which cash is spent (cash outflow). Statement of Cash Flows Cash flows from operating activities: Cash receipts from sales of goods and rendering of services, cash payments for goods/services Cash flows from investing activities: Cash payments to acquire PPE, cash receipts from sale of PPE and cash receipts/payments from sale of / to acquire equity or debt instruments Cash flows from financing activities: Cash proceeds from issuing shares or other equity instruments, cash proceeds from issuing debentures, loans, notes, bonds mortgages and cash repayments of amounts borrowed  Sry small error, should be this figure to tie to FS Source: Sembcorp Industries Annual Report 2021, Pg 90 Audit Assertions - Cash When a company’s financial statements are audited, an auditor reviews the reliability of the financial statement assertions made by the management who prepared the financial statements Keeping in mind that the risk of material misstatement for cash is risk that cash is overstated  Audit Assertions - Cash Audit Assertion (Balances) Existence Does this amount exist? Rights & Does this company have full rights to the cash? Obligations Any restrictions on the cash? Completen Are there any other balances which should have ess been reported? Accuracy & Is this amount reported at the appropriate Valuation value? Cut off* Does this amount include any transactions which should be reported for other periods? Presentati Did the company make all the necessary on & disclosures about the reported cash balances as Disclosure per SFRS? AUDIT PROGRAMME Audit Programme - Cash An audit program is a system of audit objectives, scope, timeline, and activities that will be carried out by auditors. Cash Cycle 1.Agree opening balances to last year’s financial statements 2.Agree cash balance in the financial statements to the general ledger 3.Carry out analytical procedures 4.Obtain bank confirmations for all bank accounts opened or closed during the year 5.Ensure that bank accounts opened or closed during the year are supported by director’s resolution 6.Review bank reconciliations Audit Evidence - Cash From the audit program, we can pick out the audit evidence required from the client and duly request from client / perform the audit work. Cash Cycle 1.Agree opening balances to last year’s financial statements 2.Agree cash balance in the financial statements to the general ledger 3.Carry out analytical procedures 4.Obtain bank confirmations for all bank accounts opened or closed during the year 5.Ensurethat bank accounts opened or closed during the year are supported by director’s resolution 6.Review bank reconciliations Audit Evidence - Cash Obtain from the client Request from bank General ledger for cash Bank confirmation Bank reconciliations Bank statements Bank details such as: o Bank account numbers o Bank account balances o Bank account signatories o Any pledges / restrictions Director’s resolutions for year Ensure audit evidence is sufficient and appropriate Internal Controls - Cash We will not be focusing on Test of Controls when it comes to Cash Cycle, however let’s recap some typical internal controls in cash. Timelycash deposit into the bank / Cash receipts should be deposited promptly (daily) into the bank. Segregation of duties: the person handling the cash should be different from the person performing the cash record keeping. Proper payment authorisation: all payments must be properly authorized before disbursement. o Usually require 2 signatories for transactions more than a significant amount Analytical procedures - Cash We will not be focusing on analytical procedures when it comes to Cash Cycle, however the statement of cash flows would give a good indication of whether the analytical procedures documented for cash and cash equivalents during the field work are reasonable. Audit Evidence - Cash From the audit program, we can pick out the audit evidence required from the client and duly request from client / perform the audit work. Cash Cycle 1.Agree opening balances to last year’s financial statements 2.Agree cash balance in the financial statements to the general ledger 3.Carry out analytical procedures 4.Obtain bank confirmations for all bank accounts opened or closed during the year 5.Ensurethat bank accounts opened or closed during the year are supported by director’s resolution 6.Review bank reconciliations  AUDIT PROCEDURE 1) BANK CONFIRMATION  Bank Confirmation Process Obtaining bank confirmation is a standard practice adopted by all audit firms 1. Auditor sends a blank bank confirmation template to the client 2. Client / Management provides relevant authorised signatories on the Auditor Client letter, authorising the bank to release the information to the auditors 3. The original bank confirmation request is sent out by the auditor to the 4. The bank will reply bank directly to the auditors Bank  Bank Confirmation Process o o o  Bank Confirmation Process Bank Confirmation Template Bank confirmation must be replied to the auditors directly. Why? Bank Confirmation Template Information requested in the letter includes: oCurrent account balance oAmount of interest accrued oDetailsof fixed deposits/ other bank accounts or accounts with related banks oDetailsof any guarantees issued by the company oDetails of bank loans (including security pledge) Bank Confirmation Template Blank bank confirmation request List the information we need but not the details Why? Letter of Authorisation Most bank confirmations also include a letter of authorisation. Why?  Lecture Activity: Document the why Bank confirmation Blank bank Most bank must be replied to confirmation request confirmations also the auditors directly List the information include a letter of we need but not the authorisation details Bank Confirmati on Reply How to check if the confirmation is appropriate? Why? Audit Evidence - Appropriate Appropriateness refers to the quality of the evidence or relevance and reliability of the audit evidence. Evidence is considered to be more reliable when it is: Obtained from an independent external source Generated internally by subject to effective control Obtained directly by the auditor In original form In documentary form Bank Confirmation Process After the bank confirmation reply is received from the bank, the auditors will perform the following audit procedures: Auditor Client 4. The bank will reply directly to the auditors Bank Bank Confirmation – Audit Procedures After the bank confirmation reply is received from the bank, the auditors will perform the following audit procedures: 1. Check if bank balances confirmed by the bank agree to client’s cash book, general ledger. 2. If amount ties, check for information for disclosure (e.g. Restriction of usage, mortgage) 3. In most cases the balance confirmed by the bank will not agree with the company’s cash book. This is mainly due to reconciling and adjusting items. 4. In this case, the auditor will check whether the confirmation balance would tie with the “balance per bank” in the bank reconciliation statement prepared by the company. AUDIT PROCEDURE 2) BANK RECONCILIATION  Bank Reconciliation Bank reconciliation are prepared periodically to explain the difference between the cash reported in the bank statement and the cash balance in the company’s books Trial Balance Description Amount Cash at SGD bank 100,000 SGD 120,000 Example of bank statements Bank Reconciliation Ramal Co. Bank reconciliation statement as at 31 Oct 2022 $ Balance as per bank statement 9,866 Add: Deposits in transit 4,500 Less: Unpresented cheques (2,500) Less: Error (250) Balance as per adjusted cash at bank 11,616 Bank Reconciliation Why is there a difference between bank statements and the cash balance in the books? Usually it’s due to a timing differences of: Adjusting items Reconciliation items Bank services charges Deposits in transit / Dishonoured cheques uncredited cheques Bank collections Outstanding / Unpresented Interest income on the cheques current account  Lecture Activity: Document the nature of the adjusting items and the reconciliation items Adjusting items Nature Bank services charges Dishonoured cheques Bank collections Interest income on the current account  Lecture Activity: Document the nature of the adjusting items and the reconciliation items Reconciliation items Nature Deposits in transit / uncredited cheques Outstanding / Unpresented cheques Bank Reconciliation – Audit Procedures After the bank reconciliation is prepared by client and sent to the auditor, the auditors will perform the following audit procedures: 1. Check balance per bank to bank statement and bank confirmation 2. Check balance per book to general ledger 3. Check casting (additions) 4. Check on reconciling items Unpresented cheques Deposits in transits Others Bank Reconciliation – Audit Procedures After the bank reconciliation is prepared by client and sent to the auditor, the auditors will perform the following audit procedures: Unpresented cheques Check that they are not long outstanding and clear the bank soon after year end Trace to subsequent period’s bank statement If not cleared, investigate further Deposits in transits Check that they are not long outstanding and are credited to bank account soon after year end Trace to subsequent period’s bank statement If not credited, investigate further Other reconciling items Obtain explanations and substantiate all adjustments on the reconciliation  HOW DID AUDIT PROCEDURES ADDRESS THE AUDIT ASSERTIONS? Audit Assertions – Bank Confirmation Audit Assertion (Balances) Audit Assertions – Bank Confirmation Audit Assertion (Balances) Audit Assertions – Bank Confirmation Audit Assertion (Balances) Audit Assertions – Bank Confirmation Audit Assertion (Balances) CASH = HIGH RISK AREA Cash = High risk area In addition to the fact that cash risk of material misstatement is that cash can be overstated by the client, the other material risk that we need to keep in mind is that: Cash is highly susceptible to fraud / misappropriation  Some cases in Singapore Source: Straits Times  Some cases in Singapore Source: Straits Times Always audit with a mindset of professional skepticism where you appropriately question and have a critical assessment of audit evidence  Learning Objectives 1. Understand and describe the audit assertions for cash and bank balances. 2. Apply appropriate audit procedures to be performed with respect to the bank reconciliation statement 3. Describe the bank confirmation circularisation process 4. Describe the necessary audit procedures to be performed upon receiving the bank confirmation