Auditing Special Accounts & Cash Balances PDF

c t i c e t Pr a I I d i e s Au ceduring Speucniatls Pro i t Ac c o & A ud ash B a la nc e s &C  The Acquisition & Payment Cycle Accounts Property, plant, and equip...

c t i c e t Pr a I I d i e s Au ceduring Speucniatls Pro i t Ac c o & A ud ash B a la nc e s &C  The Acquisition & Payment Cycle Accounts Property, plant, and equipment Other liabilities Prepaid expenses Income and expense accounts  The Acquisition & Payment Cycle Property, plant, and equipment Assets that have expected lives of more than one year Used in the business Not acquired for resale  The Acquisition & Payment Cycle Property, plant, and equipment (Classification)  The Acquisition & Payment Cycle Property, plant, and equipment; EQUIPMENT & RELATED ACCOUNTS  The Acquisition & Payment Cycle Property, plant, and equipment; EQUIPMENT Auditors verify equipment differently from current asset accounts for three reasons: 1. There are usually fewer current period acquisitions of equipment, especially large equipment used in manufacturing. 2. The amount of any given acquisition is often material. 3. The equipment is likely to be kept and maintained in the accounting records for several years.  The Acquisition & Payment Cycle Property, plant, and equipment; EQUIPMENT – The AUDIT: Emphasizes the verification of current period acquisitions rather than the balance in the account carried forward from the preceding year.  The Acquisition & Payment Cycle Property, plant, and equipment; EQUIPMENT – The AUDIT: The expected life of assets over one year requires depreciation expense and accumulated depreciation accounts, as which are verified as part of the audit of the assets.  The Acquisition & Payment Cycle Property, plant, and equipment; EQUIPMENT – The AUDIT: Equipment may be sold/disposed - triggering a gain or loss entry that the auditor may need to verify.  The Acquisition & Payment Cycle Property, plant, and equipment; EQUIPMENT – TESTS CATEGORIES 1) Perform Analytical Procedures 2) Verify Current Year Acquisitions 3) Verify Current Year Disposals 4) Verify Depreciation Expense 5) Verify Ending Balance in Accumulated Depreciation  The Acquisition & Payment Cycle Property, plant, and equipment; EQUIPMENT – TESTS CATEGORIES Perform Analytical Procedures  The Acquisition & Payment Cycle Property, plant, and equipment; EQUIPMENT – TESTS CATEGORIES Perform Analytical Procedures Assess the likelihood of material misstatements in depreciation expense and accumulated depreciation.  The Acquisition & Payment Cycle Property, plant, and equipment; EQUIPMENT – TESTS CATEGORIES Verify Current Year Acquisitions Failure to capitalize a fixed asset, or the recording of an acquisition at the incorrect amount, affects the balance sheet or P&L?  The Acquisition & Payment Cycle Property, plant, and equipment; EQUIPMENT – TESTS CATEGORIES Verify Current Year Disposals Transactions involving the disposal of equipment are often misstated when? a) Company internal controls lack a formal method. b) The individual makes a transposition error.  The Acquisition & Payment Cycle Property, plant, and equipment; EQUIPMENT – TESTS CATEGORIES Verify Depreciation Expense Depreciation expense is one of the few expense accounts not verified as part of tests of controls and substantive tests of transactions.  The Acquisition & Payment Cycle Property, plant, and equipment; EQUIPMENT – TESTS CATEGORIES Verify Depreciation Expense - Objectives Accumulated depreciation in the master file agrees with the general ledger Accumulated depreciation in the master file is accurate.  The Acquisition & Payment Cycle Property, plant, and equipment; EQUIPMENT – TESTS CATEGORIES Verify the Ending Balance in Accumulated Depreciation The debits to accumulated depreciation are normally tested as a part of the audit of disposals of assets. The credits are verified as a part of depreciation expense.  The Acquisition & Payment Cycle Property, plant, and equipment; EQUIPMENT – TESTS CATEGORIES Verify the Ending Balance in the Asset Account – Objectives 1. All recorded equipment physically exists on the balance sheet date (existence) 2. All equipment owned is recorded (completeness)  Cash Balance Cycle Cash is the only account included in every cycle except inventory and warehousing. Evidence accumulated for cash balances depends heavily on the results of the tests in other cycles  Cash Balance Cycle Relationships of Cash in the Bank and Transaction Cycles  Major Types of Cash Accounts General Cash Account Imprest Accounts Branch Bank Account Imprest Petty Cash Fund Cash Equivalents  Major Types of Cash Accounts General Cash Account All cash receipts and disbursements flow through this account. For example: The disbursements for the acquisition and payment cycle are normally paid from this account, while the receipts of cash in the sales and collection cycle are deposited in the account.  Cash Balance Cycle Audit of General Cash Accounts – Phase I Identify Client Business Risks Affecting Cash. Set Tolerable Misstatement and Assess Inherent Risk. Assess Control Risk.  Cash Balance Cycle Audit of General Cash Accounts – Phase II Design and Perform Tests of Controls and Substantive Tests of Transactions.  Cash Balance Cycle Audit of General Cash Accounts – Phase III Design and Perform Analytical Procedures. Design Tests of Details of Cash Balance.  Major Types of Cash Accounts Imprest Accounts Many companies establish a separate imprest payroll account to improve internal control over payroll disbursements.  Cash Balance Cycle Receipt of a Bank Confirmation Auditors usually obtain a direct receipt of a confirmation from every bank with which the client does business.  Cash Balance Cycle Receipt of a Cut-off Bank Statement To verify the reconciling items on the client’s year-end bank reconciliation with evidence that is not accessible to the client.  Cash Balance Cycle Tests of the Bank Reconciliation To determine whether client personnel have carefully prepared the bank reconciliation.  Cash Balance Cycle Testing For Fraud (Cash Receipts) Confirmation of accounts receivable Tests performed to detect lapping Review of the general ledger  Cash Balance Cycle Testing For Fraud (Cash Receipts) Comparison of customer orders to sales and subsequent cash receipts Examination of approvals and supporting documentation for bad debts and sales returns and allowances  Cash Balance Cycle Testing of Interbank Transfer (what is audited?) The accuracy of the information on the interbank transfer schedule should be verified.  Cash Balance Cycle Testing of Interbank Transfer (what is audited?) The interbank transfers must be recorded in both the receiving and disbursing banks.  Cash Balance Cycle Testing of Interbank Transfer (what is audited?) The date of the recording of the disbursements and receipts for each transfer must be in the same fiscal year.  Cash Balance Cycle Testing of Interbank Transfer (what is audited?) Disbursements on the interbank transfer schedule should be correctly included in or excluded from year-end bank reconciliations as outstanding cheques.  Cash Balance Cycle Testing of Interbank Transfer (what is audited?) Receipts on the interbank transfer schedule should be correctly included in or excluded from year-end bank reconciliations as deposits in transit.  Cash Balance Cycle Imprest Petty Cash Auditors verify petty cash primarily because of the potential for embezzlement and the client’s expectation that auditors will examine the account, even when the amount is  Cash Balance Cycle Imprest Petty Cash The most important internal control for petty cash is the use of an imprest fund that is the responsibility of one individual. Petty cash funds should not be mingled with other receipts, and the fund should be kept separate from all  Cash Balance Cycle Imprest Petty Cash There should also be limits on the amount of any expenditure from petty cash, as well as on the total amount of the fund.  Cash Balance Cycle Imprest Petty Cash When a disbursement is made from petty cash, adequate internal controls require a responsible official’s approval on a pre-numbered petty cash form.  Cash Balance Cycle Imprest Petty Cash - Balance The total of the actual cash and cheques in the fund, plus the total unreimbursed petty cash forms that represent expenditures, should equal the total amount of the petty cash fund stated in the general ledger.  Cash Balance Cycle Imprest Petty Cash – Audit Objective The emphasis in verifying petty cash should be on? a) testing controls over petty cash transactions b) The ending balance in the account. THE END