Acc 415-s6

Chapter (16)
Auditing the Financing/Investing

Process: Cash and Investments
The principal goal of chapter 16
• The principal goal of cash management is to ensure that

sufficient cash is available to meet the entity’s needs. Achieving
this goal requires good forecasting of cash receipts and
disbursements. By using sound cash-forecasting techniques,
management can plan to invest excess cash and borrow at
favorable interest rates when cash is required. Because cash and
investments are so liquid, they normally represent critical audit
areas. The Advanced Module discusses auditing fair value
measurements
Key elements:-Test of kitting & Interbank
Transfer Schedule
Tests for Kiting When cash has been stolen by an employee, sometimes the employee will
attempt to cover the cash shortage by following a practice known as kiting. This involves an
employee covering the cash shortage by transferring money from one bank account to
another and recording the transactions improperly on the entity’s books
. Interbank Transfer Schedule

One approach that auditors commonly use to test for kiting is the preparation of an interbank
transfer schedule. The auditor would examine this transfer by tracing the check to the cash
disbursements and cash receipts journals and to the bank reconciliation.
• In some instances an interbank transfer schedule is used even though control activities are
adequate and no fraud is suspected. When an entity maintains many cash accounts, cash
transfers may be inadvertently mishandled. The use of an interbank transfer schedule
provides the auditor with evidence on the proper cutoff for cash transactions.
• The tick mark ♦ outstanding check most likely indicates list of the applicable bank
reconciliation.
• The tick mark ▲/The tick mark (triangle) most likely indicates deposit in transit of the
applicable bank reconciliation.
• standard confirmation request External confirmation procedures frequently are performed
to confirm or request information regarding account balances and their elements. the
standard confirmation request is a primary evidence documented
Cutoff Bank Statement A major step in auditing a bank reconciliation is verifying the
propriety of the reconciling items such as deposits in transit and outstanding checks. The
auditor obtains a cutoff bank statement to test the reconciling items included in the bank
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 entity’s
bank account during the 7- to 10-day period. The auditor obtains this cutoff bank statement
by having the entity request that the bank send the statement, including cancelled or
electronic check images, directly to the auditor.
Bank transfer schedule
MCQ
1)The tick mark ♦ most likely indicates that the amount was traced to the
a. December cash disbursements journal.
b. Outstanding check list of the applicable bank reconciliation.
c. January cash disbursements journal.
d. Year-end bank confirmations.
Answer B
The tick mark ♦ outstanding check most likely indicates list of the applicable bank
reconciliation.
MCQ
2) The tick mark ▲ most likely indicates that the amount was traced to the
a. Deposit in transit of the applicable bank reconciliation.
b. December cash receipts journal.
c. January cash receipts journal.
d. Year-end bank confirmations.
Answer A
The tick mark ▲/The tick mark (triangle) most likely indicates deposit in transit of the
applicable bank reconciliation.
MCQ
3) An auditor ordinarily sends a standard confirmation request to all banks with which
the entity has done business during the year under audit, regardless of the year-end
balance. One purpose of this procedure is to…….
a. Provide the data necessary to prepare a proof of cash.

b. Request that a cutoff bank statement and related checks be sent to the auditor.
c. Detect kiting activities that may otherwise not be discovered.
d. Seek information about loans from the banks.
Answer D An auditor ordinarily sends a standard confirmation request to all banks with
which the entity has done business during the year under audit, regardless of the year-end
balance. Seek information about loans from the banks.
MCQ
4) The primary evidence regarding year-end bank balances is documented in the
a. Standard bank confirmations.
b. Outstanding check listing.
c. Interbank transfer schedule.
d. Bank deposit lead schedule.
Answer. The primary evidence regarding year-end bank balances is documented in the
Standard bank confirmations.
MCQ
5) On receiving the cutoff bank statement, the auditor should vouch……
a. Deposits in transit on the year-end bank reconciliation to deposits in the cash
receipts journal.
b. Checks dated before year-end listed as outstanding on the year-end bank reconciliation
to the cutoff statement.
c. Deposits listed on the cutoff statement to deposits in the cash receipts journal.
d. Checks dated after year-end to outstanding checks listed on the year-end bank
reconciliation and to the cutoff statement.
Answer:
On receiving the cutoff bank statement, the auditor should vouch checks dated after year-
end to outstanding checks listed on the year-end bank reconciliation and to the cutoff
statement.
MCQ
6)
Choice "C" is correct. Since the disbursement was not recorded until January 20X2 (4/1/2012)while the receipt
was recorded in December 20X1, cash will be overstated at December 31, 20X1.
Choices "d" and "a" are incorrect. Both the disbursement and the receipt are recorded in 20X1, so there will be
no misstatement of cash at December 31, 20X1.
Choice "b" is incorrect. Both the disbursement and the receipt are recorded in 20X2, so there will be no
misstatement of cash at December 31, 20X1.

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Chapter (16)

Auditing the Financing/Investing

• The principal goal of cash management is to ensure that

. Interbank Transfer Schedule

a. Provide the data necessary to prepare a proof of cash.

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