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Chapter 23

Chapter 23

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معتصم الحارس
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3 views

Chapter 23

Chapter 23

Uploaded by

معتصم الحارس
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 23

Audit of Cash and Financial Instruments


 23-4 Bank confirmations differ from positive
confirmations of accounts receivable in that bank confirmations
request several specific items of information:
1. The balances in all bank accounts.
2. Restrictions on withdrawals.
3. The interest rate on interest-bearing accounts.
4. Information on liabilities to the bank for notes, mortgages, or other
debt.

Positive confirmations of accounts receivable request the customer to


confirm an account balance stated on the confirmation form or designate a
different amount with an explanation. The auditor anticipates few exceptions to
accounts receivable confirmations, whereas with bank confirmations he expects
differences between the balance per bank and balance per the books that the
client must reconcile. Bank confirmations should be requested for all bank
accounts, but positive confirmations of accounts receivable are normally
requested only for a sample of accounts. If bank confirmations are not returned,
they must be pursued until the auditor is satisfied as to what the requested
information is. If positive confirmations of accounts receivable are not returned,
second and maybe third requests may be made, but thereafter, follow-ups are
not likely to be pursued. Alternative procedures, such as examination of
subsequent payments or other support of customers’ accounts may then be
used.

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23-4 (continued)

The reason why more importance is placed on bank confirmations than


accounts receivable confirmations is that cash, being the most liquid of assets,
must be more closely controlled than accounts receivable. In addition, other
information―such as liabilities to the bank must be known for purposes of the
financial statements. Finally, there are usually only a few bank accounts and
most bank accounts have a large volume of transactions during the year.

 on the books. Protested (N.S.F.) checks should be investigated to


determine they are not fictitious checks deposited temporarily to
cover a shortage.

23-12 There is a greater emphasis on the detection of fraud in tests of details


of cash balances than for other balance sheet accounts because the amount of
cash flowing into and out of the cash account is frequently larger than for any
other account in the financial statements. Furthermore, the susceptibility of
cash to misappropriation is greater than other types of assets because most
other assets must be converted to cash to make them usable.
This emphasis affects the auditor’s evidence accumulation in auditing
year-end cash as in these examples:
 Verifying whether cash transactions are properly recorded
 Testing of bank reconciliations
 Obtaining bank confirmations

 Multiple Choice Questions From CPA Examinations

23-14 a. (4) b. (3) c. (2)

23-15 a. (2) b. (4) c. (2)

 Multiple Choice Questions From Becker CPA Exam Review

23-16 a. (3) b. (2) c. (2)

 Discussion Questions and Problems


23-17
a. b. c.
MOTIVATION INTERNAL CONTROL AUDIT PROCEDURE

23-2
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1. Original check was Independent bank Verify the bank reconciliation,
unauthorized and reconciliation that including cash disburse-
illegal. Outstanding includes accounting ments for all material
check made the for all cash disburse- outstanding checks.
bank reconcile. ment transactions.
2. To cover a shortage. Internal verification of Verify the bank reconciliation
bank reconciliation, by tracing checks dated on
including accounting or before June 30 in the
for all checks recorded cash disbursements journal
in the cash disburse- to checks clearing with the
ments journal as June 30 bank statement.
cleared or still Any checks not clearing
outstanding. should be included on the
June 30 outstanding check
list.
3. To cover a shortage. Internal verification of Foot outstanding check list.
bank reconciliation.
4. To cover a cash Independent bank Obtain bank confirmation.
shortage or to reconciliation.
improve the current
ratio.
5. To cover a shortage. Internal verification of Trace all checks dated on
bank reconciliation, or before June 30 that
including accounting cleared with the cutoff bank
for all checks recorded statement to the June 30
in the cash disburse- outstanding check list.
ments journal as
cleared or still
outstanding.

23-17 (continued)

6. Hold open books Independent bank Trace deposits in transit to


to improve cash reconciliation. cutoff bank statements to
position. determine deposit date.
7. Kiting-covering Independent bank Trace all interbank transfers
a defalcation or reconciliation. to accounting records.
padding a cash
position.

23-18 The objectives of each of the audit procedures are:


1. To ascertain all cash balances and liabilities to banks that might
exist. The verification includes amounts and descriptions.

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2. To assure that the client is using the correct balance from the bank
in preparing its reconciliation.
3. To create a list of outstanding checks for follow-up to determine
why they have not cleared and to investigate the possibility of a
misstatement of cash and accounts payable.
4. To assure that all loans, terms, and arrangements with the bank
were properly authorized by the board of directors and are
disclosed in the financial statements.
5. To reconcile the recording of cash receipts and cash disbursements
between the bank and the client’s books and to prepare a bank
reconciliation at the same time. This may disclose existence,
completeness, accuracy, cutoff, or posting and summarization
misstatements.
6. To determine if there is a cutoff misstatement in cash disbursements.
7. To make sure the cash receipts were recorded by the bank shortly
after the beginning of the new year and recorded in the current
year’s cash receipts journal. A misstatement in either of these could
indicate the cover-up of a cash shortage or a cash receipts cutoff
misstatement.
8. To verify the valuation of the equity investment.
9. To test the existence and accuracy of the financial instruments
balance with an independent source.

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