Kế toán, kiểm toán - Chapter sixteen: Auditing the financing/investing process: Cash and investments

Auditing the Financing/Investing Process: Cash and InvestmentsChapter SixteenCash and the Effect of Other Business Processes‘Cash’ reported in the financial statements represents currency on hand and cash on deposit in bank accounts, including certificates of deposit, time deposits and savings accounts.‘Cash equivalents’ are frequently combined with cash for presentation in the financial statements.Definition: Short-term, highly liquid investments that are readily convertible to known amounts of cash or which are subject to an insignificant risk of changes in value. Examples: Treasury bills, commercial paper, and money market funds.Cash and the Effect of Other Business ProcessesTypes of Bank AccountsIn order to maximize its cash position, an entity implements procedures for accelerating the collection of cash receipts and delaying the payment of cash disbursements, to the extent delay is appropriate. General Cash AccountImprest Cash AccountsBranch AccountsTypes of Bank AccountsThe Effects of Controls The reliability of the client’s controls over cash affects the nature and extent of the auditor’s tests of details.Controls for Cash ReceiptsControls for Cash DisbursementsCompletion of Bank ReconciliationSubstantive Analytical Procedures – Cash This limited use of substantive analytical procedures is normally offset by (1) extensive tests of controls and/or substantive tests of transactions for cash receipts and disbursements or (2) extensive tests of the entity’s bank reconciliations. Because of the residual nature of the cash account, the auditor’s use of substantive analytical procedures for auditing cash is limited to . . .comparisons with prior years’ cash balances.comparisons with budgeted amounts. Substantive Tests of Details of Transactions and Balances Balance-Related AssertionsAuditing the General Cash AccountCopy of Bank ReconciliationBank ConfirmationCut-off Bank Statement To audit a cash account, the auditor should obtain these items.Bank Reconciliation Working PaperCut-off Bank StatementDate of Last Bank Reconciliation7 to 10 DaysA cut-off bank statement normally covers the 7- to 10-day period after the date on which the bank account is reconciled. For reconciliation purposes, any item should have cleared the client’s bank account during the 7- to 10-day period. Tests of the Bank ReconciliationThe auditor uses the following audit procedures to test the bank reconciliation:Test the mathematical accuracy and agree the balance per the books to the general ledger.Agree the bank balance on the reconciliation with the balance shown on the bank confirmation.Trace the deposits in transit on the bank reconciliation to the cut-off bank statement.Compare the outstanding cheques on the bank reconciliation with the cancelled cheques in the cut-off bank statement for proper payee, amount and endorsement.Agree any charges included on the bank statement to the bank reconciliation.Agree the adjusted book balance to the cash account lead schedule.Fraud-Related Audit ProceduresExtended Bank Reconciliation ProceduresProof of CashTests for KitingExtended Bank Reconciliation ProceduresIn some instances, the year-end bank reconciliation can be used to cover cash defalcations. This is usually accomplished by manipulating the reconciling items in the bank reconciliation. For example, suppose a client employee was able to steal €5,000 from the client. The client’s cash balance at the bank would then be €5,000 less than reported on the client’s books. The employee could ‘hide’ the €5,000 shortage in the bank reconciliation by including a fictitious deposit in transit.Proof of CashTests for KitingAuditing a Payroll or Branch Imprest AccountThe audit of any imprest cash account such as payroll or a branch account follows the same basic audit steps discussed under the audit of the general cash account. Auditing Petty Cash FundUsually not material.Potential for defalcation.Seldom perform substantive tests.Document controls.Disclosure Issues for CashDisclosure Issues for CashDisclosure Issues for CashInvestmentsCommon StockPreferred StockDebt SecuritiesHybrid SecuritiesControl Risk Assessment – InvestmentsHere are some of the more important assertions for investments. Occurrence and AuthorizationCompletenessAccuracy and ClassificationSegregation of DutiesSubstantive Procedures for Testing InvestmentsTests of Details – Investments ExistenceThe auditor should perform one or more of the following procedures when gathering evidence for existence: Physical examination Confirmation with the issuer Confirmation with the custodian Confirmation of unsettled transactions with the broker-dealer Confirmation with the counter-party Reading executed partnership or similar agreementsTests of Details – Investments Valuation and AllocationThe auditor must also determine if there has been any permanent decline in the value of an investment security. Accounting standards provide guidance for determining whether a decline in value below amortized cost is other than temporary.Tests of Details – Investments Valuation and AllocationHere are some factors that may indicate an other-than-temporary impairment of investment value (IAS 39):Significant financial difficulty of the issuer or obligor.A breach of contract, such as a default or delinquency in interest or principal payments.The lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider.It becoming probable that the borrower will enter bankruptcy or other financial reorganization.The disappearance of an active market for that financial asset because of financial difficulties.Observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group, including adverse changes in the payment status of borrowers in the group and national or local economic conditions that correlate with defaults on the assets in the group.Permanently Impaired = Write down to new carrying amount Tests of Details – Investments Disclosure AssertionsMarketable securities need to be properly classified as held-to-maturity, trading and available-for-sale.Held-to-maturity securities and individual available-for-sale securities should be classified as current or non-current assets based on whether management expects to convert them to cash within 12 months.All trading securities should be classified as current assets.End of Chapter 16