Transcript Chapter 6 Employee Fraud and the Audit of Cash

Chapter 6
Employee Fraud and the
Audit of Cash
Types of Cash Accounts
General Cash Account
Imprest Payroll Account
Branch Bank Account
Imprest Petty Cash Fund
Cash Equivalents
10-2
Relationship of General Cash
to Other Cash Accounts
Branch Bank
Account
Imprest Payroll
Account
General
Cash
Cash
Equivalents
Imprest Petty
Cash Fund
10-3
Relationships of Cash in the
Sales and Collection Cycle
Accounts Receivable
Cash
receipts
Cash Discounts Taken
Gross Sales
Cash
sales
Cash in Bank
10-4
Relationships of Cash in the
Acquisition and Payment Cycle
Accounts Payable
Payment
Cash in Bank
10-5
Relationships of Cash in
Payroll and Personnel Cycle
Accrued Wages, Salaries,
Bonuses, and Commissions
Payment
Withheld Income Taxes
and Other Deductions
Payment
Accrued Payroll
Tax Expense
Payment
Cash in Bank
10-6
Relationships of Cash in
Capital Acquisition And Repayment Cycle
Capital Stock – Common
Redemption Issue of
of stock
stock
Paid-in Capital in Excess
of Par – Common
Redemption Issue of
of stock
stock
Dividends Payable
Payment of
dividends
Cash in Bank
10-7
Sources of Audit Evidence
for Audit of Cash
Cash Receipts Journal
Cash Disbursements Journal
Bank Reconciliations
Cancelled Checks
Bank Statements
Cutoff Statement from Bank
10-8
Objectives for the Audit
of Cash
Consider inherent risks related to cash, including
fraud risks
Consider internal control over cash transactions
Substantiate existence of recorded cash
Establish completeness of recorded cash
Determine client has rights to recorded cash
Establish clerical accuracy of cash schedules
Determine presentation and disclosure of cash,
including restricted funds, are appropriate
10-9
Internal Control Cash
Account
Separation of incompatible duties
Receipts deposited daily and intact
Restrictive endorsements on checks received
Independent reconciliation of cash records including bank statement
Computerized Control Totals and edit tests
Authorization of transactions
Use of prenumbered documents
Periodic internal audits
Competent, well-trained employees
Respected access to assets and accounting records
10-10
Guidelines for Internal Control
Deposit cash receipts daily.
Make all disbursements by check or electronic funds
transfer, with the exception of small expenditures from
petty cash.
Have monthly bank reconciliations prepared by employees
not responsible for the issuance of checks or custody
of cash. The completed reconciliation should be
reviewed promptly by an appropriate official.
Monitor cash receipts and disbursements by comparing
recorded amounts to forecasted amounts
10-11
Internal Control Over Cash
Receipts
Cash Sales
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Involvement of two or more employees
Cash Registers
Electronic point of sales systems
Collections of Receivables
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Initial listing of cash receipts
Custody and depositing of cash receipts
Maintenance of customer account records
Reconciliation of customers’ ledgers with control accounts
Mailing monthly statements to customers
Collection activity and past-due accounts
Direct receipt of funds by financial institution
10-12
Processing Cash Receipts
6-13
10-13
Internal Control--Cash
Disbursements
Segregation of duties
Payment by check or electronic funds transfer
Pre-numbered check
Match of purchase order and receiving documents with
vendor’s invoice
Review of supporting documents by authorized check
signer
Cancel of supporting documents
Authorized check signer should mail checks
Monthly bank reconciliation
10-14
10-15
Substantive Tests for Cash Balances
Obtain analyses of cash balances and reconcile to
general ledger
Send standard confirmation forms to financial institutions
Obtain reconciliations of bank balances and consider
reconciling bank activity
Obtain bank cutoff statement
Count cash on hand
Verify the client’s cutoff of cash transactions
Analyze bank transfers occurring around year-end
Investigate payments to related parties
Evaluate financial statement presentation and disclosure
10-16
Standard Confirmation
10-17
Bank Cutoff Statement
Normal bank statement for the first few weeks
after year-end
Sent directly to the auditor
Includes canceled deposit slips and checks
Allows auditor to verify existence and amount
of deposits in transit and outstanding checks
on the bank reconciliation
10-18
How to Read a Cancelled Check
10-19
Check 21 Act
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Checks may be processed electronically
 Electronic processing creates a substitute check –
an electronic image of check

Legal equivalent of original check for all purposes
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Audit implications
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Need to rely on substitute check for evidence of check
Impossible for clients to kite checks (manipulate bank
balances to conceal cash shortage)
10-20
Bank
Reconciliation
Balance per bank
CONFIRM (Standard Bank Confirmation)
directly with bank
Agree to CUTOFF BANK STATEMENT
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Add Deposits-in-transit
TRACE to cash receipts journal
VOUCH to CUTOFF BANK STATEMENT
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Subtract Outstanding Checks
VOUCH to cash disbursements journal
TRACE checks cleared from cutoff bank
statement
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Add/Subtract Debit/Credit Memos
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Inspect bank credit/debit memo
Adjusted Balance
Balance per Books
Add/Subtract Debit/Credit Memos
Adjusted Balance
FOOT Reconciliation
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TRACE to trial balance
10-21
Proof of Cash
10-22
Kiting
Manipulations that utilize temporarily overstated bank
balances to conceal cash shortage or meet short-term
cash needs
Auditors can detect kiting by preparing a schedule of bank
transfers for a few days before and after balance sheet
date
Misstatements
 Date of recording per transfer per the books are from
different financial statement periods
 Date the check was recorded by the bank is from
financial statement period prior to books
10-23
Tests of Interbank Transfers
Accuracy of the information on the
interbank transfer schedule should be verified.
Interbank transfers must be recorded in
both the receiving and disbursing banks.
Date of the recording of the disbursements
and receipts for each transfer must be in
the same fiscal year.
10-24
Tests of Interbank Transfers
Disbursements on the interbank transfer
schedule should be correctly included in or
excluded from year-end bank reconciliation
as outstanding checks.
Receipts on the interbank transfer schedule
should be correctly included in or excluded
from year-end bank reconciliations as
deposits in transit.
10-25
Check
Kiting
… a fraud that
occurs by
reporting cash
simultaneously
in two different
bank accounts
10-26
Illustration of Lapping
Date
Dec. 1
Dec. 2
Dec. 3
Actually
Received
From
Abbott
Crane
Barstow
White
Crawford
Mill er
Actual
Cash
Receipts
$ 750
1,035
750
130
1.575
400
4,640
Recorded
as
Received
From
Crane
Abbott
White
Barstow
Mill er
Receipts
Recorded
and
Deposited
$ 1,035
750
130
750
400
3,065
Receipts
Withhe ld
$ 750
825
1,575
10-27
Petty Cash
Petty cash is a unique account since it is often
immaterial in amount, yet verified on many audits.
Account is verified primarily because of the potential
for defalcation and the client’s expectation of an audit
Review even when the amount is immaterial.
10-28
Audit of Imprest
Bank Accounts
Typically, the only reconciling items are
outstanding checks.
10-29