YY Chapter 7 - Substantive Test of Cash CHAPTER 7 SUBSTANTIVE TEST OF CASH TOPIC OVERVIEW: ‘This chapter discuss’ and procedures as wel dit of cash and cash equivalent, its objec tiv es the al ‘ gement assertions relating to cash I] as the manaf RNING OBJECTIVES: ihor studying this chapter, you should be able to: 1, Explain and identify the categories of management assertions, 2. Identify the audit objectives for cash and cash equivalents, 3. Describe the primary substantive audit procedures for cash and cy equivalents. ; ai 4, Identify assertions addressed by audit procedures for cash and cay equivalents, Introduction i s. Almost all the ents transactions ultimately result in either receipt or payment of cash. Cay jk, cash onhand and ¢: cat usually includes highly liquid instruments that are both easiy equivalents are short-term, Cdavertible to known amount of cash. Examples of cash and cas equivalents include, but not limited to, petty cash fund, payroll fund, mone; orders, cashier's checks, treasury bills and others. ; Because of the very nature of cash, it is considered a hii inert misappropriation than other ase - that and Due to its high degree of inherent risk, more audit time is devoted to the audit of the account than is indicated by its peso amount. Management Assertions assertionsie When auditing an account balance, the auditor should use s, s, and The auditor uses assertions in assessing risks by considering the differen" Hes of potential misstatements that may occur, and thereby desi tudit procedures that are responsive to the assessed risks. 134> 7 ~ Substantive Test of Cash er tions used by the auditor fa ¢ following three broad categories: Aas gssertions about an for the period under, - transactions and events that have been recorded have a pertain to the entity, s - all transactions and events that should have been b. corded have been recorded. etiraql + amounts and other data relating to recorded © ‘transactions and events have been recorded appropriately, - transactions and events have been recor « (Gato rded in the correct accounting period. . transactions and events have been recorded in the "proper accounts, 1 Ass AGEOUAEBALAAMes at the period end: 7 ities, and equity interests exist. the entity holds or controls the rights to ies are the obligations of the entity. - all assets, liabilities and equity interests that should Completeness e been recorded have been recorded, 4 ~ assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded. 3. Assertions about : a - disclosed events, transactions, and other matters have occurred and pertain to the entit b, ~ all disclosures that should have been included in the inancial statements have been included. « - financial information is appropriately presented and described, and disclosures are clearly expresse: 4 - financial and other information are disclosed fairly and at appropriate amounts. oe about classes of transactions and events for the period under au it pertains to assertions in the statement of comprehensive income (SCI), Statement of cash flows (SCF), and statement of changes in equity (SCE) while ‘Ssertions about account balances at the period end pertains to assertions m the statement of financial position (SFP). Assertions about presentation and disclosure can be found in all the component of the complete set of "nancial statements, 135 kz esChapter 7 - Substantive Test of Cash Nowever, the following assertions are at times used interchangeap ‘ab oth SCI items and SFP items because essentially, they have he fo, objective: e Samy SCl assertion SFP assertion Occurrence Existence Accuracy Valuation or allocation Cut-off Bxistence/occurrence and complete, ess For example, the cut-off assertion addresses the issue that transa, events should have been recorded in the correct accounting i however, it also addresses: Periog the existence or occurrence assertion when the auditor transactions of the subsequent period being recorded in th period «the completeness assertion when the auditor concerns transaction, the current period being recorded in the subsequent period. for Concern, Curren, Valuation vs. Allocation Although these two assertions are considered similar and both relate tot, ‘account balances at period end, these can be distinguished as follows, ® Valuation applies to both initial and subsequent measurement of asset or liability (e.g, initial valuation of financial assets, subsequey, valuation of inventories, etc.) «Allocation relates more on subsequent measurement of prepaymens (deferrals), precollection, intangible asset, wasting asset ari depreciable asset which is allocated for more than one period. The Use of Assertions in Obtaining Audit Evidence Management assertions are used the auditor in formulating auit procedures. They serve as “targets” over which audit procedures to b formulated should be directed. The auditor uses assertions in assessing risks by considering the differen types of potential misstatements that may occur, and thereby designing audit procedures that are responsive to the assessed risks. Other PSAS discuss specific situations where the auditor is required to obtain audit evidence at the assertion level. Audit Procedures for Obtaining Audit Evidence The auditor obtains audit evidence to draw reasonable co which to base the audit opinion by performing audit procedures: AY procedures are acts to be performed in order to obtain audit evidence. ynclusions ° at ‘The set of audit procedures prepared to test assertions for a cOmPOM the financial statements is called “audit plan” or “audit progra” ip evidence and procedures does not need to have a “one-to-one” relatio 136yr 7 - Substantive Test of Cash er in an evidence, more than one procedure may be used. Also, only too! cedure may secure more than one type of evidence. e P Financial Statements ¥ Accounts. ¥ Assertions ¥ Audit Objectives ¥ Audit Procedures ‘Audit Objectives When auditing cash and cash equivalents, the principal objective for the substantive tests is to determine the following: ‘Assertion Category Account Balances Audit Objectives Existence All cash on the SFP at a given date is held by the entity or by others (eg,,a bank) for the entity, Completeness All cash owned by the entity at the reporting date is included on the SFP. Valuation and Cash, including bank balances, is stated at Allocation realizable value and agrees with supporting schedules. Rights and The entity owns, or has a legal right to, and has Obligations unrestricted use on all the cash on the SFP at the reporting date. Presentation and | Cash, including bank balances, is properly Disclosure classified, described, and disclosed in the financial statements, including notes, in accordance with PERS. Lines of credit, loan guarantees, compensating balance agreement, and other restrictions (liens) on cash balances are appropriately identified and disclosed. Note: For subsidiaries, the amount of significant cash and cash equivalent balances held by a subsidiary that are not available for use by the group shall_be disclosed together with a 137Chapter 7 - Substantive Test of Cash commentary by management. This may “ihen cash and cash equivalents are hg SW Subsidiary that operates in a country wy) @ exchange controls or other legal restrictiong te when the balances are not available for apply tise by the parent or other subsidiaries, Beneray ‘Audit Procedures for Cash ne auditor's primary substantive procedures for cash balances ,, nd Transactions will typically include the following: ans ssending confirmation to banks or financial institutions; 2. Conducting surprise cash counts; _ 3. Obtaining and testing bank reconciliation and if appropri preparing proof of cash; ; Obtaining bank cutoff statement and tracing bank transfers; Performing cash cutoff tests; Checking the appropriate valuation of cash; and Performing analytical procedures to assess the reasonableness reported cash. sane ‘Audit procedures presented in this textbook merely illustrate typical aug, procedures (ie, primary substantive procedures) for audits of merchandising tnd manufacturing entities. It is also primarily designed for audits y corporation; however, some discussions are made for partnership and sole proprietorship businesses. In actual practice, audit programs must be tailored to each client's risk and internal control. The audit procedures comprising audit programs may substantially vary from engagement to the next. “Assertions mentioned in this textbook relate the audit procedures discussed. However, some o| addressed. to primary assertion addressed by ther assertions may also be Bank Confirmations Primary Audit | The primary procedure when testing the existence an’ Objectives: _| rights and obligations in relation to the reported cash it ee bank (savings and checking account) is through Rights and confirmation of the balances of the company's accounts obligations with banks or financial institutions. Confirmation of bis Completeness | balances also provides evidence of the accuracy of Presentation valuation of cash in bank. Although in some entities, and disclosure_| on hand and cash in bank are immaterial compared other assets, one objective when confirming bank accounts is to search undisclosed liabilities and commitments. ott priallity \e mate! "det When determining whether to confirm a bank account, thé \d con’ account balance is not a consideration. Instead, the auditor shoul 138rer 7-~ Substantive Test of Cash chal jators suc aS the volume of transactions passing through the account and Ue purpose of the account. Its unlikely that the auditor would not confirm me jecount that has a high volume of transactions and is the key account for radi operation. The auditor should also include for confirmation those tras that have Deen closed during the period, a r a bank cot i ti the requ sene to all Ene ae ie ca pe sued on auditor's paertea Seicee tat ent has dealings. The request should be clear and cé and may include balances and other information jnd request confirmation, or to request details of balances and other formation. The following information is ordinarily included in. the confirmation request: 1, Balances due to or from the bank (the letter may give the account number, description and currency, and should request information on nil balances and accounts closed during the period 2, Terms and repayments conditions of loan and overdrafts; 3, Collateral given, maturity and interest terms, unused facilities, lines of credit and any rights of offset or other rights; 4, Assets held in safe custody and any encumbrances over them; 5, Asset repurchase and resale agreements and options; 6. Contingent liabilities such as bills, acceptance, guarantees, and endorsements; 7. Listings of authorized account signers; and 8, Standby contracts, forward currency and other such arrangements. Control over the content and dispatch of requests for confirmation is the responsibility of the auditor. However, the client will need to authorize disclosure of the relevant information. Replies should be sent directly to the auditor who should enclose a stamped or business reply envelope addressed to the office of the auditor to facilitate a speedy response. On receipt, the auditor should review the returned bank confirmations for details of security, guarantees and restrictions over the entity's use of its cash, and agree details of all such items with the entity. The auditor should review documents such as minutes and agreements, during the course of audit to establish the existence of any restrictions over the entity's use of its cash, Loan Agreements loan agreements between financial institutions and their customers may Provide that the cash that is deposited in the financial institutions is pledged as security for the loans, In this case, the auditor should check whether the amount pledged is properly disclosed in the notes to financial statements. 139SS Chapter 7 - Substantive Test of Cash e Bank Overdrafts The auditor ordinarily verifies bank overdrafts thru bank Bank overdrafts arises when bank balances are overdrawn n'*™atigy, reported as current liabilities and should not be netted ys accounts with positive balance, unless it is part of the ct? er b; management or the amount involved is immaterial, “°™™Pany’s Kindly refer to Exhibit 2 at the end of this chapter for sample sy Confirmation ‘dard Bon, Cash Count Primary Audit] Cash on hand ordinarily consists of undepos i Objectives: _| receipts, petty cash funds, and change funds, can Cash Existence can be either conducted before or after the st (un Wetiasion date. In other words, cash counts should be eo ae , ould be cond throughout the year and should cover all branches. possible, all tellers or cash custodian. anit The auditor should plan to count all cash and should consider the follow; in 1. Surprise cash count. Cash counts must be performed without custodian being informed in advance (ice., on a surprise basis); 2. Control all cash funds, including marketable securities and othe negotiable assets to prevent any ‘transfers’ or ‘substitution’ of floats ts hide discrepancies, until the completion of the count; 3. Count in the presence of the custodian to ensure the auditors cannit be blamed for any shortage; 4. List each item in the fund showing the denominations of notes and coins; 5. The custodian should sign the cash count sheet as evidence of the return of all funds; and 6. Agree the total to the cash book balance and investigate any differences. Kindly refer to Exhibit 1 at the end of this chapter for sample Cash Count Sheet. Test on Bank Reconciliation 7 Primary Audit | Bank reconciliation is customarily prepared monty Objectives:_| the client as part of its internal control over cash on eaietenee) auditing bank reconciliations, the auditor would obla™ ae copy of bank reconciliation prepared by the client Completeness Rights should: 1, Verify the cash balance used in the bank reconciliation: «as a. Trace balance per books in the ledger, cash receipts disbursement journal. 1407 - Substantive Test of Cash papter b. Trace balance per bank in the bai bank confirmation. 2. Check the accuracy of the footing in the bank reconciliation, 3, Verify book reconciling items in supporting documents euch as bank statement. 4, Verify bank reconciling items by: "4. Fiscal bank reconciliation (first 11 mont ¥ Deposits in transit (DIT) - examin next month's bank statement ¥ Outstanding checks (OC package, passbook (if a statement b. Year-end bank reconciliation ¥ Deposits in transit (DIT) “bank cutoff statement” already available. Outstanding checks (OC) - examine the check voucher package, passbook (if applicable), “bank cutoff statement” or next month's bank statement. nk statement and/or reply to ths bank reconciliation) f copies of deposit slips or ) = examine the check voucher plicable) or next month's bank (last month bank reconciliation) ~ examine copies of deposit slips, the or next month's bank statement if A bank cutoff statement is normally prepared 8 - 10 business days after the reporting date. Bank cutoff statement is useful if the auditor will issue an audit report within one month after the reporting date. However, if the auditor will issue a report for more than one month after the reporting date, the auditor may just refer to the bank statement received by the client for the next reporting date (e.g,, January, February or March bank statement if the year-end is December 31), 5. Examine whether there is an adjusting entry to reflect the book reconciling items. When testing bank reconciliation, the auditors should place more importance on items that may be omitted in the bank reconciliation to conceal cash shortage or misappropriation of cash and any unusual transactions. The auditor also needs to investigate any long outstanding checks including stale checks. Note that under normal banking practice, checks not encashed for a period exceeding six months from the date indicated in the check is considered stale. Any large or unusual transactions, especially checks payable to directors, officers, employees, affiliated companies, or cash should be carefully Teviewed by the auditors to determine whether the transactions were Properly authorized, recorded and are adequately disclosed in the financial Statements as required by PAS 24 Related Party Transactions. 141tof Cash he auditor on internal controls, the a trol over cash receipts and cash disbursement®®t the auditor may consider preparing ws ‘ocedure aside from. testing ai dn is also called four-column. 2° bank reconciliation, is prepared to recg but also the account transactions cosines proof of cash is used to identify: Trin ded in the accounting record, jon. n or two date count balance reconciliatio reconciliatio not only the act a i ified period. Specifically, during Pee pts and disbursements To tatement; pat not on the bank s : 2, Cash deposits and disbursements recor’ i ds; and not on the accounting records; : 3, Cash receipts and disbursement recorded at different amounts by tp, bank than in the accounting records. [A proof of cash is essentially a fraud detection procedure that may be use by the auditor and the client, for any months during the year. ded on the bank statement, but ‘tracing Bank Transfers Many businesses maintain checking accounts with itectives:__| number of banks and often find it necessary to transfer Existence funds from one bank to another. When a check drawn on Completeness | One bank is deposited in another, traditionally three Rights working days will pass before the check clears the bank on which it is drawn, However, checks nowadays is good as cash and may clear within the same banking day. During the clearing period, the amourt of the check may be included in both banks, thereby causing overstatement ofeach balances. Due to this effect of the clearing period, an employee may take advantage of this period and manipulate bank transfers to conceal cash shortage. This scheme is called kiting. To be able to detect this fraudulent scheme, the auditor ordinarily performs the following procedures: 1. Obtain a bank cutoff statement directly from the bank or the next periods bank statement if already available; 2. Prepare a schedule of bank transfers showing al the client's bank accounts during the last week of thi the first week of the subsequent period. The sc prepared using cash receipts and payments journals, ee year-end bank statement, and cutoff bank statemt 3. ie ae deposits, and other cash changes. from the Ge nero receipts and disbursements records, P ion to dates and amounts. Il transfers betwee? e audit period am hedule should be year-ent ent 142 oory ver 7 ~ Substantive Test of Cash os rules should be observed by the auditor when tracing bank se flowing (rank entries for receiving and disbursing should have been made 1. ithin same month; : ! Book entries compared with the bank entries may be made in an earlier ‘month but not in a later month; and The receiving per bank should not be in an earlier date than the gisbursement per book. 2 3. ts ‘The auditor should perform cutoff procedures on cash receipts, disbursements and transfers to determine if these transactions are reflected in the proper period. Normally, the desire to show a more favorable current ratio may cause some entities to record cash disbursed in the first few days of a new accounting period as disbursements of the preceding period or to record cash receipts of the first few days of the ipsequent period as receipts of the preceding period. This scheme is an txample of window dressing, When testing cutoff of cash receipts and cash disbursements at the reporting date, audit procedure might include: 1 Comparing deposits on the bank statements immediately before and after the reporting date with entries in the cash receipts journal to establish the reasonableness of the deposits in transit at the reporting date; and 2. Comparing the dates of payments or interban! reporting date to establish that recorded in the proper periods. cash cut-off Tes! f the disbursement and receipt of intercompany k transfers immediately before and after the t both receipts and disbursements were Cash Valuation Primary Audit | Some companies may maintain its bank account in qlecives foreign currencies for some business purposes. If the piuation | bank account being reconciled is in a foreign currency, Presentation | the auditor should test the conversion of the cash balance tanddisdosure | +5 the presentation currency (e.g. Philippine peso) to determine whether cash is stated at its realizable value. The auditor ordinarily should: 1. Obtain the closing foreign exchange rate from an independe nt source into the currency using this rate; and 3. Compare the resultant amount to the account ledger and account for any differences. 143 balance in the generalChapter 7 — Substantive eat of 280 Cash deposits in closed bank In some cases, a company May also have bank deposits on bank: closed during the fiscal period. In considering the amounts to be that have Ported, in the statement of financial position, the auditor should consider th; in closed bank may be covered under Philippine Deposits fat deposig Corporation (pDICc). ‘Ordinarily, the auditor should also ensure nsura : closed bank should not be included as part of “cash and cash equi a valent rather it should be part ‘of non-trade receivable. dures on Cash Aside from transactions, t procedures to © cash reported in t may: Compare the listing of cash accounts with thos any unexpected changes (eg, cre ods and investigat sual Jarge balances, new accounts, closed accounts) or ff expected changes: t received and/or paid in rel overdrafts; and al fluctuations ai ical Proce’ the substantive test of balan he auditor may need to perform ae auteridence of reasonableness cht he financial statements. The audi itor Anal} Existence Rights and | obligation prior peri balances, unt 2, Review interes' lation to the average cash balances and/or bank 3, Investigate any unusti nd significant difference. larified that the foregoing is only an illustrative list of analytical employ in carrying out an aucito It may be cll review procedures which an audiCor Tay rch and cash equivalents. The exact naviey of analytical review procedurests “uation is a matter of professional judgment of the be applied in a specific s auditor. special Audit Consideration 1 Kiting. Kiting is an irregularity whereby an overstatement of cash s amsfer between bank accounts. It 1 usually as cast the other bank rom an internal control tion of duties betwee? e auditor may test issed earlier it created by a cash t characterized by recording the transfer to receipts but the disbursement is not recorded. Fr point of view, kiting occurs due to lack of segregal accounting and cash custody. To detect kiting, th cutoff bank statement and trace bank transfers as discu’ ne this chapter. 2. Lapping. Lapping is ating collections fo" customer and conceal by applying @ collection made from another customer. This scheme is used 10.7 fash shortage. As discussed earlier in this ‘chapter, lapping © ing saencted by bank confirmation, surprise cash fount and COMP details of cash receipts journal entries with the details v7 daily deposit slips. 144 done by misappropr ling this defalcationis usually acc Recor made sul To cash receipts a Cut-off Tests). ti omplished by: ding as of the last day of the accounting period collections sequent to the close of the period Recording as of the last day of the accounting period payments of b. counts made subsequent to the close of the period, detect this scheme, the auditor will ordinarily verify cash cutoff of nd disbursements (please refer to discussion in the Cash 5 ‘Assertion Cate} Existence mmal of audit procedures classified per assertion ul Primary audit procedures v Sending confirmation to banks or financial institutions Surprise cash count Obtaining and testing bank reconciliation and preparing proof cash (if appropriate) Obtaining bank cutoff statement and tracing bank transfers Cash cut-off test Analytical procedures on cash Completeness Sending confirmation to banks or financial institutions Obtaining and testing bank reconciliation and preparing proof cash (if appropriate) Obtaining bank cutoff statement and tracing bank transfers Cash cut-off test Analytical procedures on cash Valuation and Allocation Sending confirmation to banks or financial institutions Surprise cash count Obtaining and testing bank reconciliation and preparing proof cash (if appropriate) Checking the appropriate valuation of cash Rights and Obligations Sending confirmation to banks or financial institutions Surprise cash count Obtaining and testing bank reconciliation and preparing proof cash (if appropriate) Obtaining bank cutoff statement and tracing bank transfers 145oa Chapter 7 - Substantive Test of Cash ee Y Cash cut-off test ¥_ Analytical procedures on cash S Y Sending confirmation to banks or institutions inane ¥_Checking the appropriate valuation of cay I | Exhibit 1: Cash Count Sheet face center orate Gash CouneShesta ei e ena MadamiCashonHandco, «December 31.2021 January 4, 2099 Presentation and Disclosure Client Audit Date Date Petty Cash Fund Josefa Munda 054M, Name of fund Counted By Time Denomination | Quantity | Amount Total Currency: P1,000 1 ‘1,000 500 3 1,500 200 1 200 100 16 1,600 50 20 3,000 20) #0 800 6100 Coins: 10 30 00 5 100 ‘500 1 100 100 1,100 Checks: None = : 3 Vouchers: Taxi fare my we Others None Total eo Above listed cash items in the amount of P7,600 were returned to me afer count by a representative of Asuncion, Escala, Ngina & Co. All cash and cash items for which | am accountable to, have been presented for inspection and count. anwar. 2022 Pretty Custodian Date Signature of Custodian 146chapter 7 - Substantive Test of Cash exhibit 2: Standard Bank Confirmation ‘ait: Janet Nafoolish, Senior Manager k ofthe Baguio Islands qawer Session Rd, Baguio City NcpAR.InG have provided to oUF auditors the follow fustness on December 31, 2021, regarding aa confirm the accuracy of the information, nating» prove. the balances have been left Bani yes fishing the balance in the appropriate space bel nes oP nor expect you to conduct a, ComPrehensive, detailed se ing the process of completing this conf dung te Proce oar scans contirmation, $ekitona information abot please include such information below, Femput attention, Please use the encl 1. Attthe close of business on the date _following deposit balance [Account name | Account no arch of your records, if fed above, our records indicated the Type of account | Interest | Balance trayroll account T334Se79 +R ———__| rate Payroll account | 12345678 | Checking account 2% | Pis,765523 {General account | 23456789 _| Checking account | None 1324434 Free rectly inhi 8 ths finadclat jostinitenske Ini at Se clay of business on the date listed above as follows: Date through Account which n0./ Date | Interest | interestis | Description Description | Balance* | due rate paid | ofcollateral 143-444 P1,321,432 | 3/2/2025 [11.5% 12/31/2021 Delivery equipment a January 14,2022 (Customer's Authorized Signature) (Date) -To be filled by the bank’s authorized personnel The information presented above by the customer is in agreement with our records. Although we have not conducted a comprehensive, detailed search ee Fecords, no other deposit or loan accounts have come to our attention except as noted below. ee eae ee January 20.2022 BeeNay, Finance Director 3 (Date) (Financial Institution Authorized Signature) ase return this form directly to our auditors: | Asuncion, Escala, Ngina & Co. P.O. Box 14344, 2600 Baguio City _| ae 147Chapter 7 - Substantive Test of Cash Problem Issertions 1. Acts to be performed in order to obtain audit evidence. a. Audit standards b. Audit procedures ¢. Audit program d. Audit strategy 2. In designing written audit programs, an auditor sh specific audit objectives that related primarily tothe "4 estab, a. Timing of audit procedures. ‘ b. Selected audit techniques. c. Cost-benefit of gathering evidence. d. Financial statement assertions. 3. Management assertions are: a. Stated in the footnotes to the financial statements b. Implied or express representations about the accounts in the fina ig statements Explicitly expressed representations about the financial statements 4. Provided to the auditor in the assertions letter, but are not disclose the financial statements of the entity. " Assertions used by the auditor fall into the following categories, except 4 a. Assertions about the faithful representations b. Assertions about account balances at period end c, Assertions about classes of transactions and events d. Assertions about presentation and disclosure 5. Which of the following is not a financial statement assertion relating » account balances? a. Completeness. b. Existence. c. Rights and obligations. d. Valuation and competence. 6 Assertions about account balances at the period-end include valuation an allocation, which means that a. Assets, liabilities and equity interest exist. b. All assets, liabilities and equity interests that should have bees recorded have been recorded. oe ab Bll c. Assets, liabilities and equity interests are included in the fit statements at appropriate amounts and any resulting valuation allocation adjustments are appropriately recorded. d. The entity holds or controls the rights to assets, and liabilities obligations of the entity. re the 148rer 7~ Substantive Test of Cash | a S assertion of cut-off means tha a ‘all transactions and events that should have been recorded 3 ‘smounts and other data relating to recorded transactions and events | > jave been recorded appropriately Transactions and events have been recorded in the correct accounting eriod | Fransactions and events have been recorded in the proper accounts a i hich description refers to the completeness assertion? ‘All disclosures that should have been included in the financial ‘statements have been included. | , Disclosed events, transactions and other matters have occurred and pertain to the entity, Financial information is appropriately presented and described, and | disclosures are clearly expressed. 4. Financial and other information are disclosure fairly and at appropriate amounts. 4 Confirming proper title to equipment supports which of the following | assertions? i] a, Existence or occurrence tb. Presentation and disclosure | Insurance coverage || 4. Rights and obligations || 1m There are three categories of financial statement assertions: Assertions | pertaining to account balances at period end, assertions pertaining to i] classes of transactions and events during the period, and assertions {ii pertaining to presentation and disclosure. Which of the following is a financial statement assertion that is common to all three categories? a. Existence ll b. Completeness | | ©. Classifications } 4. Occurrence Problem 7-2: Substantive Test of Cash ! 1. Which of the following is not normally considered an act of concealing cash Hl shortage? a Lapping b © Banking } 4 Kiting | 149Chapter 7 - Substantive Test of Cash rs when collection of receivable from ong 2 misappropriated and then concealed by applying a subsequene he from another customer. lee a. Lapping b. Kiting cc. Window dressing d. Floating is 0c is concealed by overstati 3. This occurs when cash shortage is ng the bay cash. This is performed by exploiting the float period (the time it needa! check to clear at the bank it was drawn). on a. Lapping b. Kiting c. Window dressing d. Floating 4. The general cash account is considered significant in almost all audit a, Where the ending balance is material b. Where the beginning balance is material c, Even when the ending balance is immaterial d. Except those of not-for-profit organizations 5. When conducting surprise cash count, the auditor should simultaneoug count all cash funds, marketable securities and other Negotiable assets 1 prevent a. Time-out b. Substitution c. Defalcation d. Misappropriation 6 Acash shortage may be concealed by transporting funds from one locator to another or by converting negotiable assets to cash. Because of the which of the following is vital? a. Simultaneous confirmations, b. Simultaneous bank reconciliations. © Simultaneous verification. 4. Simultaneous surprise cash count. 7. The primary purpose of sending a standard bank confirmation request 0 financial institutions with which the client has done business during the year is to: a. Request informatio: b. Detect kiting activi © Provide the d Proof of cash. Corroborate/verify information regarding cash & loan balances. n concerning contingent liabilities & collateral ties that may otherwise not be discovered ‘i ‘ata needed to prepare the bank section of a four-colut™! 150pstantive Test of Cash coast year-end audit procedures, the auditor instructed the nt’s ne of the Yearer } standard bank confirmation request for a bank personne 7 ad ‘been closed during the year. After the client's treasurer cunt ta eesti was mailed by the assistant treasurer. What isthe aa sign win this audit procedure? law int nation request was signed by the treasurer. na) a a ‘The co! ‘equest was meaningless because the account was closed the request the year-end i before test was mailed by the assistant treasurer. «THEE cid not sign the confirmation request before it was mailed. a aber, tnree months before year-end, the bookkeeper erroneously the receipt of a one-year bank loan with a debit to cash and a recor ‘miscellaneous revenue. Select the most effective method for a eof error. ea i eh receipts journal for October. & senda bank confirmation as of year-end. > prepare bank reconciliation as of year-end. §.. prepare a bank transfer schedule as of year-end. Which of the following is not confirmed on the standard form used for cash balances at financial institutions? a. Cash checking account balances. b. Cash savings account balances. Loans payable. 4. Securities held for the client by the financial institution. am 10. 11. The primary assertion being addressed by sending bank confirmation is a. Existence b. Rights and obligation c. Completeness 4. Classification 12. Which of the following assertions is least likely to be addressed by sending bank confirmation? a. Existence Rights and obligation ©. Completeness Classification 1S, This document is a bank statement prepared a few days after month-end. {ts purpose is to help auditors verify reconciling items on the year-end bank Feconcliation, & Cut-off bank statement Bank transfer schedule Bank reconciliation Proof of cash ‘ 151 hk.Chapter 14, 15. 16. 17. 18. Substantive Test of Cash ‘An auditor who is engaged to examine the financial statements of 4 ba enterprise will request a cutoff bank statement primarily in order yg "I" a. Verify the cash balance reported on the bank confirmation ing form. : . Verify reconciling items on the client's bank reconciliation, c. Detect lapping. d. Detect kiting. ‘The auditors use a bank cutoff statement to compare: a. Deposits in transit on the year-end cash general led, deposits in the cash receipts journal. b. Checks dated prior to year-end to the outstanding checks liste, year-end bank reconciliation. c. Deposits listed on the cutoff statement to disbursements in 4 disbursements journal. d. Checks dated subsequent to year-end to the outstanding checks on the year-end bank statement. ip Wer accoun ‘dont, he cas liste Which procedure is an auditor most likely to use to detect a che outstanding at year-end that was not recorded as outstanding on the yes end bank reconciliation? : a. Prepare a bank transfer schedule using the client's cash receipts ay cash disbursements journal. b. Receive a cutoff statement directly from the client's bank. c. Prepare a four-column bank reconciliation using the year-end bay statement. 4. Confirm the year-end balance using the standard form to confin account balance information with financial institutions. A reconciliation that includes proof of receipts and disbursements that useful in discovering possible discrepancies in handling cash over a cera: period of time. a. Bank statement b. Proof of cash ©. Bank reconciliation 4. Cash requirements report Proof of cash or four-column-bank reconciliation is normally prepared by a. The auditor b. Theclient ©. Bither the client or auditor d. Neither client or auditor 1527 sunstantive Test of Cash oe tet afour-column bank reconciliation (proof of cash) at year-end, prepatiNg enerally be able to detect i 1s tor ed deposit made at the bank at the end of the month. at payment of an account payable which had already been paid b Aetwo ‘months earlier. : inl ealernent of cash receipts not recorded in the cash receipts «_ An em ofore they had been deposited into the bank joa able collected that had previously been written off as tncollectible vatowing specie scenarios are normally uncovered using proof of 20, Tm "elect the exception: cash Ser cepts and disbursements recorded in the accounting records, a put not on the bank statement. wath deposits and disbursements recorded on the bank statement, but pot on the accounting records. «cash receipts and disbursements not recorded in the accounting * Fecords and on the bank statement. 4. cash receipts and disbursement recorded at different amounts by the bank than in the accounting records. 11 This document shows the dates of all transfers of cash among the various hank accounts. Its primary purpose is to help auditors detect kiting. a. Cut-offbank statement b. Bank transfer schedule . Bank reconciliation d. Proof of cash 22. Kiting would least likely be detected by: a. Analyzing details of large cash deposits around year end. b. Comparing customer remittance advices with recorded disbursements inthe cash disbursements journal. Preparing four-column bank reconciliation for all major cash accounts. 4. Preparing a schedule of interbank transfers by using the client's records and bank statements around year end. b 153rive Test of Cash on the following informatio from the bank transfer schedule prep, sige Sige Lang Co's financial statement all checks are dated and issyey'™ oy chapter 7 - Substant : The next two questions Cis ae ‘ The information below W: during the the year ended Dec December 30, 20: ' ventana ti ‘Accounts . Bank Ace i ta i - Check From To books bank books ma ‘01 Bebe Chinito Dec.30 Jane Dec.30 jt 202 John Labidabs —Jan.3 jan? Deca0 pet? Be pans rt ee Jan.2 Jan > 404 Labidabs Lloyd Jan. 2 Jan2 Jana ped 23, Which of the following checks might indicate kiting? a, #101 and #303 b. #202 and #404 c. #10Land #404 d, #202 and #303 24. Which of the following checks illustrate deposits/ transfers in transit December 31, 2018? a. #101 and #202 b. #101 and #303 © #202 and #404 d. #303 and #404 25. A practical and effective audit procedure for the detection of lapping is a, Preparing an interbank transfer schedule, b. Comparing recorded cash receipts in detail against items making up the ae deposit as shown on duplicate deposit slips validated by the bank ©. Tracing recorded cash receipts to postings in customers’ 4d. Preparing a proof of cash. : laa 154