OVERVIEW OF AUDITING

An audit is a systematic process of objectively obtaining and evaluating evidence regarding

assertions about economic actions and events to ascertain the degree of correspondence between
there assertions and established criteria and communicating the results to interested users.

Assertions are management representations about economic actions and events. These are claims
on which the financial statements are fairly presented in accordance with accounting standards.

THE AUDIT PROCESS:

1. Accepting the Engagement
2. Audit Planning
3. Considering Internal Control
4. PERFORMING SUBSTANTIVE PROCEDURES
5. Completing the Audit
6. Issuance of Audit Report

TRANSACTION CYCLES:
1. Revenue/Receipt Cycle
2. Expense/Disbursement Cycle
3. Human Resources/Payroll Cycle
4. Production/Conversion Cycle
5. Financing/Investing Cycle

AUDIT OF CASH
Cash is one of the most important assets of a business. Because of the very nature of cash, it
is considered a high-risk area or most vulnerable to misappropriate than other assets. It
requires good internal controls and careful monitoring. 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.

Before performing the substantive testing in any account, always reconcile first the amount in
the trial balance/unaudited FS versus the amount in the general ledger (if applicable).
SUMMARY OF AUDIT OBJECTIVES AND SUBSTANTIVE AUDIT PROCEDURES:

ASSERTIONS AUDIT OBJECTIVES AUDIT PROCEDURES

Existence All cash on the SFP at a -Sending confirmation to banks

given date is held by the or financial institutions
entity or by others (eg.
Bank) for the entity -Surprise cash count

-Obtaining and testing bank

reconciliation and preparing
proof of cash (if appropriate)

-Obtaining bank cutoff

statement and tracing bank
transfers.

-Cash cut-off test

-Analytical procedures on cash

Completeness All cash owned by the entity -Sending confirmation to banks

at the reporting date is or financial institutions
included on the SFP.
-Obtaining and testing bank
reconciliation and preparing
proof of cash (if appropriate)

-Obtaining bank cut-off

statement and tracing bank
transfers

-Cash cut-off test

-Analytical procedures on cash

Rights and The entity owns, or has a -Sending confirmation to banks
Obligations legal right to, and has or financial institutions
unrestricted use on all the
cash on the SFP at the -Surprise cash count
reporting date.
-Obtaining and testing bank
reconciliation and preparing
proof of cash (if appropriate)

-Obtaining bank cut-off

statement and tracing bank
transfers

-Cash cut-off test

-Analytical procedures on cash

Valuation and Cash, including bank -Sending confirmation to banks

Allocation balances, is stated at or financial institutions
realizable value and agrees
with supporting schedules. -Surprise cash count

-Obtaining and testing bank

reconciliation and preparing
proof of cash (if appropriate)

-Obtaining bank cut-off

statement and tracing bank
transfers

-Checking the appropriate

valuation of cash
Presentation and Cash, Including bank -Sending confirmation to banks
Disclosure balances, is properly or financial institutions
classified, described, and
disclosed in the financial -Checking the appropriate
statements, including notes, valuation of cash
in accirdance with PFRS.

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
equivalent balances held by a
subsidiary that are not
available for use by the
group shall be disclosed
together with a commentary by
management. This may occur
when cash and cash
equivalents are held by a
subsidiary that operates in a
country where exchange
controls or other legal
restritions apply when the
balances are not available
for general use by the parent
or other subsidiaries.

AUDIT PROCEDURES FOR CASH:

BANK CONFIRMATIONS
How to do?
1. The request for bank confirmation should be issued on auditor's letterhead and sent to all
banks where the client has dealings.
2. The request should be clear and concise.
3. Control over the content and dispatch of requests for confirmation is the responsibility of
the auditor (with the client's authorization for the disclosure of the relevant information).

4. Replies should be sent directly to the auditor enclose a stamped or business reply envelope
addressed to the office of the auditor.
5. Auditor will review the bank confirmation reply (details of security, guarantees and
restrictions over the entity's use of its cash).
6. Check pledging if properly disclosed in the notes to FS.
CASH COUNT PROCEDURE
-Performed on cash on hand (undeposited cash receipts, petty cash fund and change fund)
-Conducted before or after the reporting date.
-Should cover all branches (and if possible all custodians and tellers).
How to do?
1. "Surprise" cash count.
2. Control all cash fund to prevent transfer or substitution of floats to hide discrepancies.

3. Count in the presence of the custodian to ensure the auditor cannot be blamed for any
shortage.
4. List each item in the fund showing the dominations of notes and coins.
5. The custodian should sign the record as evidence of the return of all funds.
6. Agree the total to the cash book balance and investigate any differences.

TEST OF BANK RECONCILIATION

-Bank reconciliation is customarily prepared on a monthly basis by the client as part of
internal control over cash.
-The auditor's role is to obtain the copy of the bank reconciliation prepared by the client.
How to do?
1. Verify the cash balance used in the bank reconciliation:
a. Trace balance per book in the ledger, CRJ and CDJ.
b. Trace the balance per bank in the balance per bank statement, reply to bank
confirmation and cut-off bank statement.

2. Check the accuracy of the footing in the bank recon.

3. Obtain the supporting documents for any book and bank reconciling items (can be verified by
obtaining bank cut-off statement)
Important Considerations:
1. Focus on items that may be omitted in the bank recon to conceal cash shortage or
misappropriation (normally, outstandin
2. Check the long-outstanding checks)
checks for a year or more.
3. Focus on any large or unusual transactions (checks payable to directors, officers,
employees, affiliated companies or even pay to "cash")

PROOF OF CASH
Important Considerations:
1. If the auditor assessed that the internal control over cash receipts and cash disbursements
as weak or ineffective, you can perform this procedure.
2. Proof of cash is also called "four-column bank reconciliation"
3. This is prepared not only to verify the account balance but also the account transactions
occurring during a specified period.
4. Essentially a fraud detection procedure that may be used for any months during the year.
5. It helps identify:
a. CR and CD recorded in the books but not in the bank statement.
b. CR and CD recorded on the bank statement but not on the books.
c. CR and CD recorded at different amounts by the bank than in the books.
TRACING BANK TRANSFERS
- To detect Kiting.
- Kiting is concealing of cash shortage by taking advantage of the clearing period of checks.
How to do?
1. Obtain a bank cut-off directly from the bank.
2. Prepare a schedule of bank transfers showing all transferes between the client's bank
accounts the last week of the audit period and the first week of the subsequent period.
3. Trace all the checks, deposits and other cash changes from the cut-off statement to CRJ and
CDJ, paying particular attention to the dates and amounts.

CASH CUT-OFF TESTS

-To detect Window Dressing Scheme (desire to have a good current ratio).
How to do?
1. Compare deposits on the bank statements immediately before and after the reporting date with
entries in the CRJ (to establish the reasonableness of the deposits in transit at the reporting
date).
2. Compare the dates of the disbursement and receipt of intercompany payments or interbank
transfers immediately before and after the reporting date (to establish that both receipts and
disbursements are recorded in the proper periods).

CASH VALUATION
-Auditor should test the valuation of cash (if there are foreigh currencies).
-Determine whether the cash is stated at its realizable value.
How to do?
1. Obtain the period-end foreign exchange rate from an independent source.
2. Re-perform the conversion using the current rate.
3. Compare the result of amount to the account balance in the general ledger and accounting for
differences.

ANALYTICAL PROCEDURES
-To obtain reasonableness of cash reported in the FS.
How to do?
1. Compare the listing of cash amounts with those prior periods and investigate any unexpected
changes (ex: credit balances, unusual large balances, new accounts, closed accounts) or absence
of expected changes.
2. Review interest received or paid in relation to the average cash balances.
3. Investigate unusual fluctuations/significant differences.