Audit of Cash and Financial Investments

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Chapter 10

• Audit of Cash and Financial Investments

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Substantive Tests General Concepts

• Reread pages 215-217
• Transaction cycles
• Groups of repetitive transactions
• Examples, pages 209-210
• Revenue Cycle
• relating to sales, shipping, receivables, and
  collections
• Acquisition Cycle
• referring to purchases, payables, and payments
• Production Cycle
• relating to manufacturing products and storage
• Also, payroll, investing, financing

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Substantive Tests General Concepts

• Combining CR assessments
• accounts affected by a single transaction cycle
• accounts affected by more than one transaction
  cycle

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Substantive Tests General Concepts (cont)

• Approaches for substantive tests
• tests of details of balances
• tests of details of transactions
• overstatement errors
• understatement errors
• Designing substantive tests
• nature
• timing
• extent

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1. Relationships Between Balance Sheet and
Income Statement Accounts
Accounts receivable Notes receivable
Securities and investments
Sales
Interest, Interest, dividends, gains,
investees income
Uncollectible accounts Uncollectible
notes Losses
Inventories
Purchases, cost of goods sold, payroll
Property, plant and equip. Intangible
assets Prepaid expenses Accrued liabilities
Rent, gains Royalties
Depreciation repairs Amortization Various
expenses Various expenses
Interest-bearing debt
Interest expense
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2. Cash - Internal Control

• Internal control over cash receipts
• general rules for handling cash
• separate functions receiving cash, depositing
  cash, recording the transactions
• controls over cash sales, payments received
  through the mail
• documents and records remittance advice, cash
  receipts list, daily cash summary, deposit slip

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2. Cash - Internal Control

• Internal control over cash disbursements
• steps pay from approved voucher, control check
  signing, mail payment, cancel voucher, record
  cash payment
• documents and records paid voucher file, cash
  disbursements journal

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3. Cash - Substantive Tests

• Cash
• Bank confirmation
• Cutoff bank statement
• Bank reconciliation
• Four-column proof of cash
• Interbank transfer schedule
• Cash cutoff tests
• Count cash on hand

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3. Cash - Substantive Tests

• Cash
• Existence and Occurrence
• confirmation, cutoff tests, cash count,
  reconciliation
• Rights and Obligations
• confirmation, cash count, reconciliation
• Completeness
• analytical procedures, confirmation, cutoff
  tests, cash count

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3. Cash - Substantive Tests

• Cash
• Valuation
• little problem, confirmation, cash count
• Presentation and Disclosure
• compare statement presentation to GAAP
• compensating balances, overdrafts, lines of
  credit, loan guarantees

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4. Investments-Internal Control

• Investments
• separate functions authorize purchasing and
  selling securities, receiving periodic income,
  recording transactions, safeguarding securities,
  recording market adjustments and
  reclassifications
• documents and records stock and bond
  certificates, brokers advice, investment
  subsidiary ledger

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5. Investments-Substantive Tests

• Investments
• Inspect and count securities on hand
• Confirm securities held by others
• Vouch entries (examine brokers advices, deposit
  slips, and paid checks
• Recalculate investment revenue earned
• Review documentation concerning fair values
• Analytical procedures

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5. Investments-Substantive Tests (cont)

• Investments
• Existence and Occurrence
• inspecting and counting, confirmation, vouching
• Rights and Obligations
• vouching (examine brokers advices, deposit
  slips, and paid checks), confirmation
• Completeness
• analytical procedures, vouching, inspecting and
  counting, confirmation

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5. Investments-Substantive Tests (cont)

• Investments
• Valuation
• review documentation concerning fair values,
  recalculate investment earned, inspection and
  counting
• Presentation and Disclosure
• compare statement presentation to GAAP
• numerous disclosures are required regarding fair
  values, and realized and unrealized gains and
  losses