Cash and Financial Investments

1. Cash and Financial Investments

2. Key Internal ControlsCash Receipts • Cash sales • Involvement of 2 or more employees • Cash Registers • Electronic point of sale (POS) systems • Collections of receivables • Initial listing of cash receipts (mailroom) • Custody and prompt depositing of cash receipts • Maintenance of customer account records • Reconciliation of customer subledgers with control A/Cs • Mailing monthly statements to customers • Collection and follow-up past-due accounts

3. Most Likely Misstatements Cash Receipts • Recording fictitious cash receipts • Not recording receipts from cash sales • Early (late) recognition of cash receipts • Not recording cash from collection of accounts receivables

4. Lapping Definition:Starts with embezzling customer payments (usually by accounts receivable clerk) and then concealing it by posting subsequent payments from other customers on a continual overlapping basis to keep individual accounts as current as possible. Prevention:(1)Segregate payment from remittance advice form or (2)making a record of the payments before sending to accounts receivable clerk and comparing list to daily deposit details. Audit Detection: (1)confirmation of balance with customers or (2)comparing accounts receivable sub-ledger credits per day to daily deposit details.

5. Lapping

6. Key Internal ControlsCash Disbursements • Segregation of duties • Payment by check or electronic funds transfer • Match of purchase order and receiving documents with vendor’s invoice • Review of supporting documents by authorized check signer • Cancel supporting documents • Authorized check signer should mail checks

7. Most Likely MisstatementsCash Disbursements • Inaccurate recording of a purchase or disbursement • Duplicate recording/payment of purchases • Unrecorded disbursements

8. Audit ObjectivesSubstantive Tests of Cash • Substantiate the Existence of recorded cash • Establish the Completeness of recorded cash • Determine that the client has Rights to recorded cash • Establish the clerical accuracy of cash schedules • Determine that the Presentation and disclosure of cash Which Assertion is missing?

9. Audit ObjectivesSubstantive Tests of Cash • Substantiate the Existence of recorded cash • Establish the Completeness of recorded cash • Determine that the client has Rights to recorded cash • Establish the clerical accuracy of cash schedules • Determine that the Presentation and disclosure of cash, including restricted funds, are appropriate • Determine proper Valuation per GAAP

10. Substantive Tests - Cash Balances • Obtain analyses of cash balances and reconcile to GL • Send standard confirmation forms to banks • Consider reconciling bank activity(proof of cash)

11. Proof of Cash: Why Perform? Reconciles bank account balance and activity (cash in bank transactions) during a specified period between client & bank records. Used to identify: Cash receipts & disbursements recorded in the accounting records, but not on the bank statement. Cash deposits & disbursements recorded on the bank statement, but not in the accounting records. Cash receipts and disbursements recorded at different amounts by the bank than in the accounting records.

12. Proof of Cash (Transactions) • Start with what the bank statement shows as to balances (beginning & ending), credits and debits to A/C. • Then, we either add or subtract from these four amounts to attempt to reconcile to GL beginning and ending balances and deposits and disbursements. • Most are timing differences (DIT, outstanding checks at beg and end of period)or items not recorded yet (bank charges).

13. Proof of Cash Worksheet

14. Substantive Tests - Cash Balances • Obtain analyses of cash balances and reconcile to GL • Send standard confirmation forms to banks • Consider reconciling bank activity (proof of cash) • Obtain reconciliations of yearend bank balances

15. Substantive Tests - Cash Balances • Obtain analyses of cash balances and reconcile to GL • Send standard confirmation forms to banks • Consider reconciling bank activity (proof of cash) • Obtain reconciliations of yearend bank balances • Obtain bank cutoff statement

16. Substantive Tests - Cash Balances • Obtain analyses of cash balances and reconcile to GL • Send standard confirmation forms to banks • Consider reconciling bank activity (proof of cash) • Obtain reconciliations of yearend bank balances • Obtain bank cutoff statement • Count cash on hand, if significant

17. Substantive Tests - Cash Balances • Obtain analyses of cash balances and reconcile to GL • Send standard confirmation forms to banks • Consider reconciling bank activity (proof of cash) • Obtain reconciliations of yearend bank balances • Obtain bank cutoff statement • Count cash on hand, if significant • Verify the client’s cutoff of cash transactions

18. Substantive Tests - Cash Balances • Obtain analyses of cash balances and reconcile to GL • Send standard confirmation forms to banks • Consider reconciling bank activity (proof of cash) • Obtain reconciliations of yearend bank balances • Obtain bank cutoff statement • Count cash on hand, if significant • Verify the client’s cutoff of cash transactions • Analyze bank transfers occurring around yearend

19. Kiting – 3 Types • Transferring funds between bank accounts, but recording the increase (debit) in the current FY and the decrease (credit) in the next FY (funds on B.S. twice). • Depositing funds in current FY, but recording the deposit in the next FY (to cover a cash shortage or when bank balance < GL). • Taking advantage of float or bank check clearance time to cover temporary cash shortage or to earn interest on same funds being transferred between bank accounts.

20. Schedule of Yearend Bank Transfers to Detect Kiting

21. Schedule of Yearend Bank Transfers to Detect Kiting

22. Schedule of Yearend Bank Transfers to Detect Kiting

23. Substantive Tests - Cash Balances • Obtain analyses of cash balances and reconcile to GL • Send standard confirmation forms to banks • Obtain reconciliations of bank balances and consider reconciling bank activity (proof of cash) • Obtain bank cutoff statement • Count cash on hand, if significant • Verify the client’s cutoff of cash transactions • Analyze bank transfers occurring around year-end • Investigate payments to/receipts from related parties

24. Substantive Tests - Cash Balances • Obtain analyses of cash balances and reconcile to GL • Send standard confirmation forms to banks • Obtain reconciliations of bank balances and consider reconciling bank activity (proof of cash) • Obtain bank cutoff statement • Count cash on hand, if significant • 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

25. Key Internal Controls Over Financial Investments • Separation of duties among employees • Authorizing purchases and sales • Having custody of the securities • Maintaining records • Registration in the name of the company • Detailed records of all securities owned and the related revenue from interest and dividends • Periodic physical inspection of securities • Determination of accounting for complex instruments by competent personnel.

26. Most Likely Misstatements Financial Investments • Fictitious investments in securities • Over Valued Securities • Double Counting • Unauthorized security transactions • Incorrect Classification or Accounting • Inadequate disclosure of the nature of investment activities

27. Audit ObjectivesFinancial Investments • Determine the Existence of recorded financial investments and that the client has rights to the investments. • Establish the Completeness of recorded investments. • Determine any Rights restrictions. • Determine that the Valuation of investments is in accordance with GAAP. • Establish the clerical accuracy of schedules of investments. • Determine that the Presentation and disclosure of investments are appropriate.

28. Substantive TestsFinancial Investments • Obtain an analysis of securities/related accounts; reconcile to ledger. • Review Bd of Dir Minutes (Maybe the Investment Committee). • Inspect securities on hand. • Confirm securities and derivative instruments held by others. • Vouch selected securities transactions. • Verify the client’s cutoff of investment transactions. • Perform analytical procedures. • Compute revenue from investments. • Determine market or estimated values. • Evaluate method of accounting. • Inspect management’s documentation of intent to classify derivative transactions as hedges.

29. Derivatives - Risks • May present the client with a high degree of business risk (e.g., risk of losses). • May involve complex accounting and valuation methods (i.e., estimating fair values). • Rules for maintaining and acquiring a derivative as a hedge are complex. • May be difficult to identify (May be acquired without an outlay of assets until a future date). • Several Recent SFASs from FASB.

30. Substantive TestsFinancial Investments • Obtain an analysis of securities/related accounts and reconcile to ledger. • Review Bd of Dir Minutes (Maybe the Investment Committee). • Inspect securities on hand. • Confirm securities and derivative instruments held by others. • Vouch selected securities transactions. • Verify the client’s cutoff of investment transactions. • Perform analytical procedures. • Compute revenue from investments. • Determine market or estimated values. • Evaluate method of accounting. • Inspect management’s documentation of intent to classify derivative transactions as hedges. • Evaluate the financial statement presentation and disclosure.