Auditing the CASH account - tests of controls and substantive testing

Summary

In this video, Amanda, an auditing expert and university lecturer, provides a detailed guide on auditing cash, emphasizing its importance for business operations. She discusses common internal controls, such as cash receipt management, bank reconciliations, and electronic funds transfers. The video also highlights key assertions like existence, accuracy, and completeness in cash auditing, with practical procedures including bank confirmations and reviewing bank access logs. Amanda covers both transactional and balance auditing, stressing the challenges of detecting fraud, especially with offshore or unrecorded accounts. This session offers invaluable insights into effective auditing of cash within various business contexts.

Takeaways

• 😀 Cash is critical for business operations as it is needed to pay suppliers, employees, rent, utilities, loans, and dividends.
• 😀 Internal controls for cash include managing receipts with a register, reconciling the cash drawer, and segregating duties to prevent fraud.
• 😀 The bank reconciliation process should be reviewed by an appropriate staff member to ensure its accuracy and completion.
• 😀 Auditing cash involves testing both the internal controls and substantive procedures related to cash transactions.
• 😀 A key substantive test for cash is requesting a positive bank confirmation to verify the existence of cash in the company’s accounts.
• 😀 Completeness of cash records is hard to verify, especially if the company hides cash in unrecorded accounts like offshore accounts.
• 😀 Accuracy and valuation of cash can be confirmed through bank confirmations and by checking if cash equivalents are properly classified.
• 😀 The right to cash (ownership) should be verified through the bank confirmation to ensure the company controls the accounts it claims to have.
• 😀 Fraud risks are high with cash, and auditors need to be alert to unusual activity such as unauthorized access to bank accounts or unreported bank accounts.
• 😀 The effectiveness of internal controls, like segregation of duties, is critical in preventing cash theft or manipulation in a business.
• 😀 The auditing process for cash often intersects with auditing other financial areas, such as sales, expenses, and accounts payable.

Q & A

Why is auditing cash considered particularly important?

Auditing cash is crucial because it directly impacts a company's ability to pay suppliers, employees, settle loans, and potentially distribute dividends to shareholders. If the company doesn't have sufficient revenue from customers, it won't be able to meet these financial obligations.

What are the key internal controls over cash in a retail process?

Key internal controls in a retail process include cash register management, reconciliation of the cash drawer at the end of each day, segregation of duties, and ensuring that bank deposits are properly handled. Additionally, there should be a process for reviewing bank reconciliations regularly.

Why is segregation of duties important when managing cash?

Segregation of duties helps prevent fraud and errors. It ensures that no single individual has control over both the approval and execution of cash transactions, reducing the risk of embezzlement or manipulation.

What is the role of a bank reconciliation in auditing cash?

A bank reconciliation is a crucial test for auditing cash because it ensures that the company's recorded cash balance matches the balance shown on the bank statement. Auditors review the reconciliation to confirm that it was completed and signed off by the appropriate staff member.

What are some signs that a bank reconciliation review may not have been properly conducted?

If bank reconciliations appear to have been signed off by the same person in identical handwriting, or if no marks or annotations indicating a thorough review are visible, it may suggest that the review was not done properly, potentially indicating weak internal controls.

What types of substantive tests are used to verify the existence of cash?

To verify the existence of cash, auditors typically request a bank confirmation. This is a direct verification from the bank to confirm the balances in the company's accounts. Positive confirmations are preferred, as they require a response from the bank to confirm the balance.

How does an auditor verify that the company's cash balance is accurate?

Auditors verify the accuracy of cash balances by reviewing bank confirmations and checking the values of transactions. They also ensure that any foreign currency or cash equivalents are appropriately valued according to current exchange rates and financial reporting standards.

What challenge does an auditor face when testing the completeness of cash transactions?

Testing completeness for cash transactions can be difficult because the auditor must ensure that no cash accounts have been omitted from the company’s books. This could involve investigating large transactions or purchases that don’t appear to be linked to any known bank account.

How do auditors confirm the rights and obligations related to cash?

Auditors confirm the rights and obligations related to cash by reviewing the bank confirmation, which will indicate who owns and controls the bank account. This helps ensure that the company has control over the cash and that the account belongs to the company’s business structure.

What was the issue with Wirecard that led to the company’s downfall?

The Wirecard scandal involved the company falsely reporting cash balances by using escrow accounts and not confirming that the cash actually existed. This led to a massive financial fraud, highlighting the importance of verifying cash existence through proper auditing procedures.