Lecture Auditing and assurance services (Second international edition) Chapter 16 Auditing the financinginvesting process

Chapter 16 Auditing the financinginvesting process Cash and investments. In this chapter, the learning objectives are Understand the relationship of the various business processes to cash, know the different types of bank accounts, know tests of details of transactions used to audit cash, be able to explain tests of details of account balances used to audit cash.

Chapter Sixteen Auditing the Financing/Investing Process: Cash and Investments © The McGraw-Hill Companies 2010 Cash and the Effect of Other Business Processes ‘Cash’ ‘Cash’reported reported in in the the financial financial statements statements represents represents currency currency on on hand hand and and cash cash on on deposit deposit in in bank bank accounts, accounts, including including certificates certificates of of deposit, deposit, time time deposits deposits and and savings savings accounts accounts ‘Cash equivalents’ are frequently combined with cash for presentation in the financial statements Definition: Short-term, highly liquid investments that are readily convertible to known amounts of cash or which are subject to an insignificant risk of changes in value Examples: Treasury bills, commercial paper, and money market funds © The McGraw-Hill Companies 2010 Cash and the Effect of Other Business Processes © The McGraw-Hill Companies 2010 Types of Bank Accounts Types of Bank Accounts General Cash Account Imprest Cash Accounts Branch Accounts In order to maximize its cash position, an entity implements procedures for accelerating the collection of cash receipts and delaying the payment of cash disbursements, to the extent delay is appropriate © The McGraw-Hill Companies 2010 The Effects of Controls Controls for Cash Disbursements Controls for Cash Receipts The reliability of the client’s controls over cash affects the nature and extent of the auditor’s tests of details Completion of Bank Reconciliation © The McGraw-Hill Companies 2010 Substantive Analytical Procedures – Cash Because Becauseof ofthe theresidual residualnature natureof ofthe the cash cashaccount, account,the theauditor’s auditor’suse useof of substantive substantiveanalytical analyticalprocedures proceduresfor for auditing auditingcash cashisislimited limitedto to comparisons comparisonswith with prior prioryears’ years’cash cash balances balances comparisons comparisonswith with budgeted budgetedamounts amounts This limited use of substantive analytical procedures is normally offset by (1) extensive tests of controls and/or substantive tests of transactions for cash receipts and disbursements or (2) extensive tests of the entity’s bank reconciliations © The McGraw-Hill Companies 2010 Substantive Tests of Details of Transactions and Balances © The McGraw-Hill Companies 2010 Balance-Related Assertions © The McGraw-Hill Companies 2010 Auditing the General Cash Account To audit a cash account, the auditor should obtain these items Copy of Bank Reconciliation Bank Confirmation Cut-off Bank Statement © The McGraw-Hill Companies 2010 Bank Reconciliation Working Paper © The McGraw-Hill Companies 2010 Tests for Kiting © The McGraw-Hill Companies 2010 Auditing a Payroll or Branch Imprest Account The The audit audit of of any any imprest imprest cash cash account account such such as as payroll payroll or or aa branch branch account account follows follows the the same same basic basic audit audit steps steps discussed discussed under under the the audit audit of of the the general general cash cash account account © The McGraw-Hill Companies 2010 Auditing Petty Cash Fund Usually not material Potential for defalcation Seldom perform substantive tests Document controls © The McGraw-Hill Companies 2010 Disclosure Issues for Cash © The McGraw-Hill Companies 2010 Disclosure Issues for Cash © The McGraw-Hill Companies 2010 Disclosure Issues for Cash © The McGraw-Hill Companies 2010 Investments Common Stock Preferred Stock Debt Securities Hybrid Securities © The McGraw-Hill Companies 2010 Control Risk Assessment – Investments Here are some of the more important assertions for investments Occurrence and Authorization Completeness Accuracy and Classification © The McGraw-Hill Companies 2010 Segregation of Duties © The McGraw-Hill Companies 2010 Substantive Procedures for Testing Investments © The McGraw-Hill Companies 2010 Tests of Details – Investments Existence The auditor should perform one or more of the following procedures when gathering evidence for existence: • • • • • • Physical examination Confirmation with the issuer Confirmation with the custodian Confirmation of unsettled transactions with the broker-dealer Confirmation with the counter-party Reading executed partnership or similar agreements © The McGraw-Hill Companies 2010 Tests of Details – Investments Valuation and Allocation The auditor must also determine if there has been any permanent decline in the value of an investment security Accounting standards provide guidance for determining whether a decline in value below amortized cost is other than temporary © The McGraw-Hill Companies 2010 Tests of Details – Investments Valuation and Allocation Here are some factors that may indicate an other-than-temporary impairment of investment value (IAS 39): •Significant financial difficulty of the issuer or obligor •A breach of contract, such as a default or delinquency in interest or principal payments •The lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider •It becoming probable that the borrower will enter bankruptcy or other financial reorganization •The disappearance of an active market for that financial asset because of financial difficulties •Observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group, including adverse changes in the payment status of borrowers in the group and national or local economic conditions that correlate with defaults on the assets in the group Permanently Impaired = Write down to new carrying amount © The McGraw-Hill Companies 2010 Tests of Details – Investments Disclosure Assertions  Marketable securities need to be properly classified as held-tomaturity, trading and available-for-sale  Held-to-maturity securities and individual available-for-sale securities should be classified as current or non-current assets based on whether management expects to convert them to cash within 12 months  All trading securities should be classified as current assets © The McGraw-Hill Companies 2010 End of Chapter 16 © The McGraw-Hill Companies 2010 ... during the 7- to 10-day period © The McGraw-Hill Companies 2010 Tests of the Bank Reconciliation The auditor uses the following audit procedures to test the bank reconciliation: Test the mathematical... held-tomaturity, trading and available-for-sale  Held-to-maturity securities and individual available-for-sale securities should be classified as current or non-current assets based on whether... accuracy and agree the balance per the books to the general ledger Agree the bank balance on the reconciliation with the balance shown on the bank confirmation Trace the deposits in transit on the