ATC f8 materials FF8 AA (int)session25 j08

SESSION 25 – LOANS, BANK AND CASH OVERVIEW Objective To determine areas of risk in the audit of loans, bank and cash To obtain appropriate audit evidence including bank reports for audit purposes “Ideas list” Examples SOURCES OF EVIDENCE CASH SYSTEM Control objectives Internal control examples Loans Bank and cash RISKS PROCEDURES Loans Bank reconciliation C A Standard letter BBA Authority to disclose P BANK REPORTS FOR AUDIT PURPOSES E R Form Standard request Supplementary info Disclaimers A comprehensive audit program for bank and cash balances (including counting of “petty” cash) is set out in Appendix and must be studied 2501 SESSION 25 – LOANS, BANK AND CASH SOURCES OF EVIDENCE Example Complete the following ideas list for bank and cash balances 1.1 “Ideas list” 1.2 Examples Accounting systems ⇒ Documentation ⇒ Tangible assets ⇒ Management and employees ⇒ Customers and suppliers ⇒ Other third parties ⇒ Analytical procedures ⇒ CASH SYSTEM 2.1 Control objectives To ensure that Stage Request for payment payments are only requested for valid business expenses Stage Payment authorisation payments are accurate and take advantage of credit terms Stage Payment made Stage 2502 Receipt Payments and receipts recorded cash/cheques are not misappropriated management has accurate/timely info concerning cash position SESSION 25 – LOANS, BANK AND CASH 2.2 Internal control examples 2.2.1 Request for payment Standardised cheque requisitions Supporting documentation (e.g invoice) 2.2.2 Payment authorization Departmental/buyer approval Agreement to suppliers’ statement 2.2.3 Payment made/Receipts Safe custody of cheque books Invoices/requisitions stamped “PAID” 2.2.4 Recording Segregation of duties Monthly bank reconciliations Supervision/independent review RISKS 3.1 Loans Loans may be obtained without authorisation/in contravention of existing agreements Loans may become repayable on demand due to breaches of agreements Secured, unsecured and inter-company loans may not be separately disclosed Loan interest may not be accrued 3.2 Bank and cash Most liquid assets may be exposed to misappropriation Secured assets may not be separately disclosed Cheques raised in bulk at y/e may be subsequently cancelled or their despatch unacceptably delayed Cash receipts may be stolen and difficult to trace Cheque payments may be misappropriated by forging endorsements if not crossed “a/c payee” 2503 SESSION 25 – LOANS, BANK AND CASH AUDIT PROCEDURES 4.1 Loans Examine the loan agreement noting: term of the loan; rate of interest (fixed or variable); security given; repayment terms Obtain schedules of the loan(s), reconciling opening balances, movements in year and closing balances Confirm redemptions during the year by reference to: authority (e.g board minutes); paid cheques and cash book entries; the calculation of any discount or premium; accrued interest paid; deletions in the register of holders of loans Verify any fresh loans/debentures issued by reference to: trust deed; receipt of monies in cash book and general ledger; entries in register Obtain direct confirmation from lenders Agree reconciliation of opening and closing balances, statement of financial position figures and comparatives Scrutinise statutory books (if any) and confirm that they are correct regarding: changes in assets; directors’ interests in debentures Re-compute interest charge and interest accrual calculations Agree disclosure of long-term liabilities in accordance with financial reporting framework For example: secured loans excluding portion repayable within one year; unsecured loans excluding portion repayable within one year; summary of interest rates, repayment terms, covenants; security given 2504 SESSION 25 – LOANS, BANK AND CASH 4.2 Bank reconciliation 4.2.1 Purpose To check the completeness and accuracy of cash book postings by “reconciling” the balance per the cash book to the balance per the bank statement (prepared by an independent, third party – the bank) At any time, the bank statement balance should equal that in the cash book, albeit “in reverse” However, the cash book balance invariably does not agree with the bank statement This is caused principally by timing differences (see below) 4.2.2 Bank statement balance Entity’s perspective Bank’s perspective Dr balance in cash book is an asset “Cr” balance on bank statement means customer is a creditor (i.e bank owes customer) Cr balance in cash book means “overdrawn” (i.e a liability) 4.2.3 “Dr” means customer owes the bank (i.e is overdrawn) Reasons for differences Unpresented cheques (i.e cheques drawn by the business) Timing differences Outstanding lodgements (i.e receipts “lodged” with the bank) Bank interest/charges Standing orders (“SOs”)/ direct debits (“DDs”) Items on bank statement not in cash book Credit transfers Dishonoured (“bounced”) cheques Bank errors Cash book errors − − − − cast errors transpositions omissions duplications 2505 SESSION 25 – LOANS, BANK AND CASH Commentary Cheques A cheque is a “money order” drawn (i.e written out) by a payer to settle an amount due to the payee The payee presents the cheque to a clearing bank to have the money transferred to the payee’s account If the payer does not have sufficient funds to cover the payment then the cheque is returned to the payer as “dishonoured” and the transfer to the payee is reversed The payer’s liability is not discharged and the payee must ask for payment again There are many other reasons why a cheque might be dishonoured e.g if: it is post-dated (i.e drawn for payment at a late) or out of date (usually after months) there is a discrepancy between the amounts written (in narrative and numerically) the account has been closed or cannot be traced the payer has put a “stop” on the cheque The bank usually charges the payer a service cost for handling such cheques Direct debit An authority given by a payer to a third party (the payee) to debit the payer’s account on a specific date (or nearest banking day thereto) This authority can be: for a fixed amount per month (e.g a loan repayment) or variable (e.g payment of a telephone bill where the amount is only known at the end of the billing period) Standing order Instructions given by a payer to their Bank to pay a fixed amount on predefined dates to a third party (who has no power to request payment from the bank) 4.2.4 Reconciliation procedure Step Correct/amend cash book – requires double entries Step Adjust bank statement balance for − − 2506 timing differences bank errors SESSION 25 – LOANS, BANK AND CASH 4.2.5 Proforma XYZ Bank reconciliation as at Step Cash a/c The fact that these not agree suggests something has occurred which needs reconciling Opening balance b/f Adjustments eg interest received $ x x Adjustments eg dishonoured cheque Balance c/f Balance per bank statement Add: Uncleared lodgements x x x Bank reconciliation statement $ x $ $ x x x Less: Unpresented cheques 4.2.6 x x +/– Bank errors (x) x Balance per corrected cash account x These should now agree This balance ⇒ balance sheet Adjust CB for all errors, timing differences or omissions ⇒ up-to-date balance Step Reconcile adjusted balance to bank statement, noting cheques in transit, bank errors, etc Summary of audit procedures Confirm balance per the bank statement (e.g to the bank report for audit purposes) and agree cash book balance to the general ledger Check the reconciliation casts (i.e adds up) Agree uncleared (“outstanding”) lodgements and unpresented cheques to entries on the bank statement dated after the end of the reporting period A comprehensive audit program for bank and cash balances (including counting of “petty” cash) is set out in Appendix and must be studied 2507 SESSION 25 – LOANS, BANK AND CASH BANK REPORTS FOR AUDIT PURPOSES Commentary Also called “bank (confirmation) letter” Role as Audit evidence: − − existence and amount of liabilities; existence, amount, ownership and custody of assets 5.1 Standard letter Facilitates extraction of information Smoothes the processing of requests Answers received highlight particular areas for further work 5.2 British Bankers Association (BBA) BBA membership includes banks around the world (e.g Amex, Moscow Narodny, Zivnostenska) Instead of the bank confirmation request letter containing an exhaustive list of all the possible information which could possibly be required, the auditor simply ticks ( ) for a “Standard request” and/or supplementary information 5.3 Authority to disclose information May be ongoing “standing” authority separate authority for each request Addressed to the bank Names all group entities “I/We authorise [Bank] including all branches [and subsidiaries] to provide to our auditor [Accountants] any information that they may request from you regarding all and any of our accounts and dealings with you.” Authorisation signature(s) for all entities 2508 SESSION 25 – LOANS, BANK AND CASH 5.4 Form Send letter on own paper ↓ BANK CONFIRMATION REQUEST LETTER Send to every bank the client has dealt with during year → (Branch where client has main business arrangement) No contractual relationship → XYZ and Co 17 Kendall Drive 11 December 2006 The Manager, (Bank) (Branch) ← to reach bank at least weeks before y/e Dear Sirs In accordance with the agreed practice for provision of information to auditors, please forward information on our mutual client(s) as detailed below on behalf of the bank, its branches and subsidiaries This request and your response will not create any contractual or other duty with us Companies (or other business entities) Names of entities [Parent Company covered by → Subsidiary request Subsidiary 2] FOR THE YEAR ENDED 31 DECEMBER 2006 Information required Tick ← Use standard request letter Attach a separate ← listing if necessary ← “Audit confirmation date” Standard Trade finance Derivative and commodity trading Custodian arrangements Other information (see attached) Explicit → authority to disclose from client The Authority to Disclose Information signed by your customer is attached/ already held by you (delete as appropriate) Please advise up if this Authority is insufficient for you to provide full disclosure of the information requested The contact name is [xx] ← Banks may charge clients a premium for supplementary info ← Request to be advised Telephone [xxxx xxx xxxx] Yours faithfully XXX Accountants 5.5 Standard request Balances on a/cs (including loans, joint a/cs and trade name a/cs) Facilities – loans/overdrafts/guarantees etc (including term, repayment, review date, limit, etc) Securities (including set-off arrangements) Additional banking relationships – not covered by above 2509 SESSION 25 – LOANS, BANK AND CASH 5.6 Supplementary information Trade finance – including letters of credit, acceptances, bills, bonds, guarantees and indemnities (and security thereon) Derivatives and commodity trading – including foreign exchange contracts, forward rate agreements, financial futures, swap arrangements and option contracts (and security thereon) Custodian arrangements – the nature and quantity of any assets held but not charged (e.g title deeds held for safe-keeping rather than securing a mortgage) Other information – copy bank statements/paying-in slips, returned paid cheques, “stopped” cheques 5.7 Disclaimers “Our response is given solely for the purposes of the audit and creates no responsibility to the auditors.” Does not significantly impair the value of information given as audit evidence Therefore entitled to rely, unless clearly wrong, suspicious, inconsistent, etc FOCUS You should now be able to: identify risks and appropriate sources of evidence; suggest cash control objectives and recommend internal control procedures; describe methods used to collect audit evidence to verify loans, bank and cash (including the bank reconciliation); state the standard information requested in a bank confirmation request letter; select appropriate audit procedures (including bank confirmations and reconciliations) for inclusion in a work program (see also Appendix 3) relating to financial statement assertions concerning bank and cash 2510 SESSION 25 – LOANS, BANK AND CASH EXAMPLE SOLUTION Solution — “Ideas list” Accounting systems ⇒ Cash system, cash book(s), “imprest” for petty cash Documentation ⇒ Cheque requisitions Tangible assets ⇒ Physical cash (count it) Management and employees ⇒ Board minutes (authorising cheque signatories), cashier Customers and suppliers ⇒ Possibly DD or SO mandates for expenses (e.g insurance premiums) Other third parties ⇒ Bank statements, report for audit purposes (= “confirmation letter”) Analytical procedures ⇒ “Proof in total” – interest payable/receivable (calculation based on month-end balances) 2511 SESSION 25 – LOANS, BANK AND CASH 2512 ... be separately disclosed Cheques raised in bulk at y/e may be subsequently cancelled or their despatch unacceptably delayed Cash receipts may be stolen and difficult to trace Cheque payments may