CHAPTER 2##Aduting JU-1.pptx CHAPTER TWO
- 1. CHAPTER TWO AUDIT OF CASH AND MARKETABLE SECURITIES
- 2. Introduction • Cash and marketable securities are generally used to meet the transaction needs of the firm and for contingency purposes. – The primary concern should be with safety and liquidity rather than the maximum profits. Motives For Holding Cash – Transaction Motive: To meet cash needs that arise from doing business. – Precautionary Motive: Having cash on hand for unexpected purposes. – Speculative Motive: To take advantage of potential profit- making. To take advantage of potential profit-making situations. – Compensating Motive: To maintain a minimum balance of cash at banks to compensate for providing services &loans.
- 3. Definition of cash • Cash:- is medium of exchange that a bank accept at its face value. – It includes coins, currency notes, cheques, bank drafts & checks & demand deposits. • In a broad sense, cash includes “near-cash assets” such as marketable securities & time assets” such as time deposits with banks.
- 4. • Marketable securities: are securities or debts that are to be sold or redeemed within a year or below a year. – These are financial instruments that can be easily converted to cash such as; • government (treasury ) note, • common shares, or certificates of deposits, • commercial paper, • Federal funds, • bank acceptance • letter of credit and etc.
- 5. Definiton of Internal control • Internal control consists of the policies and procedures adopted within a business in order to: – Optimize resources. – prevent irregularities or frauds. – Safeguard its assets. – Maintain the accuracy and reliability of its accounting records. • Internal control over cash is imperative in order to safeguard cash and assure the accuracy of the accounting records for cash.
- 6. Internal control techniques in General • Segregation of duties and authorization of activities: – The work of one employee should provide a reliable basis for evaluating the work of another employee. – Control is most effective when only one person is responsible for a given task. • Documentation procedures: – documents should provide evidence that transactions and events have occurred. – The document must proof that the accuracy of the transaction when it is needed.
- 7. • Safeguards to control access to or use of assets and records: • Using mechanical or electronic controls relate primarily to the safeguarding of assets • Then, enhance the accuracy and reliability of the accounting records. • Independent verification: • Eexternal verification indicates whether the company’s financial statements fairly present its financial position and results of operations in accordance with GAAP/IFRS. • internal verification involves review, comparison, and reconciliation of information from two sources.
- 8. A. INTERNAL CONTROL OVER CASH RECEIPTS It includes: • Only designated personnel should be authorized to handle or have access to cash receipts. • As per their authorized position, responsible individual should: 1. receive cash and deposit is a safe place or in bank accounts 2. record cash receipt transactions. 3. have custody of cash • Documents should include: 1. remittance invoices 2. cash register tapes 3. deposit slips
- 9. Cont’d---- • Access to storage areas should be limited to authorized personnel. • Cash registers should be used in visible manner to customers. • Daily cash counts and daily comparisons of total receipts should be made. • All personnel who handle cash receipts should be bonded and required to take vacations.
- 10. B. INTERNAL CONTROL OVER CASH DISBURSEMENTS • There are two cash disbursements functions as follows; – Paying liability – Recording the cash disbursements • Specifically, activities performed under cash disbursement includes; – Payments are made by cheque rather than by cash, except for petty cash transactions. – Only specified individuals and authorized should sign a cheques but the duties of approving payment must be done by different individuals (departments).
- 11. – The check must be pre-numbered cheques supported by an approved document. –Access of cheques should be restricted to authorized personnel –Following payment, the approved invoice should be stamped PAID. – Blank or unused cheques should be stored in a safe. – Using a petty cash fund to pay relatively small amounts with their recording.
- 12. C. Bank Reconciliations as internal control • Examine evidence of independent check of bank reconciliations (e.g. a signature). • Examine evidence of regular bank reconciliations (usually once per month). • Examine evidence of follow-up of outstanding items on bank reconciliations. • Pay particular attention to old outstanding reconciling items that should be written back such as old, un-presented checks.
- 13. D. Control Over Petty Cash – The level and location of cash floats should be laid down formally by the management. – All expenditure should require a voucher system signed by a responsible official, not by the petty cashier. – Vouchers should be produced before the check is signed for reimbursement. – A maximum amount should be placed on a petty cash payment to distinguish it from normal purchase procedures. – Periodically the petty cash should be reconciled by an independent person.
- 14. Audit program for cash
- 15. Objectives for Cash Audit • Cash typically has a small account balance, but auditors devote a large proportion of total audit hours because: – Liabilities, revenues, expenses and most other assets flow through cash – Most liquid asset so greater temptation for misappropriation – High risk account • Thus, in order to audit cash, follow the following steps.
- 16. 1. Obtain an understanding of internal control over cash. 2. Use the understanding of the client and its environment to consider inherent risk, including fraud risks, related to cash 3. Assess the risks of material misstatement of cash and design substantive procedures that: a. Substantiate the existence of recorded cash and occurrence of the related transactions b. Establish the completeness of recorded cash. Shows there are no unrecorded assets or liabilities, transaction or events. c. Verify the cutoff and accuracy of cash transactions
- 17. d. Determine that the client has rights to recorded cash e. Determine that the presentation and disclosure of cash, including restricted funds, are appropriate. f. Design and perform further audit procedures—tests of controls.
- 18. Tests of control over cash • Only designated personnel should be authorized to handle or have access to cash receipts and disbursements. • Test the accounting records and Reconciliation by re- performance. – Compare detail of cash receipts listings to cash receipts journal, accounts receivable postings, and authenticated deposit slips. – Compare detail of a sample of recorded disbursements in cash payments journal, accounts payable postings, purchase orders, receiving reports, invoices, and paid checks.
- 19. Cont’d… – Send standard confirmation forms to financial institutions to verify amounts on deposit. – Obtain a cutoffs: • Bank statement cut-off containing transactions of at least seven business days subsequent to balance sheet date. – Count and list cash on hand. – Verify the Analyze bank transfers for the last week of audit year and the first week of following year. – Investigate any checks representing large or unusual payments to related parties.
- 21. Limitations of internal control over cash • Weak internal control procedures would create opportunity for fraud or thefts of cash. • The most common defalcation techniques of cash are: 1. Kiting: Fraudulent cash scheme to overstate cash assets at year end by showing the same cash in two different bank accounts. – For example: A business has two bank accounts say in bank X and Y. check is written to withdraw an account from bank -X account balance, and deposited into bank- Y account. Because of lag (delay) of time for clearance, is not reflected as deduction (withdrawal) from bank X account soon. But, the amount deposited in bank Y is immediately reflected, such technique is practiced by casher to cover up cash shortage which an auditor might uncover.
- 22. 2. Lapping: refers cheating by using A/ receivable that have been paid and will be closed with unpaid receivables next and so on. –It can be a way of skimming money by way of cash-retreat delay the recording of cash receipts in both the near-term and longer periods of time. •This is usually practiced as temporary borrowing. – For example: Galilo (borrower)stole cash and used by Customer A to pay the loan, the funds received from Customer B was used to pay the balance of receivables owned by the Customer A and so on, this can be liken to digging a hole and cover the hole.
- 23. 3. Writing off bad debts: accounts receivable could be written - off as bad debts when actually customers’ remittance is pocketed. 4. Sales discount: cash can be abstracted from sales discount not taken by customers. N.B: This is when customers pay the full amount, only amount net of discount are recorded to customers and the difference would be pocketed by recording it to discount account.
- 24. Auditing programs for Marketable securities
- 25. • Marketable securities are liquid assets in that they can easily and quickly be converted into cash. – Thus, they are held as a temporary investment and classified as current assets. • The securities are marketable securities if; The firm can readily convert them into cash, and The firm intends to do so when it needs cash. • If either of the two tests for marketable securities do not apply, then the securities are properly classified as investment in securities (long-term investment securities).
- 26. Control Tests of Marketable securities • Reviewing policies for authorization – To purchase, sell, and manage such securities • Inquiring of BoD about board’s oversight of process and examining related documentation. • Examining documentation of authorization – For selected purchases and sales • Reviewing minutes of board meetings – For reference to investment policies and associated oversight.
- 27. Cont’d… • Examining evidence of authorization controls – For changes in classification of such securities • Inquiring of management about its process for – Establishing valuation and – Reviewing related documentation • Inquiring about process for reclassifications and review related documentation
- 28. Substantive Tests of Marketable securities • Existence or occurrence: check securities exist at balance sheet date. • It is requesting for a schedule of securities and verifying their existence. • Completeness: Securities balances include all securities transactions taken place during the period. • Take footing schedule of marketable securities and examining them. • Rights and obligations: Company has title (right) to such securities accounts as of balance sheet date. Examining selected documents to determine any restrictions
- 29. Inherent and Fraud Risks Existence Reasons • Internal Control risks (theft) of securities may arise when: – They are not physically controlled – Authorization and monitoring over their trade is not effective • Lack of policies over purchase or sale of securities • Lack of monitoring of changes in securities balances • Lack of policies over valuation or classification of securities • Lack of segregation of duties between those responsible for: – Making investment decisions – Custody of securities • Lack of involvement or oversight by internal audit in relation to securities
- 30. Auditing in Practice - Common Fraud Schemes Relating to Investments • Securities purchased, not authorized • Securities purchased, not recorded as purchased • Securities recorded as purchased, not purchased • Securities sold, not recorded as sold • Securities recorded as sold, not sold • Investment income is stolen • Investments are purposely valued inaccurately • Investment classifications are purposely inaccurate
- 31. Thank you !!! END OF CHAPTER TWO