Ateneo de Zamboanga University

School of Management and Accountancy

Wally’s Billboard & Sign Supply

The Audit of Cash

Aud 310-A

CALIXTON, Aimee Jane

HABBI, Alieddine L.
SARAHADIL, Shermaida T.
SARUANG, Monaisa R.
TAN, Irene Gayle

May 17, 2017

BACKGROUND OF STUDY

Wally’s Billboard & Sign Supply Inc., which was founded by Walter Johnson, is a company that
specializes in providing locations for sign and billboard advertising and has recently begun to enter the
sign design market. With the company preparing to expand its business in which it would require
outside funding from investors, it has enlisted the help of our firm, Taylor & Jones, LLP. Our assigned
task is to conduct substantive testing of the company’s cash balances. The audit senior, Bill Thompson,
has already conducted tests of controls for each of the company’s transactions and has assessed that
the control risk is relatively low in those cycles. After inquiring, the management told us that there are
no restrictions imposed by external parties regarding the use of cash. But as auditors, we still need to
acquire reasonable assurance regarding this so we plan to corroborate this response using bank
confirmations. As of the current audit, the company has 3 bank accounts. The first one is the general
account in connection with its business operations, second is for the payroll account, while the third one
is an interest bearing account as an investment for the company’s extra cash.

With this background information regarding the company, the audit of its accounts is an
essential task in order to obtain reasonable assurance that the financial cash balances accounts are free
from material misstatement, whether caused by fraud or error for the benefit of its intended users. Our
task in this audit engagement is to audit the cash balances of the company. We are all aware that the
cash is the most susceptible to fraudulent acts and misstatements because of its nature and
characteristics. Because of this, it is of high importance that the cash balances are always properly
stated and in check. In this engagement, the tests of controls already assessed that the control risk is
relatively low, which means that the audit risk will not be very low and the number of procedures to be
conducted will not be very high.

Since most of the company’s cash assets are in the banks, we have sent out confirmation letters
in order to obtain details if those stated amounts in the company’s books coincide with the amounts
stated in their bank balances. According to PSA 330, External Confirmation procedures frequently are
relevant especially at times when addressing assertions associated with account balances and their
elements. Audit evidence in the form of external confirmations, especially the ones received directly by
the auditor, from appropriate confirming parties may assist the auditor in obtaining audit evidence with
the high level of reliability that the auditor requires to respond to significant risks of material
misstatement, whether due to fraud or error. This is because third party confirming parties are of
separate entity from the company being audited, which gives them the independence from the
company which directly increases the degree of reliability of audit evidences gathered from them.

Other audit evidences that we have gathered other than the Confirmations are the Cutoff Bank
Statements, Client’s Bank Reconciliations, Cash Receipt and Cash Disbursement Journal, Cash Lead
Sheet, and Undeposited Receipts and Cash on Hands statements. We have concluded that these
evidences are sufficient and appropriate already for the audit task assigned to us. After obtaining these
documents, we performed the audit procedure/s that is/are appropriate for the listed checklist of tasks
to be done. With the requirements needed to be fulfilled, the following pages of this report will show
you our findings.
REQUIREMENTS

[1] Why is the audit of cash an important part of the audit?

Most business transactions are usually settled through the cash. Cash is a company’s highly liquid asset
with high inherent risk due to the relatively high risk of misappropriation. With this, we can conclude
that the audit of cash accounts is essential for the following purposes:

 Accuracy
 Authenticity
 Completeness
 Cutoff Dates
 Disclosure – categorization and appropriation of cash in financial statements

Overall the aforementioned purposes are done to verify amounts, existence, and occurrence of assets,
liabilities, expenses, and revenue transactions.

[2] Bill performed tests of controls for all transaction cycles with good results. Why is it important to
also perform substantive audit procedures for the ending cash balance even when tests of controls
over transactions that affect the cash account indicate that those controls are operating effectively?

Test of Controls is an audit procedure designed to evaluate the operating effectiveness of control in
preventing or detecting and correcting material misstatements at the assertion level. While substantive
procedure is designed to detect material misstatements at assertion level.

It is important to also perform substantive audit procedure for the ending cash balance even when test
of controls over transaction that affect the cash account indicate that those controls are operating
effectively. Substantive procedures are conducted to verify existence of any material misstatement
relevant to financial records’ completeness, accuracy, and validity.

[3] According to AICPA auditing standards, what are the necessary ingredients for audit evidence to be
considered “appropriate”?

According to PSA 500, appropriateness is the measure of the quality of audit evidence; that is, its
relevance and its reliability in providing support for the conclusions on which the auditor’s opinion is
based. The reliability of evidence is influenced by its source and by its nature, and is dependent on the
individual circumstances under which it is obtained.

Whether sufficient appropriate audit evidence has been obtained to reduce audit risk to an acceptably
low level, and thereby enable the auditor to draw reasonable conclusions on which to base the auditor’s
opinion, is a matter of professional judgment.

[4] For each procedure listed in the audit program (Schedule C 2), indicate the primary assertions(s)
targeted by the procedure.

Refer to Table No. 1

[5] For each error, concern, or adjustment you listed on the Audit Summary schedule (C 3), briefly
describe at least one additional test you could perform to gain evidence as to whether or not the cash
account is materially misstated.

Refer to Table No. 2

[6] The AICPA and the American Banker’s Association developed a standardized bank confirmation
form – see working paper C 6. What is the purpose for confirming information in item number two on
the bank confirmation form? Identify the accounts and related audit assertion(s) to which the
information in item number two is relevant.

The purpose for confirming information of the loan balance on the bank confirmation form is verify the
actual amount of loan per bank records and to be able to evaluate whether the loan was classified
appropriately (current or noncurrent ) by verifying the loan due date and agreement.

The related accounts to which the information in item number two is relevant are Interest Payable, Loan
Payable, Interest Expense and Cash and the related audit assertions are existence, valuation, obligation
and presentation and disclosure.

[7] What audit procedures might you perform if you were to decide that the risk of fraud involving the
cash account was relatively high for this client?

Considering the nature of the inherent risk embedded with Cash, there are certain audit procedures that
are to be done in order to prevent and detect fraud. Such are the following:

a. Bank Reconciliation
– Bank Reconciliation is prepared to reconcile cash balances per book and per bank to uncover
any possible errors, unrecorded disbursements or receipts, and intentional misstatements.

b. Proof of Cash

c. Test of Kiting
– Kiting involves concealing cash shortage by transferring money from one back account to
another and recording transactions improperly on the client’s books.
– Test of Kiting is done by preparing an interbank preparing:
a. Comparing the disbursements and receipts to cash books
b. Compare the date of transfers on the schedule with the bank statements, noting that all
transfers a few days before and after the end of reporting period has been included in
the schedule.

d. Test for Lapping

– Lapping is concealment of receipt of payment for receivable accounts.
– Test of Lapping can be done through the following procedures:
a. Obtaining a Cutoff Bank Statement and checking the proper listing of Outstanding
 Checks and Deposits in Transit on Bank Reconciliation.
b. Checking the details of customer payments listed in bank deposits in comparison to
details of customer payments in daily remittance list or other records of detail postings.
c. Comparing the checks listed on a sample of deposit slips from the reconciliation month
to the detail of customer credits listed on the day’s postings to customer Accounts
Receivable.

[8] Perform an online search for “electronic bank confirmations.” Summarize in one page or less what
you learn about recent developments in the use of web-based bank confirmations. Include a brief
discussion of the advantages of electronic confirmations in your write-up.

Web-based bank confirmation is used to obtain quicker confirmation responses from banks and other
financial institutions for the purpose of simplifying the audit process. It is a secure web-based service
that can be used to confirm cash, term loan balances, lines-of-credit balances, investment accounts,
Accounts Receivable, Accounts Payable, and more.

Benefits:

a. Saves time – the number of hours allocated to prepare and send confirmation requests is lesser
than the number of hours needed to prepare a traditional confirmation request.
b. Enhances the productivity – due to less human intervention, web-based bank confirmation
produces more reliable information output and because it is easier and faster, it allows the
auditor to be more efficient.
c. Reduces administrative costs for the firm and the client – through web-based bank
confirmations, less staff would be needed and there is no longer a need to pay for delivery
expenses.

ISSUES
Table 1

Reference: C-2
Prepared by: CNH
Date: 1/16/15
Reviewed by: CNH

Wally’s Billboad & Sign Supply

Audit Program for Cash
For the Year Ended December 31, 2014

Assertions-
Audit Procedures Initial Date Reference Audit Response
Related
1. Obtain Cutoff Bank Statements and Confirmations returned C-6, C-7, C-9, C- Existence &
CNH 1/12/2015 Confirmation
by the bank, scan and review. 10, C-12 Occurrence
2. Obtain copies of client’s bank reconciliations and perform the CNH
1/12/2015
following for each account:
a. Test the mathematical accuracy of each bank reconciliation. CNH 1/12/2015 C-8, C-11, C-13 Valuation Recalculation
b. Trace the line item “Balance Per Bank Statement” on each
C-4, C-5, C-7, C-
bank reconciliation to the related Bank Confirmation and to CNH 1/12/2015 Existence Inspection
8, C-11
the Cutoff Bank Statement.
c. Trace the check number and amount of outstanding items on
Completeness
each bank reconciliation to the corresponding Cutoff Bank CNH 1/12/2015 C-7, C-8 Inspection
and Presentation
Statement.
d. Trace the date, check number, and amount of outstanding
Completeness
items on each bank reconciliation to the corresponding entry CNH 1/12/2015 C-5, C-8 Inspection
and Presentation
In the Cash Disbursement Journal.
e. Trace the account of any deposit in transit on the bank
C-4, C-7, C-8, C-
reconciliation to the Cutoff Bank Statement and then to the Completeness
CNH 1/12/2015 10, C-11, C-13, Inspection
Cash Receipts Journal. Investigate unexpected timing and Presentation
C-14
differences.
f. Trace the line item “Undeposited Cash Receipts” from each Completeness
CNH 1/12/2015 C-5, C-7, C-8 Inspection
bank reconciliation to the Undeposited Cash Receipts List. and Presentation
3. In the presence of client personnel, count cash on hand
CNH 1/12/2015 C-14 Existence Inspection
following proper procedure.
4. Inquire with management about cash restrictions and review Presentation and
CNH 1/12/2015 Inquiry
response for disclosure needs. Disclosure
Table 2

Reference: C-3
Prepared by: CNH
Date:1/16/2015
Reviewed by: CNH

Wally’s Billboad & Sign Supply

Audit Summary
For the Year Ended December 31, 2014

Working
Audit
Paper Description of Error or Concern Additional Procedures
Procedure
Reference
 No cut off bank statement from Brigham
National Bank.
C6
 Gretchen Larson signed the confirmation letter
C7 Send again another confirmation letter to Brigham
but her title or position is not indicated. Is she
C9 National Bank if there is still some doubtful assertions
authorized to sign?
1. C10 to the reply of Brigham National Bank. Request the
 The format of confirmation letter is not on the
C12 client to allow the auditor to personally contact the
standard bank confirmation form.
bank and ask them as to why regarding the letter.
 The confirmation letter was faxed only; there
is no corroborating evidence as to the
genuineness of the document.
 There is a transposition error. The bank
reconciliation balance does not reconcile with After performing Recalculation, request to the client
the bank statement cut off balance. The the bank statement they’ve used as the basis for the
C11
2. A amount per bank reconciliation is P3652 while line item Balance per Bank Statement in their Bank
the amount per bank statement is P3625. Reconciliation. If a misstatement is confirmed,
Therefore, there is an error in the request the client to change the amount.
computation of bank reconciliation in effect.
 The difference in the balances per book and Although the delay in recording is reasonable, as an
C7
the balances per bank is just reasonable auditor we must remain skeptic. Request the copy of
C8
B because the transactions occurred after the invoices and other supporting documents pertaining
C10
year end therefore, the transactions were not to the bank checks from the month of December that
C11
reflected. was encashed after the year of cutoff.
 Request from the management the Receipt, invoices
and other supporting documents pertaining to the
 Follow up the check with the account number
transaction with the advertising company and once
5730 which was not cleared as of year-end.
C7 the identity of the advertising company is known,
C Does the transaction with the advertising
C8 send a confirmation letter to them to confirm if such
company really occurred? Why is it not yet
transaction occurred and if a bank check was received
encashed?
by them. And if it is a yes, ask for the reason as to
why they are not yet encashing it.
 The checks with the account numbers 5721,
5722, 5724, 5726, 5728, 10123, 10126, 10127
were not encashed during January. There is no
C5 evidence that these checks were encashed
Request from the client the bank statement for the
D C8 during December. Supporting documents
month of December, 2014.
C10 specifically the bank statement for the month
of December is needed to check the
transactions for December.

 There is a timing difference in the deposit of

the collections for December 30 and
Inquire from the management about the cause of this
E December 31. Why were the collections for
delay (Issue of time difference)
December 31 deposited earlier than the
collections for December 30.
ISSUES

1. The manual system leads to delay in the recording of the transactions that opens
opportunity for misstatements.
2. It is stated in the case that the daily cash collections should be deposited regularly but
based on the cut off bank statements aimee
 Chix Ni Habbi & Co.
Tickmark Legend
// Test the mathematical accuracy of each bank reconciliation.
O Trace the line item “Balance Per Bank Statement” on each bank
reconciliation to the related Bank Confirmation and to the Cutoff
Bank Statement.
Trace the check number and amount of outstanding items on each
bank reconciliation to the corresponding Cutoff Bank Statement.
€ Trace the date, check number, and amount of outstanding items on
each bank reconciliation to the corresponding entry in the Cash
Disbursement Journal.
# Trace the amount of any deposits in transit on the bank reconciliation
to the Cutoff Bank Statement and then to the Cash Receipts Journal.
Investigate unexpected timing differences.
□ Trace the line item “Undeposited Cash Receipts” from each bank
reconciliation to the Undeposited Cash Receipts List.