AUDIT OF CASH BALANCES OF TEMPLE CO.
Instructions:-
Your firm is engaged in the audit of Temple Co. Temple is a small manufacturing company. You have been tasked with handling the portion of the audit dealing with cash. You’ve reviewed the balance sheet and last year’s work papers. You’ve been provided with an Audit Program for Cash (see case assignment PDF). As part of your orientation training, you were provided with Chapter 23 “Audit of Cash Balances” from the Arens textbook.Your analysis of the balance sheet, as of December 31, 2012, identifies the following accounts and ending balances:
- A bank account at Citizens Bank $1,500,000
- A bank account at TD Bank$ 2,500*
- Certificates of Deposit from Firstrust Bank$ 100,000*
- Petty Cash held by the bookkeeper$ 200*
The controller has papers related to the CDs in a safe. She believes that there are four CDs, but she does not recall any other information about them. They did not appear on last year’s work papers. The TD account did not appear in last year’s work papers. Deliverable:Your paper should describe the procedures you employed, based on the Audit Program and the audit procedures in the Arens text (and other sources you may reference), to ascertain that the balances in these accounts are fairly presented. Your paper should speak to risks that were of concern to you, procedures you used with respect to each of the items above, what documents you procured, how you procured them, from whom you procured them, etc. Additionally, you should note all of your findings.The paper should be in the form of a memo, double spaced using 12 point Times Roman font with pages numbered at the bottom center. Your paper should be no more than four (4) pages in length. The paper must be submitted in MSWord format. Upload the paper with the following file name: Lastname-Firstname.docxDo not email me your paper. The paper should be well constructed and grammatically correct with minimal spelling and word usage errors. Your paper should have the following at the top left hand corner.Your NameCase #3 – Audits of CashThis case will help you in understanding and applying basic auditing procedures.
Solution
AUDIT OF CASH BALANCES OF TEMPLE CO.
TO: The audit manager XYZ Audit firm (YOUR NAME)
FROM: (YOUR NAME)
DATE: November 15, 2017
SUBJECT: AUDIT OF CASH BALANCES OF TEMPLE CO.
The audit of cash balances is a critical part of an audit exercise due to the susceptibility of loss of cash in a manufacturing concern, such as Temple Co. Ideally, almost all business transactions ultimately get paid through cash/bank accounts and therefore the audit of these accounts also helps in the verification of other assets and liabilities, expenses and revenues in the company. Secondly, cash is a highly liquid asset and therefore there is a relatively higher inherent risk of misappropriation compared to other assets.
In auditing of cash balances, just like any other asset, the financial statement assertions; existence, accuracy, valuation, completeness, rights, and obligations form the basis for the verification of cash. In the audit of Temple and co, an evaluation of the balance sheet revealed cash and bank balances. The aim of this paper, therefore, is to document the audit procedures necessary to confirm the stated cash and bank balances.
The procedures carried out in the audit of cash balances are heavily depended on the cash balance risk assessment. A review of information available and the working papers reveals that there are errors and inconsistencies that may require more in-depth procedures. In the section that follows, the audit procedures for the balances are documented.
- Citizens Bank $1,500,000
This being a major bank account, there was the risk of incorrect bank reconciliations, aimed at covering fraud within the company. To confirm the financial statement assertions on the above balance, the following procedures were carried out.
The first step was to obtain bank reconciliation for the Citizens bank account and trace the balance on the bank reconciliation to the bank statement as at 31/12/2012.
This balance was also traced to the general ledger, lead schedules, and the working trial balance.
It was tested to ensure that there are no clerical errors.
We then wrote directly to Citizens Bank, on our letterhead, requesting for a confirmation on the amount held by Temple Co on this account as at 31/12/2012. The confirmed amount was then compared with the reconciliation balance. There were no exceptions to this account.
- A bank account at TD Bank$ 2,500
A review of previous year’s working papers indicated that the above balance was not captured. The first step was to confirm whether the above bank account actually existed in the previous period. To do this, we obtained board minutes authorizing the opening of the bank accounts from the controller and checked the dates on those minutes to ensure that the. We checked the dates of the minutes, and signatures of board members to verify that the account was actually authorized for opening and that it was opened in the year under review. We also wrote to the TD bank directly, to confirm when the account was opened, signatories to the account and balance as at 31/12/2012. This was compared with the board minutes earlier obtained. This was followed by the procedures in (a) above, to confirm the financial statement assertions on this balance. It was confirmed that the account had been authorized by the board of management and opened during the year. The balance was also confirmed to be fairly stated.
- Certificates of Deposit from Firstrust Bank$ 100,000*
Unlike a normal bank account, certificates of deposits are interest-bearing instruments held by the bank with interest only paid at maturity. The principal objective of the audit of the certificate of deposit was to ensure that the principal and interest accrued on the deposits accurately reflected the company’s assets and those balances were accurately recorded (Arens, Elder, and Beasley, 2011).
Since the certificates of deposits did not appear in the previous year’s working papers, the initial procedure was to request for the board minutes authorizing the certificates of deposits where the relevant dates were confirmed to ensure that such deposits were only in the current year, and not fraudulently omitted in the previous years working papers.
We wrote to FirstTrust bank, requesting to be supplied with information on all certificates of deposits by Temple Co, held by the bank as at 31/12/2012. These were compared with those held by the controller, including those that were held in a safe. In this comparison, we checked that the certificates held reflected on the bank’s records with regard to the depositor’s name, the amount deposited, rates of interest, the frequency of interest payments, a method of compounding and maturity date of the deposits.
A review of the reconciliation of the CD’s trial balance to the general ledger was done, paying keen emphasis on the interest computations. Test calculations were also done to determine the accuracy of interest rates accrued. We also confirmed whether interest earned was credited as other income in the income statement. The above procedures established that as at 31/12/2012, the amount CD’s amounted to $125,000 while the balance sheet carried $100,000. This discrepancy was investigated and explanations provided by the management. To correct this anomaly in the final books, a journal entry was suggested to correct the understatement in the certificate of deposit balance, as well as interest credited to the income statement.
- Petty Cash held by the bookkeeper$ 200
While the petty cash amount was immaterial, it was audited primarily because of its high potential for defalcation, and also the client’s expectation of its audit review.
The audit of the petty cash commenced with a review of the petty cash ledger for selected material transactions and checking for the relevant supporting documentation and approvals. We also checked if these material transactions were listed as petty cash items in the finance and procurement manual. To ensure cut-off procedures were adhered to, we tested transactions 15 days before and after year end.
The petty cash balance as per the general ledger as at 31/12/2012 was checked and compared with a signed petty cash certificate for the year-end petty cash count. The petty cash certificate was checked to ensure that the cash count was witnessed by a responsible official of the company, especially in the finance department.
Finally, we did a surprise cash count. This involved walking in unannounced, to the custodian of the petty cash, and requesting a count of the available cash at that particular time. The cash available was compared with the general ledger balance, and explanations sought for any variances noted. A petty cash certificate was then signed to confirm the amount held at that particular time, and that such cash had been handed back intact, to the custodian of the petty cash.
From the audit procedures documented above, it was found that the cash balances presented on the balance sheet of Temple Co were fairly stated. This conclusion was arrived at, despite the errors in the Certificates of Deposit, as it was determined that the said error was not material, relative to the total cash balances held by the company as at 31/12/2012
References
Arens, A., Elder, R. and Beasley, M. (2011). Auditing and Assurance Services Prentice Hall; 14 edition