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Fundamentals of Auditing

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Fundamentals of Auditing ­ACC 311
VU
Lesson 29
TESTING THE CASH SYSTEM
Controls over Banking of Receipts:
a) Receipts should be banked daily. The receipts should be banked intact - for example no cash payments
should be made out of cash receipts. Banking intact allows control (d) below to operate.
b) Each day's receipts should be recorded promptly in the cash book.
c) Sales ledger personnel should have no access to the cash or the preparation of the paying-in slip.
d) Periodically a comparison should be made between the split of cash and cheques:
i)
Received (and recorded in rough cash book)
ii)
Banked (and recorded on paying-in slip).
Controls over Cheque Payments:
a) Unused cheques should be held in a secure place.
b) The person who prepares cheques should have no responsibility over purchase ledger or sales ledger.
c) Cheques should be signed only when evidence of a properly approved transaction is available. Such
evidence may take the form of invoices, payroll, petty cash book etc.
d) This control should be evidenced by signing the supporting documentation.
e) In a large concern those approving the original document should be independent of those signing
cheques.
f)  Cheque signatories should be restricted to the minimum practical number in order to make the operation
of controls as practical as possible.
g) Two signatories at least should be required except perhaps for cheques of small amounts.
h) The signing of blank cheques and cheques in favour of the signatory should be prohibited.
i)  Cheques should be crossed 'A/c Payee only', if this is not pre-printed on the cheque before being signed.
j)  Supporting documents should be cancelled as paid to prevent their use to support further cheque
payments. This cancellation could be done by the cashier before the cheque is signed (provided the
cancellation identifies the cheque number) or by the cheque signatory at the time of signing the cheque.
k) Cheques should preferably be dispatched immediately. If not, they should be held in a safe place.
l)  Returned cheques may be obtained from the bank and a sample checked against cash book entries and
supporting documentation.
Bank reconciliations
a) Bank reconciliations should be prepared on a regular basis, at least monthly.
b) The person responsible for preparation should be independent of the receipts and payments function or,
alternatively, an independent person should check the reconciliation.
c) If the reconciliation is prepared by an independent person he/she should obtain bank statements directly
from the bank and hold them until the reconciliation is completed.
d) The preparation should preferably include a check of at least a sample of receipts and payments against
items on the bank statement.
Controls over Petty Cash
a) The level of and location of cash floats should be laid down formally.
b) There should be restricted access to the floats.
c) Cash should be securely held e.g. in a locked drawer or a safe, with restricted access to keys.
d) All expenditure should require a voucher signed by a responsible official, not the petty cashier.
e) The imprest system should be used to reimburse the float i.e. at any time the total cash and value of
authorized vouchers not reimbursed equals a set amount, for example Rs.1,000.
f)  Vouchers should be produced before the cheque to top up the cash float is signed.
g) Vouchers should be cancelled once reimbursement has taken place.
h) A minimum amount should be placed on a petty cash payment to discourage normal purchase procedures
being by-passed.
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Fundamentals of Auditing ­ACC 311
VU
i)
A petty cash book should be maintained by the petty cashier. Entries should be made promptly.
j)
Periodically the petty cash float should be reconciled to the balance in the petty cash book by an
independent person.
k) Rules should exist preferably preventing the issue of IOU's or the cashing of cheques for employees
TESTS OF CONTROL
Cash Receipts
(i)
Attend mail opening and ensure procedures are adhered to.
(ii)  Test independent check of cash receipts to bank lodgments.
(iii)  Test for evidence of a sequence check on any pre-numbered receipts for cash.
(iv)  Test authorization of cash receipts.
(v)  Test for evidence of arithmetical check on cash received records.
Cash Payments
(i)
Inspect current cheque books for:
Sequential use of cheques
Controlled custody of unused cheques
Any signatures or blank cheques.
(ii)  Test (to avoid double payment) to ensure that paid invoices are marked 'paid'.
(iii)  Test for evidence of arithmetical check on cash payments records, including cashbook.
(iv)  Examine evidence of authority for current standing orders and direct debits.
Bank Reconciliations
(i)
Examine evidence of regular bank reconciliations (usually one per month).
(ii)  Examine evidence of independent check of bank reconciliations (e.g. a signature).
(iii)  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 cheques.
Petty Cash
(i)
Test petty cash vouchers for approval.
(ii)  Test cancellation of paid petty cash vouchers.
(iii)  Test for evidence of arithmetical check on petty cash records.
(iv)  Examine evidence of independent check of petty cash balance.
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Table of Contents:
  1. AN INTRODUCTION
  2. AUDITORSí REPORT
  3. Advantages and Disadvantages of Auditing
  4. OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS
  5. What is Reasonable Assurance
  6. LEGAL CONSIDERATION REGARDING AUDITING
  7. Appointment, Duties, Rights and Liabilities of Auditor
  8. LIABILITIES OF AN AUDITOR
  9. BOOKS OF ACCOUNT & FINANCIAL STATEMENTS
  10. Contents of Balance Sheet
  11. ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
  12. Business Operations
  13. Risk Assessment Procedures & Sources of Information
  14. Measurement and Review of the Entityís Financial Performance
  15. Definition & Components of Internal Control
  16. Auditing ASSIGNMENT
  17. Benefits of Internal Control to the entity
  18. Flow Charts and Internal Control Questionnaires
  19. Construction of an ICQ
  20. Audit evidence through Audit Procedures
  21. SUBSTANTIVE PROCEDURES
  22. Concept of Audit Evidence
  23. SUFFICIENT APPROPRIATE AUDIT EVIDENCE AND TESTING THE SALES SYSTEM
  24. Control Procedures over Sales and Debtors
  25. Control Procedures over Purchases and Payables
  26. TESTING THE PURCHASES SYSTEM
  27. TESTING THE PAYROLL SYSTEM
  28. TESTING THE CASH SYSTEM
  29. Controls over Banking of Receipts
  30. Control Procedures over Inventory
  31. TESTING THE NON-CURRENT ASSETS
  32. VERIFICATION APPROACH OF AUDIT
  33. VERIFICATION OF ASSETS
  34. LETTER OF REPRESENTATION VERIFICATION OF LIABILITIES
  35. VERIFICATION OF EQUITY
  36. VERIFICATION OF BANK BALANCES
  37. VERIFICATION OF STOCK-IN-TRADE AND STORE & SPARES
  38. AUDIT SAMPLING
  39. STATISTICAL SAMPLING
  40. CONSIDERING THE WORK OF INTERNAL AUDITING
  41. AUDIT PLANNING
  42. PLANNING AN AUDIT OF FINANCIAL STATEMENTS
  43. Audits of Small Entities
  44. AUDITORíS REPORT ON A COMPLETE SET OF GENERAL PURPOSE FINANCIALSTATEMENTS
  45. MODIFIED AUDITORíS REPORT