Question

Discuss the relationships among the initial assessed control risk, test of controls, and substantive tests of transactions for cash disbursements, and the tests of details of cash balances. Provide one example in which the conclusions reached about internal controls in cash disbursements will affect the tests of cash balances.

Answer 1

The appropriate  tests for the ending balance in the cash accounts dependheavily on the initial assessment of control risk, tests of controls, and substantive testsof transactions for cash disbursements. The company's controls over cashdisbursements assist the auditor in determining that cash disbursed is for approvedcompany purposes, that cash disbursements are promptly recorded in the proper amount, and that cash cutoff at year-end is proper. If the results of the evaluation of internal control, the tests of controls, and the substantive tests of transactions areadequate, it is appropriate to reduce the tests of details of balances for cash, especiallyfor the detailed tests of bank reconciliations. On the other hand, if the tests indicate thatthe client's controls are inadequate, extensive year-end testing may be necessary. ?n example in !hich the conclusions reached about the controls in cashdisbursements !ould affect the tests of cash balances !ould be"If controls over the issuance of blank checks, the revie! of payees, amounts,and supporting documentation, the signing of checks, and the reconciliation of bank statements and vendors' statements are adequate, the auditor's revie! of outstanding checks on the year-end bank reconciliation may be greatly reduced.The year-end outstanding checks can be verified by testing a sample of checksreturned !ith the cutoff bank statement rather than tracing all paid outstandingchecks and the final monthly checks in the cash disbursements #ournal to the lastmonth's cleared checks and the bank reconciliation.

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