In: Accounting
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.
If the auditors understanding of internal control and tests of
controls and substantive tests of transactions during the
acquisition and payment cycle cause them to believe that it is
recommended to reduce the assessed control risk level to low, they
can reduce detailed tests of the ending cash balance. However, if
the assessed control risk should be higher, more extensive testing
would be necessary. When testing the yearend balance of the cash
account, the auditor must accumulate sufficient and relative
evidence to determine whether cash as stated on the balance sheet,
is fairly stated and properly disclosed in accordance with five of
the eight balance related audit objectives (existence,
completeness, accuracy, cutoff, and detail tie-in)
Internal controls over year end cash balances fall under two
categories; controls over the transaction cycles and independent
bank reconciliations. The transaction cycle controls include the
segregation of the check signing and accounts payable functions and
a monthly bank reconciliation by someone independent of the
handling or recording of cash receipts and disbursements . This
reconciliation is typically extensively audited at year end,
comparing the ending balances of the bank rec., deposits in
transit, outstanding checks and other reconciling items with the
prior year reconciliation . Cash is compared in a similar manner
using prior month’s balances; both procedures help to identify
misstatements in the cash account.