Question

Explain in summary of how an auditor audited cash and marketable securities.

Answer 1

Cash:

Cash is an area with high fraud risk , especially when the internal control is weak . Control procedures and Test of controls related to cash receipts and cash disbursements were covered above in the discussions of the revenue cycle and the expenditure cycle.

Segregation of duties demands that close consideration be given to check writing authority. Separation of cash handling, record keeping and reconciliation of bank statements should exist as well as separation of petty cash activities. Good internal control for cash would include the use of a voucher system for cash disbursements.

Primary audit procedure performed due to the existence, completeness and valuation of the ending cash balance are the bank confirmation and the audit of the year end bank reconciliation.

. 1. Bank confirmation: bank confirmation should be sent to all banks with whom the client has done business during the year regardless of whether there is year end balance to confirm. This is done because the bank confirmation in addition to verifying year end balances and also provides evidence about actual loans and contingent liabilities, discounted notes, pledged collateral and guarantee or security agreements

2. Bank reconciliation: The year end bank reconciliation for every account should be tested by

a. footing the bank reconciliation and the list of outstanding checks.

b. agreeing the balance as per the books to the general ledger

c. agreeing the balance per the bank confirmation to the balance per the bank on the bank reconciliation.

d. Agreeing deposits in transit and outstanding checks to the cut off bank statement. The cut off bank statement is obtained by the auditor from the bank and covers the first ten to fifteen days of the period after year end. Reconciling terms should generally clear during the ten to fifteen day period. Any item that does not clear should be investigated.

2. Auditing cash receipts and cash payments:

Auditor should trace a sample of remittance advice to the cash receipts journal and deposits slips. For cash payments, the auditor should trace the sample of cancelled checks to the cash disbursement journal.

Auditor should verify the cut off cash receipts and cash payments shortly before and after year end for recording in the proper period. The auditor should compare the dates for recording a sample of cash receipts with the dates the cash was deposited in the bank and the dates for recording a sample of checks with the dates the checks cleared the bank , noting significant delays.

Auditor should ensure that all required disclosures related to cash have been included in the notes to financial statements. Required disclosure related to cash include:

1. Policy defining cash and cash equivalents

2. Restrictions on cash , including sinking fund requirements

3. Compensating balance requirements.

Marketable Securities:

Trading and available for securities over which the investor has no significant influence should be carried at fair value and held to maturity securities should be carried out at amortized cost . The auditor should inquire of management and obtain written representations concerning management's intent's and ability with respect to holding versus selling securities.