Substantive Audit Procedures: Cash Balances

Lillian Stockton, the treasurer, prepares the monthly bank reconciliation. Don McKenna provided you with a copy of the reconciliation for the month of December, 2009. You also obtained from Don selected portions of the cash receipts and cash disbursements journals. You have received directly from the bank the confirmation and cutoff bank statements that were requested January 4, 2010. The cutoff bank statements cover the period from January 1 to January 12, 2010.

The cutoff bank statement, along with items clearing during the cutoff period, which you requested from Big City National Bank, are shown in Exhibit 1. A selected portion of the cash receipts journal is provided as Exhibit 2, while a selected portion of the cash disbursements journal is shown in Exhibit 3. You may assume that checks written in December and not shown as clearing on the cutoff bank statement cleared on the December bank statement.

The following are the two working papers prepared for you by the client or obtained directly from the bank. The client prepared the bank reconciliation working paper, A-1. Having requested the bank confirmation from Big City National Bank, you received it (working paper A-2) directly from the bank.

Reference

Bank reconciliation-Big City National Bank A1

Standard bank confirmation-Big City National Bank A2

Required Exercises

1. Prepare a substantive audit program to test cash balances. The construction of such a program should begin with the five financial statement assertions: (1) existence or occurrence, (2) completeness, (3) rights and obligations, (4) valuation or allocation, and (5) presentation and disclosure. You should derive your specific audit objectives for cash balances from these assertions. Your audit program should address the five financial statement assertions, as well as any internal control weaknesses you have uncovered. In this regard, keep in mind the six control procedure categories, as well as the other internal control elements. You may assume that you have satisfied yourself as to any assertions not specifically mentioned in the narrative.

As you write your program, remember the generalized evidencegathering procedures of (1) recalculation, (2) physical observation, (3) confirmation, (4) verbal inquiry, (5) vouching of documents, (6) tracing, (7) scanning, and (8) analytical procedures. Use them to help you write the specific evidencegathering procedures in your program. Write your program on form AP1. Use the financial statement assertions as the major headings, or captions, for your program.

2. Study the prior year's working papers, paying attention to the use of tick marks to indicate your audit procedures, and the system of crossreferencing among working papers.

Gather evidence as necessary from the exhibits, the direct bank mailings, the clientprepared schedules, and your own observations to perform your audit work in the cash area by completing working papers A-1 and A-2.

Important Note: Mr. Lancaster, President of Peach Blossom Cologne Company, has asked you to record every adjusting journal entry that you find, regardless of materiality. You should add any such adjustments to the applicable working paper and also record them on working paper AJE (Schedule of Adjusting Journal Entries) and the working trial balance (working paper TBBS-TBIS). Recording these adjustments on working papers AJE and TBBS-TBIS as you find them will reduce your workload at the end of the audit.

AP-1

Substantive Audit Program-Cash Balances

Assertions

Begin with the list of assertions below and add others as you think appropriate. Then write your audit program to test those assertions.

1. The amount of cash is not materially more than the amount shown on the balance sheet.

2. All cash has been recorded.

3. Cash is correctly shown as a current asset.

4. Cash is not restricted to noncurrent use.

					EXHIBIT 1
				BIG CITY NATIONAL BANK
				Cutoff Bank Statement and Clearings
				BIG CITY NATIONAL BANK
				Main at Michigan Avenue
				Chicago, Illinois 60612
	Statement of Account #58-4329
						PEACH BLOSSOM COLOGNE COMPANY
	DATE			CHECKS				DEPOSITS			BALANCE
	12-31-09	Balance forward									400,927
	1-4-10	140		185				25,311			425,913
	1-5-10	4,150						73,550			495,313
	1-6-10	147,226						18,000			366,087
	1-7-10	5,740		1,590				6,000			364,757
	1-8-10	214		125		960		7,600			369,458
		1,600
	1-11-10	468		1,840		275		70,000			428,175

EXHIBIT 1 (Continued)

Deposit slips that agree with the above statement were received with the cutoff bank statement. The following is a list of paid checks that were received with the cutoff bank statement.

Check Date of Cleared

Number Check Bank Payee Amount

1446 12-28 1-04 Longhorn Garbage Disposal 140

1449 12-29 1-04 DeBella Hardware 185

1445 12-28 1-05 Roberts and Underwood Insurance 4,150

1451 1-04 1-06 Fruit Juicy Perfume Co. 147,226

1452 1-04 1-07 Hammel, Hammel, & Johnson 5,740

1456 1-05 1-07 Barrows Office Supply 1,590

1465 1-06 1-08 Dr. Edward Abel 214

1444 12-28 1-08 Lawns by George 125

1450 12-29 1-08 Quick-Print Printers 960

1458 1-05 1-08 Apple Valley Security 1,600

1460 1-06 1-11 William F. Reimann 468

1459 1-05 1-11 Alex McBane 1,840

1464 1-06 1-11 Fulton Paper Co. 275

1455 1-04 1-11 Edwards, Overstreet, & Gilley 8,700

1454 1-04 1-12 Norton Exterminators 445

1461 1-06 1-12 Kalvin and Hubbs 2,350

			EXHIBIT 2
			CASH RECEIPTS JOURNAL
			(selected portions)
				CREDIT
CASH				ACCOUNTS
DEBIT		DATE	SOURCE	RECEIVABLE		OTHER
163,093		12-24-09	Total brought forward	163,093		0
25,800		12-28	Various A/R - Listed	25,800
53,250		12-29	Various A/R - Listed	53,250
25,311		12-31	Various A/R - Listed	25,311
267,454		12-31-09	December totals	267,454		0
0		1-01-10	Beginning balance	0		0
73,550		1-05	Various A/R - Listed	73,550
18,000		1-06	Young and Beautiful	18,000
6,000		1-07	Incense, Inc.	6,000
97,550		1-07-10	Totals forward to next page	97,550		0

		EXHIBIT 3
		CASH DISBURSEMENTS JOURNAL
		(selected portions)
Peach Blossom Cologne Company Cash Disbursements
			DEBIT
	CHECK		ACCOUNT	CASH
DATE	NUMBER	PAYEE	NUMBER	CREDIT
12-26-09		Totals brought forward		212,000
12-28	1444	Lawns by George	301	125
12-28	1445	Roberts and Underwood Ins.	301	4,150
12-28	1446	Longhorn Garbage Disp.	301	140
12-28	1447	Gulf States Oil Supply	830	80
12-28	1448	United Fund	832	25
12-29	1449	DeBella Hardware	301	185
12-29	1450	Quick-Print Printers	301	960
12-31-09		December totals		217,665
1-04-10	1451	Fruit Juicy Perfume Co.	301	147,226
1-04	1452	Hammel, Hammel, & Johnson	301	5,740
1-04	1453	Mid-Town Office Supply	112	3,800
1-04	1454	Norton Exterminators	301	445
1-04	1455	Edwards, Overstreet, and Gilley	301	8,700
1-05	1456	Barrows Office Supply	301	1,590
1-05	1457	Central Power and Light	301	1,400
1-05	1458	Apple Valley Security	832	1,600
1-05	1459	Alex McBane	301	1,840
1-06	1460	William F. Reimann	301	468
1-06	1461	Kalvin and Hubbs	301	2,350
1-06	1462	Fruit Juicy Perfume Co	301	8,064
1-06	1463	Hoffmann Supply Co.	301	240
1-06	1464	Fulton Paper Co.	301	275
1-06	1465	Dr. Edward Abel	832	214
1-07	1466	Flash Freight Co.	301	340
1-07-10		Totals carried forward		184,292