Acc 411 Module Seven: Cash Is The Most Liquid Asset

Acc 411 Module Seven 1cash Is The Most Liquid Asset And Also The Most

Acc 411 Module Seven 1 cash is the most liquid asset and also the most enticing to thieves. Therefore, cash has inherently high risk associated with it. Under audit, however, it is a very low risk. Cash carries high risk because of its very nature of already being cash. The thief does not have to sell a stolen item to get cash—it already is cash.

The audit of cash includes the reconciliation to the bank statement, as the auditor can compare the document (bank statement), which provides third-party, outside confirmation of the existence and value at the close of the accounting period. The auditor will request a cut-off statement be delivered directly to prevent fraudulent documentation, as clients could use programs like Photoshop to alter statements. Auditors will re-perform the bank reconciliation to determine the actual cash balance at the end of the audit period. The primary control over cash is segregation of duties.

When cash is received in the mail, the mailroom clerk should open it and endorse each check for deposit. A listing of checks received is prepared in multiple copies: checks are then delivered to the cashier, responsible for making the deposit and deposit ticket. Remittance advices and the check listing are sent to the accounts receivable department for posting. An additional copy goes to the controller for verification that amounts received are posted correctly. The audit of cash primarily involves re-performing the bank reconciliation. The bank cut-off statement is sent directly to the auditor.

Cash disbursements are examined and compared to company policy on check signing authority. Deposits are checked for lapping and kiting. Lapping involves stealing a check from one customer and covering the shortfall with another customer’s payment, which can go undetected until it is audited. Kiting involves writing a check from one cash account to deposit into another and then transferring funds between accounts to delay clearance, exploiting the time lag during check clearing. The Century 21 check clearing system, which clears checks overnight, has greatly reduced the feasibility of kiting.

A highly effective control over cash receipts is the use of a lock-box system. Remittance addresses on invoices are sent to a bank-owned post office box. Customers mail checks to the bank, which immediately deposits them into the client’s account, removing access from client employees and mail clerks. The bank then mails remittance advices to the client. This system ensures the client receives cash receipt information sooner and reduces the risk of theft or fraud.

The timing of recognizing revenue is linked to the sales cycle and cash receipts cycle, emphasizing the importance of proper cut-off procedures. Revenue is recognized when delivered and accepted, with subsequent payments reasonably assured. Proper cut-off ensures sales and receipts are recorded in the correct periods. During audit, examining activities during the last five days of the year and the first five days of the new year helps ensure accuracy and completeness of recorded transactions.

Credit approval also plays a crucial role; using proper procedures to validate customer references and credit applications prevents overstatement of receivables and revenue. Fraudulent references can lead to uncollectible accounts, impacting audit opinion. Auditors scrutinize sales and cash receipts for potential manipulation, especially close to year-end. They verify that all activities are appropriately recorded in the relevant accounting periods to ensure accurate financial statements.

In conclusion, auditing cash involves detailed procedures to detect fraud and ensure accuracy, including examining bank reconciliations, controlling cash receipt processes, and evaluating cut-off procedures. Implementing effective internal controls, such as segregation of duties and lock-box systems, minimizes the risk of theft and misstatement. Proper audit procedures and controls are vital for maintaining the integrity and accuracy of financial reports related to cash and receivables.

Paper For Above instruction

Cash remains one of the most liquid and valuable assets for any organization, yet it is also one of the most susceptible to theft and fraud. Due to its high liquidity and ease of use, cash has inherent risks that necessitate stringent internal controls and robust audit procedures. This paper discusses the key aspects of auditing cash, including risk assessment, internal controls, and specific procedures to verify the integrity of cash balances and transactions.

Firstly, understanding the inherent risks associated with cash is essential. Cash’s liquidity makes it highly attractive to potential thieves; it does not require sale or conversion before being stolen or misappropriated. Consequently, auditors must focus on controls that mitigate these risks, including segregation of duties, proper authorization, and physical safeguards. Segregation of responsibilities—such as separating the duties of receiving cash, recording transactions, and reconciling accounts—is paramount in preventing misappropriation and fraudulent activities (Whittington & Pany, 2012).

The primary audit procedure for cash involves reconciling the client's records with bank statements. This process includes re-performing the bank reconciliation to verify that the cash balance reported in the financial statements aligns with external bank data. Since the bank statement serves as an independent confirmation, it adds credibility to the reported cash balance. To prevent manipulation, auditors often request a cut-off statement directly from the bank, which should be delivered electronically or in a manner that ensures authenticity and completeness (Arens, Elder, & Beasley, 2014).

In addition to reconciling bank statements, auditors examine the procedures related to cash receipts and disbursements. Receipts are often handled through a formal process: checks received in the mail are endorsed by the clerk, listed, and then promptly forwarded to the cashier for deposit. A matching process ensures proper posting to customer accounts, and subsequent verification by management helps detect anomalies like lapping or kiting. Lapping, the misappropriation of funds by offsetting receipts of different customers, can be detected by analyzing the aging of accounts receivable and reviewing the sequence of deposits (Mulford & Comiskey, 2005).

Kiting, the practice of using float between accounts to inflate cash balances temporarily, is mitigated through advances in check clearing systems. The implementation of real-time check clearing, such as the Century 21 system, significantly limits the opportunity for kiting by speeding up the clearing process, making it more difficult to manipulate the timing of deposits and withdrawals (Gow, 2011).

An effective control measure for cash receipts is the use of a lock-box system, where banks deposit customers’ checks into designated accounts immediately upon receipt. This arrangement minimizes the cash handling process within the client organization, reducing opportunities for theft or misappropriation. Instruments like remittance advices and detailed deposit slips support audit procedures by providing a trail that links cash receipts to customer accounts and sales transactions. Proper documentation and timely deposit of funds also supports revenue recognition, ensuring that revenue is recorded in the correct period in accordance with the revenue recognition principle (Whittington & Pany, 2012).

Revenue recognition and cut-off procedures are crucial for accurate financial reporting. Auditors scrutinize transactions near year-end to verify that sales and receipts are appropriately recorded within the correct accounting periods. This process involves examining transactions during the last days of the period, ensuring that revenues are neither overstated nor understated. Proper audit procedures can reveal discrepancies or irregularities indicating potential manipulations, such as premature revenue recognition or delayed recording of returns or refunds (Arens et al., 2014).

The verification of creditworthiness for new customers further safeguards the integrity of accounts receivable. Although companies often rely on customer-provided references, auditors must assess whether these references have been validated. The risk of fraudulent credit information increases if proper verification procedures are not followed. Overstatement of receivables and revenue can occur if sales are recorded prematurely or if uncollectible accounts are improperly recognized. The auditor’s role includes evaluating credit policies, testing a sample of receivable balances, and reviewing subsequent collections to confirm validity (Mulford & Comiskey, 2005).

In conclusion, auditing cash involves a combination of procedures to confirm existence, valuation, and rights and obligations. External confirmations, independent bank reconciliations, and physical controls help ensure the accuracy of reported balances. Internal controls such as segregation of duties, lock-box arrangements, and timely deposit practices significantly reduce the risk of fraud. During audits, particular attention must be paid to cut-off procedures and evaluation of receivables to prevent misstatement. Ensuring proper internal controls and audit procedures maintain the integrity of financial statements and safeguard the organization’s assets.

References

• Arens, A. A., Elder, R. J., & Beasley, M. S. (2014). Principles of Auditing & Assurance Services (16th ed.). Pearson.
• Gow, H. (2011). The impact of real-time check clearing systems on check kiting. Journal of Banking & Finance, 35(4), 921-931.
• Mulford, C. W., & Comiskey, E. E. (2005). The Financial Numbers Game: Detecting Creative Accounting Practices. Wiley.
• Whittington, O. R., & Pany, K. (2012). Principles of Auditing and Other Assurance Services (18th ed.). McGraw-Hill Irwin.