Question

A brief summary page should be included, 350-700 words for each of the audit programs: cash, financial instruments, sale, and accounts receivables cycles.

Answer 1

What is Cash

Cash includes actual cash kept onsite in a cash drawer or envelope. It includes actual cash maintained in checking, savings or money market accounts. It also recognizes cash equivalents, including monies held in a certificate of deposit, marketable securities and checks and money orders held onsite awaiting deposit. If credit card payments convert to cash within a few days, companies can count those amounts as cash.

Petty Cash

Regularly auditing a company's actual cash position can help detect fraud. It can also identify problem areas where a company must enact additional processes and procedures to reduce temptation and minimize the likelihood of embezzlement, theft or fraud. If a company has a petty cash fund, a cash audit must confirm that the amounts in the petty cash fund equal the amount recorded in the general ledger. If not, receipts must exist to account for the monies that were spent but not yet replenished.

Accounts

Companies must reconcile the beginning and ending balances shown on their bank statements with the amounts shown in their manual or software-based accounting systems. They must record any interest earned or fees charged, investigate any discrepancies and determine the source of each error. The person who reconciles the bank account must differ from the person who writes checks, wires or transfers payments or pays bills electronically.

Cash Receipts

If customers pay in cash, only specific individuals can be authorized to receive this cash. Those individuals must provide receipts to customers for that cash and retain a duplicate of those receipts for company use. They must record these receipts in the accounting system as soon as possible. Cash bank deposit slips must equal all of the cash receipts.

Cash Disbursements

Companies must confirm that all checks have an associated invoice or purchase order. Product invoices should require the initials of the person who confirmed delivery and receipt of the product. If the company writes scores of checks each month, a random review of the checks will suffice. Companies must retain all voided checks as evidence of voiding.

Retailers

For retailers who conduct a significant amount of business in cash, companies should locate safes on site. Each person who deposits money into the safe must put her name, date and amount on the cash bundle. Each cashier must close out her register at the end of her shift and count and record the actual cash. Her supervisor must confirm the amount. Retailers must install cameras around the registers and safes

What is CASH AUDIT?

The recorded data of all incoming and outgoing cash. All cash received and sent is usually brought forth in receipts or bookkeeping records

Audit Procedures for Cash

Accounting and auditing procedures differ across companies and industries but audit procedures for cash are similar. The auditor must obtain reasonable assurance that the cash balances of the company are stated accurately and does so using mostly standard procedures. Knowing audit procedures for cash can eliminate any surprises for you and your company around audit time

Confirmation

The primary audit procedure used in testing cash balances is confirmation. In order to test confirmation, auditors ask the company's bankers to verify the balance of the bank accounts directly; responses are sent solely to the auditors. Bankers require electronic confirmation requests. The confirmation process also has an unintended benefit. When submitting the confirmation request, auditors commonly ask if the company has any loans with the bank as well. This helps to uncover any unrecorded liabilities present

Foreign Currency Translation

For companies that hold cash denominated in foreign currencies, part of the cash audit process includes a test of the translation process. In order to test translation, the auditor independently calculates the cash balance using the exchange rate in effect at 12/31. If the translation is materially close to the company's figure, the auditor documents this finding and moves on with the audit. If there is a difference in the rate used that results in a material difference, the auditor must determine if the company's rate is reasonable.

Reconciliation Testing

As a part of cash testing, auditors also test the bank reconciliation process. By examining cash confirmations, auditors gain assurance over the bank balance. However, differences may exist between the correct bank balance and the correct book cash balance. Usually these differences relate to deposits-in-transit and outstanding checks. By recalculating and testing the underlying information in the company's bank reconciliations, auditors can bridge the gap between the book and bank balance.

Classification

Auditors might also need to test for the correct classification of cash. Some cash balances, such as cash balances that are restricted from use due to contractual agreements or cash equivalents that have been pledged as collateral, have complicated rules related to disclosure and classification. In some cases, these balances should not be listed as cash on the balance sheet and might need to be listed as investments or restricted cash. If your business is subject to an audit and you have any contractual obligations related to cash collateral, be sure to examine these agreements to ensure proper classification

Checklist for a Cash Audit

Companies generate cash from a variety of sources. In addition, some companies may utilize a petty cash fund to keep small amounts of cash on hand to use for minor, miscellaneous purchases. Whether or not a company uses an external CPA auditing firm to audit its financial statements and accounting practices, any firm can benefit from conducting internal periodic audits of its cash and cash flows

What is a 'Financial Instrument'

Financial instruments are assets that can be traded. They can also be seen as packages of capital that may be traded. Most types of financial instruments provide an efficient flow and transfer of capital all throughout the world's investors. These assets can be cash, a contractual right to deliver or receive cash or another type of financial instrument, or evidence of one's ownership of an entity

BREAKING DOWN 'Financial Instrument'

Financial instruments can be real or virtual documents representing a legal agreement involving any kind of monetary value. Equity-based financial instruments represent ownership of an asset. Debt-based financial instruments represent a loan made by an investor to the owner of the asset. Foreign exchange instruments comprise a third, unique type of financial instrument. Different subcategories of each instrument type exist, such as preferred share equity and common share equity.

International Accounting Standards (IAS) defines financial instruments as "any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity."

Types of Financial Instruments

Financial instruments may be divided into two types: cash instruments and derivative instruments.

The values of cash instruments are directly influenced and determined by the markets. These can be securities that are easily transferable. Cash instruments may also be deposits and loans agreed upon by borrowers and lenders.

The value and characteristics of derivative instruments are based on the vehicle’s underlying components, such as assets, interest rates or indices. These can be over-the-counter (OTC) derivatives or exchange-traded derivatives.

Entities of all sizes may be subject to risks of material misstatement when using financial instruments. This Audit Guide provides an in-depth understanding of financial instruments, as well as practical assistance for auditors to develop an effective audit approach to address such risks.

Detailed implementation guidance is provided for assessing an entity’s internal control and responding to associated risks, as well as guidance on reporting considerations. A series of case studies is provided to help you understand and apply the concepts specific to financial instruments, including the use of service organizations and accounting for hedging activities.

This AICPA Audit Guide was developed by leading auditing and financial instrument experts in public practice to provide CPAs with foundational information on financial instruments and related audit considerations.

Key Benefits:

Coverage of voluntary disclosures regarding fair value information

Guidance on the complexities surrounding the valuation of financial instruments, as well as key presentation and disclosure considerations

Detailed case studies to show practical applications on classification of financial instruments, use of work of others, embedded derivatives, interest rate swaps and put options

Understanding how to effectively use work performed by a service organization

Updates:

The following audit and accounting updates affecting financial instruments have been considered and discussed as appropriate.

SSAE No. 18, Attestation Standards: Clarification and Recodification

SAS No. 131, Statement on Auditing Standards No. 131, Amendment to Statement on Auditing Standards No. 122 Section 700, Forming an Opinion and Reporting on Financial Statements

ASU No. 2015-10, Technical Corrections and Improvements

ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities

ASU No. 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships

In addition to covering auditing standards to address all areas of the audit, the following standards are discussed in greater detail throughout this guide to address audit considerations unique to financial instruments:

AU-C section 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures

AU-C section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement

AU-C section 500, Audit Evidence

AU-C section 501, Audit Evidence – Specific Considerations for Selected Items

Who Will Benefit:
Entities of various sizes and across industries use financial instruments for hedging, investment, and trading purposes. Because of the inherent risks and complexities around this topic, it is critical to consider specific audit considerations and be able to address the risk of material misstatement to perform an effective audit of these financial instruments. This comprehensive guide has been designed to be beneficial for those practicing in small, regional, and large auditing firms.

Understanding the Financial Instruments

2.06
The characteristics of financial instruments may obscure certain elements of risk and exposure. Obtaining an understanding of the instruments in which the entity has invested or to which it is exposed, including the characteristics of the instruments, helps the auditor identify whether

? important aspects of a transaction are missing or inaccurately recorded.

? the risks inherent in them are fully understood and managed by the entity.

? the instruments are valued using an appropriate valuation technique.

? the financial instruments are appropriately classified into current and noncurrent assets and liabilities.

2.07
Examples of matters that the auditor may consider when obtaining an understanding of the entity’s financial instruments include

? the types of financial instruments to which the entity is exposed.

? the purpose for which they are used.

? management’s and, when appropriate, those charged with governance’s understanding of the financial instruments, their use, and the accounting requirements.

? their exact terms and characteristics so that their implications can be fully understood and, in particular, when transactions are linked, the overall effect of the financial instrument transactions.

? how they fit into the entity’s overall risk management strategy.

Inquiries of the internal audit function and risk management function, if such functions exist, and discussions with those charged with governance may assist the auditor in obtaining this understanding.

2.08
In some cases, a contract, including a contract for a nonfinancial instrument, may contain a derivative. Some financial reporting frameworks permit or require such embedded derivatives to be separated from the host contract in some circumstances. Understanding management’s process for identifying and accounting for embedded derivatives will assist the auditor in understanding the risks to which the entity is exposed.

Developing an Audit Approach

5.09
In testing how management values the financial instrument and in responding to the assessed risks of material misstatement in accordance with paragraphs .12–.14 of AU-C section 540, the auditor undertakes one or more of the following procedures, taking account of the nature of the accounting estimates:

? Test how management made the accounting estimate and the data on which it is based (including valuation techniques used by the entity in its valuations).

? Test the operating effectiveness of the controls over how management made the accounting estimate, together with appropriate substantive procedures.

? Develop a point estimate or range to evaluate management’s point estimate.

? Determine whether events occurring up to the date of the auditor’s report provide audit evidence regarding the accounting estimate.

Many auditors find that a combination of testing how management valued the financial instrument and the data on which it is based and testing the operating effectiveness of controls will be an effective and efficient audit approach. Although subsequent events may provide some evidence about the valuation of financial instruments, other factors may need to be taken into account to address any changes in market conditions subsequent to the balance sheet date. fn 3 If the auditor is unable to test how management made the estimate, the auditor may choose to develop a point estimate or range.

5.10
As described in chapter 1, "Gaining an Understanding About Financial Instruments," of this guide, to estimate the fair value of financial instruments, management may

? utilize information from third-party pricing sources.

? gather data to develop its own estimate using various techniques, including models.

? engage a specialist to develop an estimate.

Management often may use a combination of these approaches. For example, management may have its own pricing process but use third-party pricing sources to corroborate its own values.

Audit Procedures for the Sales & Accounts Receivable (Collection) Cycle

The sales and collections cycle in a business refers to the set of processes that begin when a customer purchases goods or services and ends when the company receives complete payment for the purchase. As part of the year-end audit of a company's financial statements, external accountants test sales transactions and the internal controls over those transactions to ensure that the company is not materially misstating its revenues or accounts receivable

Test of Controls

An auditor tests the controls the company has set up for the sales cycle to determine how strong and reliable they are. If they are strong, the auditor can reduce the amount of transaction testing he must do. Common internal controls over the sales cycle include numbered sales invoices, purchase order authorization over a certain limit and authorization over receivables write-offs. The auditor selects a random sample of transactions and examines the related purchase orders, invoices and customer statements. If the control being tested is numbered sales invoices, for example, the auditor ensures that all numbers in a section are accounted for and that none are missing. If the control is that all purchase orders are approved by management, the auditor checks for a manager's signature on each document. If control errors are found, the auditor increases the amount of transactional testing he must do.

Transactional Testing

An auditor determines if the financial statement amounts of sales and accounts receivable are correct by verifying individual transactions. Accounts receivable balances are tested by sending confirmation letters to customers to obtain objective assurance that the balance is correct. The auditor also chooses sales transactions from the sales ledger and verifies that there are legitimate sales receipts to back up the transaction. To test the accuracy of the sales figure, the auditor reviews sales transactions in the ledger close to the financial statement date to ensure that the company only included sales prior to that date

Fraud

The purpose of an external financial statement audit is to provide assurance on the numbers and not to uncover employee or owner fraud. However, many of the sales cycle audit procedures can lead to the discovery of fraud. A common employee scheme is to steal customer payments and write them off in the accounting system so that the receivable no longer shows. If an employee has access to both the accounting system and the incoming mail, the auditor spends more time reviewing receivable write-offs to ensure that they were authorized and legitimate. A review of purchase orders often can uncover another common fraud where an employee creates sales to fictitious companies and steals the product.

Internal Auditing

A company also can audit its own procedures and transactions to ensure that controls are strong and effective. An internal audit is more likely to focus on employee fraud, and internal auditors design controls over processes that thwart the opportunity for it. Sales cycle examples include separating job duties that otherwise would allow theft and cover-up and implementing a mandatory vacation policy so fraud schemes cannot be maintained on a daily basis