audit of cash and revenues and accounts receivable

Explain how the audit of cash and revenues and accounts receivable may be overlapping and how an auditor may approach this area of the audit.

 

Must be originnal

 

2 pages and references in apa format

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 does include the
reconciliation to the bank statement. Because the auditor can compare the document (bank
statement), there is 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
the auditor because with computers using programs such as Photoshop the client could
easily create a statement to provide the auditor with fraudulent documentation. Auditors will
re-perform the bank reconciliation to determine the actual cash balance at the end of the
period under audit.

The primary control over cash is segregation of duties. When cash is received in the mail the
mailroom clerk should open it. The clerk is required to endorse each check for deposit. A
listing of checks received is prepared in multiple copies. The checks are then delivered to
the cashier, who is responsible for making the deposit ticket and making the deposit to the
bank. Remittance advices and the listing of checks received are delivered to the accounts
receivable department for posting to the customer accounts. An additional copy is delivered
to the controller to allow for verification that the amounts received are posted to the cash and
accounts receivable accounts.

The audit of cash is primarily accomplished by the re-performance of the bank reconciliation.
The bank cut-off statement is delivered directly to the auditor. Cash disbursements are
examined and compared to company policy on the authority to sign checks. Deposits are
examined to detect lapping and kiting. Lapping is the process of an employee stealing a
check from one customer and using the payment of another customer to cover the shortfall.
The amount stolen rolls from one customer to another until the scheme is detected. Kiting is
accomplished by writing a check on one cash account to deposit into another cash account
and then taking money from the second account. The intent is to take advantage of the time
it takes for the checks to clear. With the inception of the new Century 21 Check clearing
system this is far more difficult. The Century 21 system clears checks overnight if not
immediately. This makes check kiting nearly impossible.

One highly effective control over cash receipts is the use of a lock-box system. Remittance
addresses on invoices to customers have a post office box that is owned by the bank. The
customer mails the check to the bank lock-box; the bank opens the mail and immediately
deposits the checks into the client’s checking account. Documentation such as the
remittance advices is then mailed to the client. This completely eliminates the ability of a
mail clerk or other client employee from having access to the cash receipts. The audit client

Module Seven: Auditing Cash and
Accounts Receivable

ACC 411 Module Seven

2

has access to received cash at least one day sooner. A calculation of the amount of interest
the client may earn over time is significant if the cash is being deposited immediately.

Revenue recognition states that revenue is recorded when the product or service has been
delivered to and accepted by the client and subsequent receipt of payment can be
reasonably assured. This is the link between the sales cycle and the cash receipts cycle for
cut-off. Auditors are primarily concerned with the timing of the recording of sales and the
subsequent receipt of cash. The assigned reading will make clear the link between sales,
accounts receivable, and cash receipts. Credit approval is of great concern to auditors. In
many companies the credit application is received via email or fax and simply filed. The
concept here is that the prospective customer would not give bad references. However,
those references may be fraudulent. There should be notes on the credit application that the
references were validated.

Auditors examining accounts receivable and sale are concerned with the overstatement of
both accounts. This relates primarily to the cut-off assertion. Accounting records being left
open after year-end are inherently subject to this type of error. Auditors will examine all sales
and cash receipts for the last five days of the year and the first five days of the new year to
determine that all activity is in the correct period.

The bulk of information about cash and financial investments, accounts receivable, notes
receivable, and revenue will be located in your textbook. A video by Map It Accountancy will
reinforce your reading by using a visual representation of how the different parts of accounts
receivable relate to each other. Check your understanding of the underlying principles of
these concepts with the self-check quiz and then write a short paper, which will be due at the
end of the module.

ACC 411 Module Seven 3

References

Whittington, O. R., & Pany, K. (2012). Principles of auditing and other assurance services (18th ed.). Boston,

MA: McGraw-Hill Irwin.