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Cash and Financial Investments

This chapter described the fundamental controls over cash receipts and disbursements and financial investments. It also explained how the auditors design tests of controls for cash and financial investments and substantive tests for these accounts. To summarize:

  • Since cash generally has a high degree of inherent risk, more audit time is devoted to the audit of the account than is indicated by its dollar amount.

  • Internal control over cash receipts should provide assurance that all cash received is recorded promptly and accurately. Control over cash sales is strongest when two or more employees participate in each transaction, or when a cash register or an electronic point-of-sale system controls collections. When cash receipts consist of checks received through the mail, the receipts should be listed and controlled by personnel who do not maintain cash or accounts receivable records. The control listing should be reconciled to the entries in the cash receipts journal and deposit records from the financial institution.

  • Internal control over cash disbursements is best achieved when all payments are made by check or well-controlled electronic funds transfers, except for payment of minor items from petty cash funds. Separation of the functions of preparation of the payments from that of signing checks tends to prevent errors and fraud in cash disbursements.

  • The principal objectives for the substantive tests of cash are to (a) substantiate the existence of recorded cash, (b) establish the completeness of recorded cash, (c) determine that the client has rights to recorded cash, and (d) evaluate the adequacy of the presentation and disclosure of the cash accounts. A primary substantive test of cash is confirmation of the balances of the company's accounts with financial institutions.

  • The high value and liquid nature of many financial investments makes the separation of the authorization, custody, and recordkeeping functions especially important. In addition, securities should be registered in the name of the company; complete, detailed records of securities should be maintained; and securities should be physically inspected periodically. Derivative instruments are financial investments that present particular risks because of the complex accounting and valuation principles that are applicable.

  • Auditors often vouch investment transactions during the year and inspect securities on hand at yearend. The liquid nature of many investments in securities makes cutoff tests especially important. Appropriate accounting for securities and derivatives is very complex and depends on the nature of the instrument and management's intent. Therefore, in auditing the valuation of certain financial investments, the auditors may use the work of a specialist, such as a security appraiser.

Describe the sources and nature of cash.

Identify the auditors' objectives for the audit of cash.

Explain the nature of the cash receipts and disbursements cycles, and describe the fundamental controls over the business processes related to cash.

Assess inherent and fraud risks for cash.

Assess control risk and design typical tests of controls used by auditors to support the assessed levels of control risk for cash.

Explain how the auditors design substantive audit procedures and address the risks of material misstatement of cash.

Describe the risks involved in auditing financial investments, including why the auditors might need specialized skills.

Identify the auditors' objectives in the audit of financial investments.

Describe typical internal controls over the business processes related to financial investments.

Describe tests of controls and substantive procedures used to audit financial investments.

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