Advanced Auditing Assignment
QUESTION 1 (16 marks)
Cash is the most vulnerable asset to audit. Answer the following questions;
a) What are the three assertions an audit needs to establish? (6 marks)
SOLUTION:
Cash balances include cash on hand and at bank. Cash on hand includes undeposited receipts and petty cash. Cash at bank includes cash held in current and savings accounts which is available on demand. Unlike any other account balance, cash may be either an asset or a liability. The latter arises where the bank with which the entity holds an account allows the entity to write cheques in excess of the balance in the account up to an agreed limit known as an overdraft. Using the assertions described in SAS 400 (ISA 500) the audit objectives to be achieved in verifying cash balances are identified in Table 1.
Table 1: Specific audit objectives for cash balances
Assertion Account balance audit objective
Existence Recorded cash balances exist at the balance sheet date.
Completeness Recorded cash balances include the effects of all cash transactions that have occurred.
Rights and obligations The entity has legal title to all cash balances shown at the balance sheet date.
Valuation Recorded cash balances are realisable at the amounts stated on the balance sheet.
Presentation and disclosure Cash balances are properly identified and classified in the balance sheet.
Lines of credit, loan guarantees and other restrictions on cash balances are appropriately disclosed.
Therefore of the 5 assertions and audit objectives listed above the 3 assertions applicable to direct test of cash balances are Existence, Completeness and Valuation.
b) List 4 audit procedures to use in auditing cash. (4 marks)
SOLUTION:
Because of the large volume of transactions and the small account balance, the audit strategy is invariably to concentrate on verifying the account balance rather than the transactions. Moreover, because of the significance of cash to an entity's liquidity,
Cash is the most vulnerable asset to audit. Answer the following questions;
a) What are the three assertions an audit needs to establish? (6 marks)
SOLUTION:
Cash balances include cash on hand and at bank. Cash on hand includes undeposited receipts and petty cash. Cash at bank includes cash held in current and savings accounts which is available on demand. Unlike any other account balance, cash may be either an asset or a liability. The latter arises where the bank with which the entity holds an account allows the entity to write cheques in excess of the balance in the account up to an agreed limit known as an overdraft. Using the assertions described in SAS 400 (ISA 500) the audit objectives to be achieved in verifying cash balances are identified in Table 1.
Table 1: Specific audit objectives for cash balances
Assertion Account balance audit objective
Existence Recorded cash balances exist at the balance sheet date.
Completeness Recorded cash balances include the effects of all cash transactions that have occurred.
Rights and obligations The entity has legal title to all cash balances shown at the balance sheet date.
Valuation Recorded cash balances are realisable at the amounts stated on the balance sheet.
Presentation and disclosure Cash balances are properly identified and classified in the balance sheet.
Lines of credit, loan guarantees and other restrictions on cash balances are appropriately disclosed.
Therefore of the 5 assertions and audit objectives listed above the 3 assertions applicable to direct test of cash balances are Existence, Completeness and Valuation.
b) List 4 audit procedures to use in auditing cash. (4 marks)
SOLUTION:
Because of the large volume of transactions and the small account balance, the audit strategy is invariably to concentrate on verifying the account balance rather than the transactions. Moreover, because of the significance of cash to an entity's liquidity,