CHAPTER 6

AUDIT CASH AND CASH

EQUIVALENTS

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 LEARNING OBJECTIVES

• Understand the contents and features of Cash and Cash

Equivalents
• Analyze the economic transactions and recognize the
audit risks of material misstatements related to Cash and
Cash Equivalents in the financial statements
• Understand the audit process and perform the audit tests
for Cash and Cash Equivalents

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 CONTENTS OF CHAPTER 6

1 Contents and Features

2 Assertions

3 Internal Control

4 Audit Procedure

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Part 1

CONTENTS AND FEATURES

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 CONTENTS

"Cash" is an indicator reflecting the full amount of

existing money of an enterprise at the time of
reporting.
"Cash" includes:
 Cash on hand
 Cash in banks
 Cash in transit

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 CONTENTS

Cash on hand:
 Cash on hand includes: Viet Nam Dong (VND),
Foreign Currencies and Monetary Gold.
 Account Code: “111”
 This account is used to record revenues, expenses
and balance of the enterprise’s fund.

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 CONTENTS

Cash in banks:
 Cash in banks includes: Viet Nam Dong (VND),
Foreign Currencies and Monetary Gold.
 Account Code: “112”
 This account is used to record current amounts and
increases and decreases in demand deposits of the
enterprise in a bank.

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 CONTENTS

Cash in transit:
 Cash in transit includes: Viet Nam Dong (VND) and
Foreign Currencies.
 Account Code: “113”
 This account is used to record amounts of money which
an enterprise paid to banks but no credit note or
confirmation of payment to other enterprises has been
received; or the enterprise made wire transfer from their
bank account to other enterprises, but no debit note or
bank statement has been received.

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 CONTENTS

Cash equivalents:
 Cash equivalents are investments securities held for
the purpose of meeting short-term cash commitments
rather than for investment or other purposes.
 For an investment to qualify as a cash equivalent it
must be readily convertible to a known amount of cash
and be subject to an insignificant risk of changes in
value.

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 CONTENTS

Cash equivalents:
 Therefore, an investment normally qualifies as a cash
equivalent only when it has a short maturity of, say, three
months or less from the date of acquisition
 Cash equivalents may include: bank certificates of
deposit, bankers‘ acceptances, corporate commercial
paper and other money market instruments.

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 FEATURES

 Most commonly used as a measure of company's liquidity

 Affect revenues, incomes, expenses, debts and other
assets
 There are many transactions occurred with considerable
amounts. Material Misstatements are likely to occur and
difficult to detect.
 Cash is very sensitive asset => possibility of frauds is
generally higher than other assets.
=> Inherent risk of cash and cash equivalents is
assessed as high.
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Part 2
ASSERTIONS

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 Assertions about classes of
transactions and events
 Occurrence
 Completeness
 Accuracy
 Cut-off
 Classification

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 Assertions about account balances

 Existence
 Rights and Obligations
 Completeness
 Valuation and Allocation

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Part 3
INTERNAL CONTROL

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 INTERNAL CONTROL

The requirements of internal control:

- Controlling business cycles that affect cash receipts
and cash disbursements
- Checking independently by cash-count and bank
statements reference

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INTERNAL CONTROL

The principles of internal control:

 Ability and Integrity of employees
 Separate responsibility
 Recording timely and adequately revenues and
expenses
 Using banking facilities as much as possible, keeping
the amount of cash on hand to a possible minimum
 Taking cash-count and preparing bank reconciliation
monthly

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 INTERNAL CONTROL

Internal control for cash receipts:

 Collect directly from sales:
• Separating the functions of selling goods and
collecting money.
• Cash receipts devices must be used when separation
is impossible.
• When devices are also impossible, revenues
management of the day must be done by Daily Sales
Report.

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 INTERNAL CONTROL

Internal control for cash receipts:

 Collecting debts from debtors:
• Encouraging customers to get receipts when they make
payments.
• Regularly performing debt comparison to control the
cash flows and preventing lapping tip.
• Designating specific people who are responsible for
different duties when collecting money via banks.

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 INTERNAL CONTROL

Internal control for cash disbursements:

 Paying via banks and minimizing cash payments
 Applying principles of authorization and ratification
 Establishing procedures for approval of cash
disbursements
 Monthly comparing with bank statements and
preparing bank reconciliation

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Part 4

AUDIT PROCEDURE

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 AUDIT PROCEDURE

- Valuation of internal control

- Substantive tests

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 VALUATION OF
INTERNAL CONTROL

1) Figure out about internal control

2) Valuate preliminarily control risk
3) Design and perform tests of control. Assess whether
the internal control procedures have existed and
operated effectively or not?
4) Revaluate control risk and design substantive tests

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 VALUATION OF
INTERNAL CONTROL

1/ Figure out about internal control:

- Create narrative tables and use flowcharts to describe
internal control procedures
- Establish the narrative tables and flowcharts through
interviews, observations and questionnaires

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 VALUATION OF I
NTERNAL CONTROL
2/ Valuate preliminarily control risk:
Based on understanding of internal control procedures,
auditors carry out a preliminary assessment of control risk
for every assertion lower than the maximum
- If the level of assessed control risk is low or the internal
control procedures are effective and efficient, auditors
should perform the tests of control
- If the level of assessed control risk is high and is not able
to be reduced, auditors will not perform tests of controls
should perform the substantive tests at an appropriate
level.

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 VALUATION OF
INTERNAL CONTROL

3/ Design and perform tests of control:

The auditors design and perform tests of control to
gather evidences for the existence and effectiveness
of internal control procedures.
Textbook [1] – Chapter 8:
• Tables 8.3: Control policies and procedures and tests
of control for cash receipts transactions
• Tables 8.5: Control policies and procedures and tests
of control for cash disbursements transactions

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 VALUATION OF
INTERNAL CONTROL

4/ Revaluate control risk and design substantive tests:

Based on the results of tests of control, auditors will
revaluate control risk for each assertion to adjust the level
of performing substantive tests
• Ineffective internal control => increase the level of
performing substantive tests
• Effective internal control => maybe decrease the level of
performing substantive tests

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 SUBSTANTIVE TESTS

Substantive tests includes:

 Analytical procedures
 Tests of details
Audit procedure issued by VACPA: D130

Textbook [1] – Chapter 9 – Table 9.1: Assertions,

objectives and substantive procedures for cash balances

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 SUMMARY

• The contents and features of cash and cash equivalents

• Inherent risk of cash and cash equivalents is assessed as
high.
• Assertions about financial reports and account balances
• Internal controls for cash receipts and cash disbursements
• Audit procedure including valuation of internal control and
substantive tests

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 MULTIPLE-CHOICE
QUESTIONS
Question 1: Which of the following assertions is relevant
to whether the company has title to the cash accounts as
the Balance Sheet date:
a.Existence
b.Completeness
c.Rights and Obligations
d.Valuation and Allocation

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 MULTIPLE-CHOICE
QUESTIONS
Question 2: Which of the following assertions is relevant
to the cash balances reflect the true underlying
economics value of those assets?
a.Existence
b.Completeness
c.Rights and Obligations
d.Valuation and Allocation

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 MULTIPLE-CHOICE
QUESTIONS
Question 3: Inherent risk for cash is usually assessed as
high for which of the following reasons?
a.The volume of transactions flowing through cash
accounts throughout the year makes the account more
susceptible to error.
b.The cash account is more susceptible to fraud because
cash is liquid and easily transferable.
c.Cash can be easily manipulated.
d.All of the above.

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 MULTIPLE-CHOICE
QUESTIONS
Question 4: Which of these following controls represents a
control over cash that is unique to cash accounts?
a.Separation of duties
b.Restrictive endorsements of customer checks
c.Periodic internal audits
d.Competent, well-trained employees

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 MULTIPLE-CHOICE
QUESTIONS
Question 5: Which mix of evidence would be most
appropriate for the following scenario? This is a client where
the auditor has assessed the control risk at the maximum
level.
a.100% tests of details
b.70% tests of details, 10% analytics, 20% tests of control
c.50% tests of details, 10% analytics, 40% tests of control
d.20% tests of details, 40% analytics, 40% tests of control

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 EXERCISES

Textbooks:
• Auditing & Assurance Services in Australia, 6th Edition.
Chapter 09: Page 447 – 9.20
Key References:
• Auditing: A risk-based approach to conducting a quality
audit. Chapter 10: Page 481 – 10.55, 10.59

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 SELF-STUDY

Textbooks:
• Auditing & Assurance Services in Australia, 6th Edition.
Chapter 09: Study Pages 405 – 407
Key References:
• Auditing: A risk-based approach to conducting a quality
audit. Chapter 10: Study Pages 439 – 464
• Auditing. Read chapter VIII
Other References:
• Internal Control. Read chapter VII

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 HOMEWORKS

Key References:
• Auditing: A risk-based approach to conducting a quality
audit. Chapter 10: 10.57
• Auditing Exercises – Chapter VIII
 Multiple-choice questions
 Exercises: 8.21, 8.22, 8.23, 8.24

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 THE END

THANKS FOR YOUR STUDY

SEE YOU IN CHAPTER 6

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