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Auditing Cash Collection Cycle.

In this video I discuss audit cash collection cycle. ✔️Accounting students and CPA Exam candidates, check my website for additional resources: https://farhatlectures.com/ 📧Connect with me on social media: https://linktr.ee/farhatlectures #cpaexam #accountingstudent #auditcourse Auditors use the same methodology for designing tests of controls and substantive tests of transactions for cash receipts as they use for sales. Cash receipts tests of controls and substantive tests of transactions audit procedures are developed around the same framework used for sales, but of course the specific objectives are applied to cash receipts. Given the transaction-related audit objectives, the auditor follows this process: Determine key internal controls for each audit objective Design tests of control for each control used to support a reduced control risk Design substantive tests of transactions to test for monetary misstatements for each objective As in all other audit areas, the tests of controls depend on the controls the auditor identifies, the extent they will be relied on to reduce assessed control risk, and whether the company being audited is publicly traded. Because the methodology for cash receipts is similar to that for sales, our discussion is not as detailed as our discussion of the internal controls, tests of controls, and substantive tests of transactions for the audit of sales. Instead, we focus on the substantive audit procedures that are most likely to be misunderstood. An essential part of the auditor’s responsibility in auditing cash receipts is to identify deficiencies in internal control that increase the likelihood of fraud. he most difficult type of cash embezzlement for auditors to detect is when it occurs before the cash is recorded in the cash receipts journal or other cash listing, especially if the sale and cash receipt are recorded simultaneously. For example, if a grocery store clerk takes cash and intentionally fails to record the sale and receipt of cash on the cash register, it is extremely difficult to discover the theft. e type of control will, of course, depend on the type of business. For example, the controls for a retail store in which the cash is received by the same person who sells the merchandise and enters cash receipts in a cash register should be different from the controls for a company in which all receipts are received through the mail several weeks after the sales have taken place. It is normal practice to trace from prenumbered remittance advices or prelists of cash receipts to the cash receipts journal and subsidiary accounts receivable records as a substantive test of the recording of actual cash received. This test will be effective only if a prelisting or other record of payments was prepared at the time payments were received. Prepare Proof of Cash Receipts A useful audit procedure to test whether all recorded cash receipts have been deposited in the bank account is a proof of cash receipts. In this test, the total cash receipts recorded in the cash receipts journal for a given period, such as a month, are reconciled with the actual deposits made to the bank during the same period. A difference in the two may be the result of deposits in transit and other items, but the amounts can be reconciled and compared. This procedure is not useful in discovering cash receipts that have not been recorded in the journals or time lags in making deposits, but it can help uncover recorded cash receipts that have not been deposited, unrecorded deposits, unrecorded loans, bank loans deposited directly into the bank account, and similar misstatements. Ordinarily, this somewhat time-consuming procedure is used only when the controls are deficient. In rare instances, when controls are extremely weak, the period covered by the proof of cash receipts may cover the entire year. Lapping of accounts receivable is the postponement of entries for the collection of receivables to conceal an existing cash shortage. The embezzlement is perpetrated by a person who handles cash receipts and then enters them into the computer system. He or she defers recording the cash receipts from one customer and covers the shortages with receipts of another. These in turn are covered from the receipts of a third customer a few days later. The employee must continue to cover the shortage through repeated lapping, replace the stolen money, or find another way to conceal the shortage. This embezzlement can be easily prevented by separation of duties and a mandatory vacation policy for employees who both handle cash and enter cash receipts into the system.