Summary
Highlights
This session introduces the auditing of cash disbursements as a component of the acquisition and payment cycle. It's crucial to ensure that recorded transactions are legitimate, accurate, complete, and properly classified. The audit process involves evaluating internal controls, performing tests of control, and conducting substantive testing to verify financial records' accuracy and integrity.
To ensure accuracy, auditors check that recorded amounts are correct. Key internal controls include internal verification of calculations and independent reconciliation preparation. Tests of control involve observing verification procedures and inspecting bank reconciliations. Substantive testing includes comparing canceled checks and bank records with cash disbursements and recalculating selected transactions.
For completeness, auditors verify that all valid disbursements are recorded, with nothing missing. Companies should use pre-numbered checks in sequence and have monthly bank reconciliations reviewed by an independent person. Tests of control include verifying the sequence of issued checks and observing the bank reconciliation process. Substantive testing involves comparing cash disbursement records with bank statements and tracing canceled checks to the cash disbursement journal.
To confirm occurrence, auditors ensure recorded disbursements actually happened and were for legitimate goods/services. Key internal controls are proper segregation of duties, requiring support documentation for payments (purchase orders, receiving reports, invoices), and approval before issuing checks. Tests of control involve observing and interviewing personnel and vouching canceled checks to authorization records. Substantive testing includes vouching cash disbursement journal entries back to canceled checks, receiving reports, and invoices.
Timeliness, or cutoff, ensures cash disbursements are recorded in the proper period. Companies should record transactions as soon as approved and internally verify transaction dates. Tests of control include inquiring about and observing the recording process. Substantive testing involves comparing transaction dates on checks, bank statements, and accounting records to ensure appropriate period recording.
A multiple-choice question tests the understanding of verifying existing cash disbursement transactions are recorded. The best answer is tracing canceled checks or electronic record disbursements to the related acquisition journal entry. This procedure directly checks if a physical payment has a corresponding entry in the company's accounting records, ensuring transactions are properly recorded.