Cash Management and Internal Controls

This assignment focuses on the significance of physical verification of assets and periodic reconciliation statements in managing cash resources effectively. It highlights the need for management to conduct regular physical verifications and prepare reconciliation statements to ensure control over its cash resources. The assignment also stresses the auditor's responsibility in reviewing these statements to evaluate the effectiveness of management's internal controls.

Running Head: AUDITING
Audit
Name of the Student:
Name of the University:
Authors Note:

2AUDITING
Table of Contents
Trial Balance:...................................................................................................................................4
Income Statement:...........................................................................................................................5
Balance sheet:..................................................................................................................................5
1.0 Audit planning:..........................................................................................................................7
1.1 Analytical Review:............................................................................................................8
1.2 Preliminary judgment of materiality:................................................................................8
2.0 First account selected:................................................................................................................8
2.1 Rationale for selection:..........................................................................................................9
2.2 Assertion and explanation:....................................................................................................9
2.3 Recommended Audit procedure:...........................................................................................9
3.0 Second account selected:.........................................................................................................10
3.1 Rationale for selection:........................................................................................................10
3.2 Assertion and explanation:..................................................................................................10
3.3 Recommended audit procedure:..........................................................................................10
4.0 Third account selected:............................................................................................................10
4.1 Rationale for selection:........................................................................................................10
4.2 Assertion and explanation:..................................................................................................11
4.3 Recommended audit procedure:..........................................................................................11

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5.0 Fourth account selected:..........................................................................................................11
5.1 Rationale for selection:........................................................................................................11
5.2 Assertion and explanation:..................................................................................................11
5.3 Recommended audit procedure:..........................................................................................12
6.0 Fifth account selected:.............................................................................................................12
6.1 Rationale for selection:........................................................................................................12
6.2 Assertion and explanation:..................................................................................................12
6.3 Recommended audit procedure:..........................................................................................13
7.1 Sixth account selected:.......................................................................................................13
7.1 Rationale for selection:........................................................................................................13
7.2 Assertion and explanation:..............................................................................................13
7.3 Recommended audit procedure:......................................................................................13
8.0 Seventh account selected:........................................................................................................14
8.1 Rationale for selection:........................................................................................................14
8.2 Assertion and explanation:..................................................................................................14
8.3 Recommended audit procedure:..........................................................................................14
References:....................................................................................................................................16

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Trial Balance:
Cerise Enterprises
Trial Balance
Particulars Jul 1, 2016 - June 30, 2017
Debit Credit
Cash at Bank 82,266.67
Accounts receivable 134,090.00
Inventory 181,595.00
Machinery 71,000.00
Accumulated Depreciation 34,491.35
Motor Vehicles 66,000.00
Accumulated Depreciation 30,479.53
Furniture 7,400.00
Accumulated Depreciation 3,142.25
Bank Loan 230,000.00
Sales 189,000.00
Cost of sales 69,500.00
Consultancy fees 59,250.00
Interest income 48.00
Bank charges 348.00
Depreciation 21,866.09
Interest expense 11,500.00
Printing 231.00
Repairs and Maintenance 1,320.00
Wages 48,000.00
Superannuation 3,263.33
Owner's Equity 151,968.96
698,380.09 698,380.09
On the basis of the above Trial balance the income statement and the Balance sheet of Cerise
Enterprise have been prepared below.

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Income Statement:
Income Statement
2016-17 2015-16
Revenue: Amount ($) Amount ($) Amount ($) Amount ($)
Sales 189,000.00 187,450.00
Consultancy fees received 59,250.00 57,000.00
Interest income 48.00 50.00
Total revenue 248,298.00 244,500.00
Expenditures:
Cost of sales 69,500.00 63,595.00
Interest expenses 11,500.00 11,500.00
Depreciation 21,866.09 15,863.33
Bank charges 348.00 350.00
Printing 231.00 250.00
Repairs and Maintenance 1,320.00 5,050.00
Wages 48,000.00 53,000.00
Superannuation 3,263.33 4,770.00
Total Expenses 156,028.43 154,378.33
Net income 92,269.57 90,121.67
Balance sheet:
Balance Sheet:
Assets
2016-17 2015-16
Amount ($) Amount ($) Amount ($) Amount ($)
Non-current assets
Machinery 71,000.00 65,000.00
Motor Vehicles 66,000.00 66,000.00
Furniture 7,400.00 7,400.00
144,400.00 138,400.00
Current Assets
Cash at Bank 82,266.67 80,000.00
Accounts receivable 134,090.00 111,000.00
Inventory 181,595.00 174,000.00
397,951.67 365,000.00

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Total Assets 542,351.67 503,400.00
Liabilities and owners' equity
Non-current liabilities
Bank Loan 230,000.00 230,000.00 -
Accumulated Depreciation 68,113.14 47,595.00
Owners' fund:
Owner's Equity 151,968.96 135,683.33
P / L Account balance 92,269.57 90,121.67
Total liabilities 542,351.67 503,400.00

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1.0 Audit planning:
In order to select seven accounts for the purpose of auditing an innovative approach has been
used to enhance the effectiveness of auditing process. A fluctuation model has been created on
the basis of the figures containing in trial balance to measure the fluctuation in debit and credit
items of the organization (Abbottet al. 2016). This has helped us to identify abnormal
fluctuations in certain items and accordingly the selection of such seven accounts have been
made to check the reason for such abnormal fluctuation in these items. Here are the fluctuations
in the trial balance items with percentage of fluctuation taking the balances of June 30, 2016 as a
base.
Cerise Enterprises
Trial Balance
Fluctuation in %
Debit ($) Credit ($) Debit ($) Credit ($)
Cash at Bank 2,266.67 - 2.83
Accounts receivable 23,090.00 - 20.80
Inventory 7,595.00 - 4.36
Machinery 6,000.00 - 9.23
Accumulated Depreciation - 10,116.35 41.50
Motor Vehicles - -
Accumulated Depreciation - 9,479.53 45.14
Furniture - -
Accumulated Depreciation - 922.25 41.54
Bank Loan - -
Sales - 1,550.00 0.83
Cost of sales 5,905.00 - 9.29
Consultancy fees - 2,250.00 3.95
Interest income - (2.00)
Bank charges (2.00) - (0.57)
Depreciation 6,002.76 - 37.84
Interest expense 0.00 -
Printing (19.00) - (7.60)
Repairs and Maintenance (3,730.00) - (73.86)
Wages (5,000.00) - (9.43)

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Superannuation (1,506.67) - (31.59)
Owner's Equity - 16,285.63 12.00
1.1 Analytical Review:
Analytical review include use of different mathematical and statistical techniques such as use of
fluctuation model to find out the accounts which have shown abnormal fluctuation in the
current year; use of ratio analysis to assess whether there has been abnormal changes to
profitability, liquidity and solidarity ratios of an organization (Arenset al. 2016).
In case of Cerise Enterprise, the sales of the organization in the year ending on June 30,
2017 has only increased by a mere 0.83% from the sales of previous year. However, the cost of
sales for the same period of $69500 has increased by almost 10%, 9.29% to be precise, from the
cost of sales of the previous year of $63595. Thus, normally the gross profit ratio of the
organization has certainly dipped by almost 9% from the previous year. Finding out the reason
for the same is also one of the objectives which an efficient audit system will be able to achieve
(Badolatoet al. 2014).
1.2 Preliminary judgment of materiality:
In case of Cerise Enterprise the materiality has been judged taking into consideration a certain
percentage of an item’s amount to the overall amount of revenue, expenditures, asserts and
liabilities of such an item is concerned. Thus, in case of an item of income if the same is at least
5% of the total revenue of the organization then the item has been considered as material
otherwise not much time and planning has been expended on such item (Bierstakeret al. 2014).
2.0 First account selected:
Accounts receivable

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2.1 Rationale for selection:
Accounts receivable 134,090.00 111,000.00 23,090.00 - 20.80
The main reason for selecting this account is the increase by 20.80%. This account is also
selected to verify that no fraud sales is included in the account for inflating sales figure.
2.2 Assertion and explanation:
The Accounts receivable; the balances of accounts receivable ledger has increased by
almost 21% from the previous year thus, this shall be audited properly. The audit procedure is
performed on account receivable to verify the audit assertion of existence of sales.
2.3 Recommended Audit procedure:
The Accounts receivable of the organization has shown substantial increase in a year. A
21% increase in accounts receivable balance can be a very positive thing but it can also be a
concerning one. The increase in accounts receivable balance will be justified and more than
welcome if the same is corresponded to substantial increase in sales. Thus, if the sales of an
organization remain more or less similar to previous year’s sales then an increase of 21% in
accounts receivable balance is certainly not a welcoming change (Caoet al. 2015).
The credit sales recording procedure firstly has to be checked and verified. The whole
credit sales procedure in the organization will have to be checked to ensure that the standard
credit sales procedure is followed. In case of any deviation in the procedure the same shall be
noted and reported to the management (Coderre 2015). The system of payments to be received
from the customer is to be checked to find out whether there is any loophole in the system which
can be sued by the employees to rob the organization. Assessing the due time allowed to the

10AUDITING
customers and whether the management is able to collect the dues within such time are also to be
checked and reported accordingly.
3.0 Second account selected:
Depreciation accounting.
3.1 Rationale for selection:
Depreciation 21,866.09 15,863.33 6,002.76 - 37.84
The deprecation account is selected for increase in the expenditure in the current year.
The deprecation is non-cash expenditure therefore sudden increase in depreciation indicates that
the company is trying to show decreased profit.
3.2 Assertion and explanation:
The depreciation accounting is an important element in a financial statement. In case of
this organization the annual depreciation has increased by 37.84% from the previous year thus,
depreciation account has also been selected in this document for the auditing purpose. The
assertion that is tested in this is the accuracy.
3.3 Recommended audit procedure:
Firstly, the method followed by the organization will have to be checked to see whether
the method is appropriate for the organization (Gambettaet al. 2016). The consistency of
following such method of depreciation is to be assessed and it is to be seen whether the
organization has changed the method of providing for depreciation in recent years, if yes, the
reason for such change has to be verified.

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4.0 Third account selected:
Repair and maintenance account.
4.1 Rationale for selection:
Repairs and Maintenance 1,320.00 5,050.00 (3,730.00) - (73.86)
This account is selected because there have been rapid decline in the expenditure. The
rapid decrease in this expenditure requires significant attention.
4.2 Assertion and explanation:
Repair and maintenance is one of the accounts that is most prone to misuse due to its
generality. In addition, the fluctuation in the accounts in the current year is significant though,
the expenditure under this head has reduced substantially but the reason for the same shall be
assessed. The assertion that should be tested is the occurrence of the repair and maintenance.
4.3 Recommended audit procedure:
Firstly, it is to be seen that whether the organization has any annual contract with any
organization to conduct repairing and maintenance related works within the organization, if yes,
then the contract shall be verified to check whether the payments have been made in accordance
with such contract (Gaynoret al. 2016). In case no such annual contract exist then it is to be
checked whether the management follows the standard procedure of inviting quotations and
accordingly, gives the repairing and maintenance contract to the lowest bidder. The method of
payment is also to be checked and assessed to ensure there is no misuse of funds in the name of
repair and maintenance.

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5.0 Fourth account selected:
Inventory has been selected for its sheer importance to the smooth functioning of the
organization.
5.1 Rationale for selection:
Inventory 181,595.00 174,000.00 7,595.00 - 4.36
The account is selected because inventory has increased by 4.36%. It is an important
account and has impact on the profit.
5.2 Assertion and explanation:
Inventory is the most important resources required by an organization to run its
operations and functions. Considering its huge important it is of utmost importance for the
organization to manage the inventory efficiently hence, it has been selected for auditing purpose
to assess the control of the management on inventory. The assertion that should be checked in
the inventory is the completeness of the recording of the transaction related to inventory.
5.3 Recommended audit procedure:
As an auditor,it would essential to know the system that is in place and used by the
management to manage the inventory of the organization. FIFO, LIFO, average cost are few of
the most used methods followed by management around the globe for inventory control. The
auditor will have to check whether the management follows the appropriate method to manage
inventory and the same method has been followed throughout the year or not (Karimet al. 2017).
6.0 Fifth account selected:
Fixed assets such as machinery, motor vehicles and furniture.

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6.1 Rationale for selection:
Machinery 71,000.00 65,000.00 6,000.00 - 9.23
Accumulated Depreciation 34,491.35 24,375.00 - 10,116.35 41.50
Motor Vehicles 66,000.00 66,000.00 - -
Accumulated Depreciation 30,479.53 21,000.00 - 9,479.53 45.14
Furniture 7,400.00 7,400.00 - -
Accumulated Depreciation 3,142.25 2,220.00 - 922.25 41.54
6.2 Assertion and explanation:
Fixed assets are used for long period of time and essential to the long term future of an
organization. Considering the importance of keeping proper control on fixed asset, it has been
decided that the auditing procedure shall be conducted on the fixed assets including physical
verification. The assertion that is checked is the existence and the accuracy is verified in
performing the audit procedures.
6.3 Recommended audit procedure:
Fixed assets are assets which are generally used for more than a year to run critical business
operations within an organization. Conducting physical verification of fixed assets to be sure of
their existence and ownership to the organization is an important aspect of auditing and thus, to
be followed in this case (Shandellet al. 2017). The audit procedure shall also include verification
of the related documents certifying the ownership of such assets as well as the condition and
situation in which these have been stored.
7.1 Sixth account selected:
Wages owing to its importance to an organization.

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7.1 Rationale for selection:
Wages 48,000.00 53,000.00 (5,000.00) - (9.43)
It is selected as the expenditure has declined by 9.43%
7.2 Assertion and explanation:
Wages are paid to the workers of an organization. It is important for an organization to
continue operation in the long run and to do that it must give the workers their dues on time and
in accordance with the minimum wage rate the workers deserve. Thus, auditing process would
not only check the wages as an account but also as a liability of the organization (Suryanto
2016). The assertion that is tested in performing audit procedure is the completeness.
7.3 Recommended audit procedure:
The organization should keep a proper register which shall contain the details about all the
workers of the organization. The auditor apart from checking such register shall also check the
attendance register of workers to see whether the organization has make payment to the workers
in accordance the attendance register. The payment method is also to be assessed and checked
for any loophole. Whether the wages are paid directly to the bank accounts of the workers or by
cash is also to be checked. In case cash payment the organization should be advised to make the
payments through bank accounts of the workers.
8.0 Seventh account selected:
Cash in hand and at bank for the vulnerability of it.

15AUDITING
8.1 Rationale for selection:
Cash at Bank 82,266.67 80,000.00 2,266.67 - 2.83
This account is selected as there has been increase in the balance.
8.2 Assertion and explanation:
One of most prone areas to fraud and error is cash in hand and at bank due to its liquidity
and immense value. Thus, simply to ensure that the management of the organization has due
control over its cash resources, cash in hand and at bank has been selected for auditing propose
(Wahlenet al. 2014). The assertion that is tested is the existence.
8.3 Recommended audit procedure:
The cash management system of the organization firstly has to be verified to assess
whether the system is standard or not. It is to be seen that the cashier is not allowed to maintain
the accounts and the vice a versa. Periodic physical verification of cash has to be conducted by
the management thus, the auditor should check whether the management has conducted such
physical verification or not. Periodic reconciliation statement shall be prepared and the auditor
shall check such statement to assess the control of the management over its cash resources.

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