Cash in a nutshell (its a big nutshell)
1. Confirm directly with bank: There is a form that is sent to the client’s current bank and former banks requesting the account numbers and balances in the accounts on the balance sheet date. This form is mailed from the bank directly to the auditor. Here is the one that we use to confirm accounts. I have it shared on my Amazon Cloud drive. If you have any problems opening it, I'll get with Jeff to figure out a better way to get this to you.
https://www.amazon.com/clouddrive/share?s=55pYRHJ9SsQo-qZ4rNo_kE
Why: This is done to verify the cash balance. You use the form the bank returns to you and compare it to the bank reconciliation and the cash transfer schedule. Cash is the easiest asset to steal or manipulate, so you never take the client’s word for the cash balance. You ALWAYS get confirmation from the outside source.
2. Inspect Bank Debit Memorandum – A bank debit memo is a withdrawal of cash, remember that the client’s cash is a liability (credit) on the bank’s books.
Why: Really, why are they withdrawing cash or are they transferring cash from one account to another and was the in/out recorded in the proper period? If the deposit is posted in the clients’ books on 12/31 but the debit memo is posted in the clients’ books on 1/1 then cash is overstated at 12/31 by the amount of the debit memo. A withdrawal of cash should have proper documentation as to WHY! Most thieves/embezzlers’/ idiots have enough sense to NOT do this on the last day of the year so debit memo’s need to be checked for several months.
3. Trace items on the cutoff statement to the bank reconciliation – The cutoff statement is a statement that the bank provides that has transactions for a couple of weeks or even a month after the close of the fiscal year.
Why: You trace the outstanding checks and deposits in transit on the final bank recon of the fiscal year to the cut off statement to make sure they cleared the bank. An outstanding check may look like a normal outstanding check on the bank recon but if it hasn't cleared the bank by the cut off statement date, then it could be a fictitious expenditure that was used to cover the theft of cash. Remember all you need is a debit and a credit to make something balance. A credit to a customer’s A/R account because they paid their bill and a debit to an expense (a check) and an employee can walk away with cash.
4. Confirm the receipt of a check with the payee – Send the vendor a confirmation with the check number, the invoice they are paying, the amount and date of the check in question. The vendor returns this to the auditor and NOT to the client.
Why: This can be a positive verification, where the vendor continues to get the confirmation letters until they send back a response, or a negative confirmation, where the vendor only sends the form back if there is a discrepancy. This is done to make sure that checks are actually sent, are printed for the correct amount and are dated on the correct date. You are looking to make sure the client actually paid their bill and that A/P is correct.
5. Deficiency of design – This one is all about internal control so I’m not going into a lot of detail.
Why: Do we have the proper segregation of duties? Do we have an independent individual reconciling the bank statements? In a small operation, does the owner oversee cash transactions?
6. What is all of this crap? – It’s all about making sure that cash is correct because it’s the easiest asset to steal and the easiest way to manipulate the financial statements to make them look better than they really should.
7. How do you remember all of it? Think about how someone could steal from the client or the investors.
I hope I didn't miss anything or have anything wrong, please remember that I had major surgery Tuesday, so if I made a mistake, please be kind! Good Luck!
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