Briefly summarize the steps necessary to audit cash. Please incorporate the audi

Question

Briefly summarize the steps necessary to audit cash. Please incorporate the audit risk model in your response.

What steps does an auditor ordinarily take when confirming cash balances held in deposits with financial institutions?

Something Went Sour at Parmalat There was much confusion when Italian dairy food giant Parmalat defaulted on a $187 million bond payment in mid-November 2002. Default on a bond payment seemed difficult to bel considering that a Parmalat subsidiary in the Cayman Islands had a $4.9 billion cash balance in Bank of America account. The problem was that the cash account did not exist. PROBLEM Subsequent investigation revealed that, over a 15 year period, Parmalat's management had fal sified accounts and created assets to hide losses of $10 billion from Parmalat's Latin American operations. Other allegations charged that Parmalat's management had lied about repurchasing $3.6 billion in bonds, which they had never done. By hiding losses and increasing assets on its bal ance sheet, Parmalat was able to continue to borrow enough money from investors and creditors to conceal and perpetuate the massive fraud AUDIT APPROACH From 1990 to 1999, the Italian branch of Grant Thornton audited Parmalat. Under Italian law, how ever, Parmalat was forced to change auditors periodically and chose the Italian branch of Deloitte Touche Tohmatsu (Deloitte & Touche SpA) to be the company's new auditor in 2000. Grant Thorm ton, however, continued to audit Parmalat's offshore subsidiaries located in the Cayman Islands, first inquired about the Cayman Islands account in December 2002 and The new auditors received a letter on Bank of America letterhead in March 2003, confirming the existence of the account. The letter, however, was a forgery, created in Parmalat's headquarters. Nevertheless, the $4.9 billion was listed on the subsidiary's balance sheet as of December 31 dated into Parmalat's balance sheets dated December 31. 2002, and June 30, 2003 , 2002, and was consoli The auditors missed several red flags. First, the size of the account, on its own, should have been a red flag. It is very unusual for a large company to have so much cash in a single bank account. In addition, between January 2000 and September 2003, Parmalat raised more than $5 billion in debt offerings. With so much cash available in the Cayman Islands, why was Parmalat continuing to borrow money? Second, the communication received from the Bank of America was in the form of a fax (see Parmalat Exhibit 1), which raises two issues. First, a fax transmission is not subject to the same level of control as returning an original confirmation. Essentially, a fax can be sent from almost anywhere, and the originating phone number can be falsified by simply changing the phone num- mitting fax machine. A mailed confirmation, however, passes through eral mail system and is postmarked with the originating zip code. Also, this particular fax smudged, raising more suspicions. Forgers routinely "age" their copying them to ob should have followed up directly with the bank "originals" by repeatedly photo- scure any telltale photocopying lines. Given these circumstances, the auditors Third, when such large balances represent a significant portion of a company's balance sheet (in this case, 38 percent of Parmalat's assets were in the subsidiary's bank account), auditors should take additional care to obtain further corroboration. All told, the combination of a larg bank account and a questionable form of confirmation should have provided Deloitte & Touche SpA with sufficient warning to dig deeper DISCOVERY Parmalat management also told Deloitte& Touche SpA that the company had a S6 investment in an open-ended mutual fund that it could access at any time. T was unsuccessful in its attempts t management's claims, Deloitte & Touche SpA included a qualification in its a highlighting the lack of e s to retrieve the funds. Because no evidence was available to s company, however dit re vidence and alerted regulators of suspicions of a larger fraud view rep ort Initial investigation revealed that massive were missing or nonexistent. Parmalat and its subsidiaries filed for bankruptcy protection on December 27, 2003. amounts (estimates as high as $19 bil lion) of assels

Explanation / Answer

Ques 1)
When udit is conducted of all items of cash book it is known as cash audit,the auditor has to check the reciepts and payments made through cash with the supporting documents or vouchers

Audit check points cash transactions:
a)Internal control system:the internal control system of entity are strong enough that all transactions are recorded correctly and to give protection against losses through fraud ,waste , mistakes ,etc.
b)Correctness of book keeping records/accounting records:detailed checking of the record of transactions for verifying the entries that have been made in books of accounts according of system of accounting which is regularly followed.
c)observance of accounting principles:the transaction should be recorded in the books of accounts having regards to principles of accounting
-distinction being drawn between revenue and capital expenditure and similarly between capital and revenue receipts
-the expenses or cost should be matched to the income or benefit
d)evidence of transactions:
two kinds of evidence internal evidence generated within organisation and external evidence which are confiramtions from third parties.generally third party confirmations are preffered over internal evidence.
e)validity of transactions:any legal provision if any having bearing of the accounts of the entity under audit
the rules or regulation governing the internal working of organisation
or where possible any contract involved involving transaction of cash

The risks are very internal as there is very little chance of any external party handling cash of the company

Ques 2)Standard bank confirmation requests should be signed by a client officer.
Banks usually will not release information without client permission. Auditors should be very careful that the bank’s address is reliable and not subject to alteration by the client in such a way as to misdirect the confirmation. so the banks authirosed signatory and stamped statement should be relied on.
the request should seek information the recipient can supply, like the amount of a balance. the audit firm should control and mail the confirmations, not be given to client personnel for mailing.
Pay close attention to the period of the statement issued
Auditing standards requires direct communication. Responses should be returned directly to the audit firm not to the client.

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