IN this session, I will discuss auditing for cash and financial instruments.
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The general cash account is the focal point of cash for most organizations because virtually all cash receipts and disbursements flow through this account. For example, the disbursements for the acquisition and payment cycle are normally paid from this account, while the receipts of cash in the sales and collection cycle are deposited in the account.
many companies establish a separate imprest payroll account to improve internal control over payroll disbursements. A fixed balance, such as $25,000, is maintained in the imprest payroll bank account
Branch Bank Account
For a company operating in multiple locations, it is often desirable to have a separate bank balance at each location. Branch bank accounts are useful for building banking relations in local communities and permitting the centralization of operations at the branch level.
An imprest petty cash fund is not a bank account, but it is sufficiently similar to cash in the bank to merit inclusion. A petty cash account is often something as simple as a preset amount of cash set aside in a locked cash drawer or safe for incidental expenses. The use of an imprest petty cash fund is more likely in smaller organizations than larger ones to provide immediate funds for small cash acquisitions that can be paid more conveniently and quickly by cash than by check, or for the convenience of employees in cashing personal or payroll checks.
Companies often invest excess cash accumulated during certain parts of the operating cycle that will be needed in the reasonably near future in short-term, highly liquid cash equivalents. These may include time deposits, certificates of deposit, and money market funds. Cash equivalents, which can be highly material, are included in the financial statements as a part of the cash account only if they are short-term investments that are readily convertible to known amounts of cash, and there is insignificant risk of a change of value from interest rate changes.
Financial instruments accounts include investments in marketable securities such as debt and equity securities, derivative instruments, and hedging activities. Investments in financial instruments can be classified as trading securities, available-for-sale securities, or held-to-maturity securities, while derivatives can be classified as assets or liabilities, consistent with financial accounting standards. Companies may purchase marketable securities as a way to temporarily invest excess cash or may also invest in derivative financial instruments as a way of hedging. For example, an airline company will invest in fuel hedges as a way to offset increases in operating fuel costs. We discuss internal control and auditing considerations related to financial instruments following our discussion of the cash accounts.