Chapter 23, Problem 1RQ

Explain the relationships among the initial assessed control risk, tests of controls and substantive tests of transactions for cash receipts, and the tests of details of cash balances.

To determine

Identify the relation among the initial assessed control risk, test of controls and substantive tests of transaction for cash receipts and test of details of cash balances.

Explanation of Solution

Cash account is affected by the transaction in most of the cycles. Since, there is relationship between the transaction in various cycles and ending cash account balance of the company, the auditor has to wait to audit the ending cash balance until the results of test of control, substantive test of transactions and test of details analysis of all the transactions are completed and analyzed. The test of cash balances includes bank reconciliation of imprest petty cash, general cash account etc. If the auditor feels the internal control and test of controls and substantive transaction in the acquisition and payment cycle is appropriate to reduce the assessed control risk, they can reduce detailed test of the ending cash balances. However if auditor concludes that the assessed control risk is high, extensive test such as extended bank reconciliation procedures, proof of cash or test of interbank transfers are necessary.