Auditing the First Thing That I Did

Auditing

The first thing that I did for this audit was to gather the balance sheet and the work papers. This is the basic information that I used to conduct the audit. Having these two things allows me to reconcile the two. Ideally, the work papers and the bank accounts will correspond, and that they will also align with the financial statements. It was found that this was not the case. But the initial step was to gather the information.

The second step was to reconcile the information that I gathered. The work papers, bank accounts and financial statements are three different things, and all of the information should align. In seeking to evaluate these things, several issues were identified. It is not unusual to identify an area of concern in an audit. The response to this step is to check with the accounting department to try to determine how and why the information does not align.

Each issue was itemized, and then examined individually. This allowed the auditor to identify each issue. The CDs in the safe are one issue; the TD Bank account is another. There are other things that have been identified as well, by using basic auditing knowledge. For example, the bookkeeper holds the petty cash, which is something that an experienced auditor would find to be odd.

Reconciliation is the most important aspect of auditing for cash. Every transaction should be recorded in the work papers first, and from there should find its way to the balance sheet. Everything on the balance sheet should correspond with a transaction on the work papers. The balance sheet should reflect all of the transactions. What has happened here is that the recording of transactions is hit and miss, and the movement of cash has been poorly recorded as well. On the balance sheet, cash might be aggregated into a single line item, but there should be a cash statement that outlines the different accounts that the company has, and the balances of those accounts.

The Findings

There are several areas of concern. First, there are things that are not accounted for. It was indicated that there are CDs in the safe, but the controller does not know the details. The details of these CDs should be recorded somewhere, there should be a transaction record for their purchase and they need to be recorded on the balance sheet. This is a major issue that affects the accuracy of the financial statements.

Another issue identified is the TD Bank account. This bank account has been found to exist, but does not appear in the working papers. That is an unacceptable situation -- there needs to be a transaction record that shows the deposit made into that account. Further, the fact that the account was not previously known raises questions about who has control over that account, and why they never reported this to the controller.

The petty cash is another issue. The bookkeeper should not control access to the petty cash. There needs to be a separation between who keeps the books on the petty cash and who disburses it, just as a basic security control. Petty cash disbursements should ideally require two people to approve, but if it is just one person, then the petty cash should be controlled by someone from outside of the accounting department, who would then track the different transactions.

Recommendations

First, a classification system needs to be developed. Right now, the cash is spread out among CDs, bank accounts and petty cash. Each of these needs its own classification so that the company can track its cash movements. A classification systems will help monitor the cash within the organization. The lack of such a monitoring system has resulted in this company having its cash in different places, but even the controller does not know how much cash it has, and where that cash is located. This creates a significant risk for the company of theft or fraud.

Petty cash needs to be handled by someone who does not have access to the books. When the cash and the bookkeeping are handled by one person, that increases the risk of theft or fraud. Thus, petty cash should be handled by someone else, and the movements recorded and reported back to the bookkeeper. Disbursements into petty cash should be handled by a third party as well, so that there is a separation between the person who authorizes funds released into petty cash, and the person who authorizes petty cash disbursements, and a third person to do the bookkeeping. This separation reduces risk significantly.