Audit Cash
Overview
Cash is usually an inherently risky asset on the balance sheet when we audit cash accounts . This
is due to cash may be inappropriately used without proper authorization and wrong account or
incorrect timing of record may be made involving in cash transactions.
In the audit of cash, the inherent risk of cash is usually assessed as high risk because the nature
of cash has several risky elements such as high volume, high liquidity, automation of
transactions, debt covenants, high susceptibility of manipulation, etc.
In assessing the risk of fraud related to the cash, we need to consider how high the level of
client’s business, control and policy related to incentives, opportunities to commit fraud, and
rationalization.
For example, the staff having access to cash think they are being paid too low (incentive). Cash
is physically available to employees (opportunity). And top management takes cash without
proper recording of transactions (rationalization).
Audit Assertions for Cash
In the audit of cash, we usually test the audit assertions included in the table below:
Audit assertions for cash
Existence Cash balances on the balance sheet really exist at the reporting date.
Cash balances include all cash transactions that have occurred during the
Completeness
accounting period.
Rights and obligations The company has title to the cash accounts as of the reporting date.
The recorded balances reflect the true underlying economic value of the
Valuation or allocation
cash and cash equivalents.
Cash is properly classified on the balance sheet and adequate disclosure
Presentation and disclosure
has been made in the notes to the financial statements.
In the audit of cash, we usually focus more on the existence and completeness assertions as we
concern more about whether the cash does actually exist and that cash transactions that should
have been recorded have actually been recorded.
Test of Controls in Audit of Cash
The common controls over cash include segregation of duties, authorization, regular bank
reconciliation, regular cash count, and limiting access to cash.
Usually, after we assess the inherent and fraud risks of cash that could lead to misstatements in
financial statements, we will obtain an understanding of the control system that the client has in
place. This is to make sure if the client’s internal control is effective in preventing or detecting
the risks of material misstatements.
As auditors, we can gain an understanding of the client’s internal control by performing a
walkthrough of the process, making an inquiry to the client’s personnel, observing the control
procedures performed by the client’s personnel, and inspecting the supporting documents. This
understanding provides us with a basis for making a control risk assessment.
Analytical Procedures in Audit of Cash
Financial statement line item like cash doesn’t have a very predictable relationship with other
accounts or non-financial information such as sales with the cost of goods sold or salaries
expense with the number of employees. As a result, there won’t be many analytical
procedures available to use in the audit of cash.
However, we may perform analytical procedures by comparing cash to prior-period and
budgeted figures, as they are useful in alerting to the risks.
Comparing cash to prior-period
In the audit of cash, comparing balances to the prior-period is very useful to examine the
fluctuation of cash between the two periods. This way, we can evaluate the reasons behind any
major fluctuation of cash balances in order to alert to the risks involving cash.
Also, it is very useful in the audit of petty cash this way. This is due to petty cash should always
be the same as the prior period. For example, in a normal circumstance, the petty cash balance at
the end of last period should be the same as the petty cash balance at the end of the current
period; it is because of the imprest system.
We usually discuss with the client’s management when there is any significant fluctuation in the
balances of cash comparing to the prior-period balances.
Checking cash against budgeted figures
In this way of audit cash, we compare the actual cash balances with budgeted figures including
cash from anticipated payments on accounts receivable, cash receipts, and proceeds from debt
and equity.
If there is a big difference between the actual figures and the budgeted figures, we need to
enquire management about the reasons behind. Additionally, the sampling size of the test, for
example in revenues transactions, may also need to be increased. This is so that we make a better
evaluation of whether there are any cash receipts that were not appropriated leading to the
misstatement.
Audit Procedures for Cash
Bank Confirmation
In the audit of cash, bank confirmation is the process to ask for verification or confirmation to
the third party, which is the bank, on the cash accounts and balances that the company has at the
bank. It is done through bank confirmation letter which is usually used for inquiry about
outstanding interests, contingent liabilities and guarantees in addition to the cash amount that the
company has with the bank.
Bank confirmation letter is usually sent out at the early date of the audit fieldwork as the
confirmation process may take sometimes. The request for confirmation from the bank may also
include loans and other accounts in addition to the client’s cash.
The following procedures are usually performed for bank confirmation in audit cash:
Obtain written authority from the client to have in bank confirmation letter in order for
the bank to disclose the necessary information.
Send bank confirmation letter in a standard format to the bank
When the confirmation letter is received from the bank, check whether the bank has
answered all the questions requested for confirmation in the letter
Follow up all points in the bank letter
Bank Reconciliation
The client usually performs bank reconciliation at the end of the month by comparing the cash
balances on its bank statement with the cash balances in the accounting records. In the
procedures of audit cash, we usually review the bank reconciliation statement at the year-end to
make sure that client has taken into account all adjusting and reconciling items, such as deposits
in transit, outstanding check, and bank charges, into the bank reconciliation. In addition, we also
need to check and verify that the adjusted items have been corrected recorded in the balance
sheet.
Following procedures are usually used for bank reconciliation in audit cash:
Check and agree the balances per bank statement shown on the reconciliation to the bank
statement and to the balances shown on confirmation letter received from the bank
Recasting the bank reconciliation to test arithmetic
Review the last period bank reconciliation to see whether they are cleared or carried to
the current period
Trace and verify the adjusting and reconciliation items, such as deposits in transit,
outstanding check, and bank charges to see if they are properly accounted for
Get a cutoff bank statement that shows the transactions after the end of the period to trace
and check on items such as deposits in transit and outstanding check to see if they have
been cleared after year-end
Verify that balances per accounting records shown on the reconciliation agree with the
general ledger account balance the year-end and that this has been properly reflected in
the financial statements.
