INTRODUCTION

Cash – unrestricted and immediately available for use in current operations

- first item in the current assets section
- more audit time is devoted to the examination of cash balances because cash has a high degree of
inherent risk

- Highly prone to misappropriation, misapplication and other forms of fraud

- Most financial statement items flow through the cash account, such that a misstatement in cash
balance means misstatement of some other accounts

AUDIT OBJECTIVES

1. Obtain an understanding of internal control procedures adopted by the company to safeguard

cash
2. Establish the existence of the recorded amount of cash
3. Establish the completeness of recorded cash
4. Determine that the client has rights to recorded cash
5. Establish that the presentation and disclosure of cash is appropriate

INTERNAL CONTROL OVER CASH

- Auditor should consider control over cash transactions to determine the extent of audit
procedures to be performed
- One of the most important aspects of cash control: segregation of custodian function from the
record keeping function
- Segregation of incompatible duties
o Minimizes fraud – because the act of misappropriation would involve at least 2 persons
 It is unlikely that one will seek the help of another in committing a wrongful act
o Help detect unintentional errors because at least two persons handle diff. aspects of the
same transaction
- No. of individuals involved in cash transactions must be controlled
o Individual responsibilities for cash handling must be fixed & individual duties must be
limited to minimize if not eliminate fraudulent activities involving cash

CONTROLS OVER CASH RECEIPTS

- Should provide assurance that cash which should have been received was in fact received,
recorded correctly and deposited promptly
- Basic principle: No one person should be allowed to collect, handle and deposit cash w/o
additional control features to ensure that all funds are accounted for
- Internal control procedures over cash receipts:
o No one person should be assigned the function of cash handling & record keeping.
o Official receipts must be pre-numbered and sequentially used.
o Each day’s cash receipts must be deposited intact.
o Deposits should be matched with official receipts. The person reconciling the official
receipts with the deposits made should be one other than the person making the
deposit.
 o Cash sales should be recorded at the point of sale. (point of sale system or POS)
o Cash register totals and credit card machines should be balanced daily. Any resulting
cash overage/shortage should be monitored.

CONTROLS OVER CASH DISBURSEMENTS

- Should provide assurance that disbursements are made only for authorized business purposes
and are properly recorded
- Internal control procedures for cash disbursements include the ff.:
o All disbursements must be properly authorized and adequately documented. Adoption
of voucher system, which requires review of supporting documents as support for
disbursements, is highly recommended.
o Payments must be made by checks, electronic fund transfers or from petty cash fund
o Issued checks must be sequentially numbered.
o Checks should be signed by at least 2 persons to prevent fictitious disbursements.
o Check signatories shall be persons in appropriate high levels in the organization.
o Checks issued must be payable to specific entities (company or person) and must not be
made payable to “Cash”
o Periodic bank reconciliations must be made by a person independent of the
authorization, check signing function and cash receipts function.
 Must be made at least once a month to ensure that all deposits and
disbursements are properly made and recorded both by the entity and the bank

AUDIT PROCEDURES

- Involves identifying the risks of material misstatements for cash and gathering audit evidence to
reduce these risks to an acceptable level
- Common risks of MM associated with cash: non-recording of cash transactions, non-existence of
cash balances and recording cash transactions in inappropriate reporting period
- Has to trace the opening balance of cash to prior year’s FS or for repeat engagements, prior
years’ working papers
- Schedule showing the composition of cash items – must be reconciled w/ the opening balance in
the year under audit

AUDITING CASH ON HAND

- To validate the existence of cash on hand, auditor shall conduct a cash count
o Must be conducted in the presence of a cash custodian
o Custodian must be present throughout the count
o Auditor must obtain the signature of the custodian certifying that the fund was returned
intact
o Count of the cash on hand balances and count of other highly liquid instruments must
be made simultaneously to avoid any transfer of funds to temporarily conceal cash
shortage
- In conducting cash count, items counted shall be compared w/ cashier’s accountability
- Items counted may include:
 o Currency and coins
o Checks
o Properly approved PCVs evidencing payments
o IOUs with no supporting vouchers
- Checks counted may include:
o Checks representing collections (dated and post-dated)
o Checks for disbursements (entrusted to custodian)
- Cashier’s accountability – includes all items entrusted to the cashier for w/c he or she is
accountable to the entity or another party
o Imprest balance of the cash fund
o Checks/money items for payment to another
o Collections temporarily handled by the custodian for remittance to the general cashier
o Other collections handled by custodian
o Cashier’s accountability
- Total items counted must equal the cashier’s total accountability. Otherwise, the discrepancy is
a cash overage or cash shortage
- If cashier’s accountability exceeds the items counted – difference is cash shortage
o Unaccounted cash shortage requires requires reclassification either as a receivable from
the cashier or part of miscellaneous expenses
- If the total amount of items counted exceeds the cashier’s accountability – excess is cash
overage (must also be reclassified)
o Cash item representing cash overage must be taken out of the cash fund and deposited
to the general cash in bank account of the company
o Unaccounted cash coverage – miscellaneous income
- Auditor has to bring the cash fund balance equal to the cash items (currency and coins)
o Appropriately composing the undisbursed cash fund
- All non-cash items must be properly reclassified
- Any other cash items belonging to entity not forming part of the cash fund – miscellaneous
collections handled by the cashier, shall be properly recorded and deposited
- Auditor should seek an explanation from an official as to the existence of IOUs as part of the
items counted
- Borrowing by the employees from PCF – may be against the entity’s policy and defeats the
purpose for w/c the PCF is held by the entity
o PCF balance after adjustment – represent only actual cash items counted properly
forming part of the undisbursed cash in the PCF