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Proof of Cash

Auditors frequently prepare a proof of cash when the client has material internal control
weakness in cash. Proof of cash includes the following:

 a reconciliation of the balance on the bank statement with the general ledger
balance at the beginning of the proof of cash period
 a reconciliation of cash receipts deposited with the cash receipt journal for a
given period
 a reconciliation of cancelled checks clearing the bank with the cash disbursement
journal for a given period
 A reconciliation of the balance in the bank statement with the general ledger
balance at the end of the proof of cash period

The auditor uses a proof of cash to determine whether:

 All recorded cash receipts were deposited

 All deposits in the bank were recorded in the accounting records
 All recorded cash disbursements were paid by the bank
 All amounts that were paid by the bank were recorded.
Test of kitting

Embezzlers occasionally cover a cheating of cash by a practice known as kiting:

transferring money from one bank to another and improperly recording the
transactions.

A useful approach to test for kiting is to list all bank transfers made a few days before
and after the balance sheet date and to trace each to the accounting records for proper
recording.

Audit of Petty Cash

Petty Cash is a unique account because it is frequently immaterial in amount, yet it is

verified on most audits. The most important internal control for petty cash is use of an
imprest fund that is the responsibility of one individual. In addition petty cash funds

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should not be mixed with other receipts and the fund should be kept separate from all
other activities.

When ever a disbursement is made from petty cash, adequate internal controls require
a responsible official’s approval on a pre numbered petty cash form. When the petty
cash balance runs low, a check should be written to the custodian for the
reimbursement of petty cash. The check should be for the exact amount of
expenditures made from the petty cash.

Audit Procedures for Petty Cash

The tests of transactions depend on the number and size of the petty cash
reimbursement and the auditor’s assessed level of control risk. The two most common
procedures to test petty cash are:

1. to count the petty cash balance and

2. to carry out detailed tests of one or two reimbursement transactions.