AUDIT OF CASH & CASH EQUIVALENTS, PART 2

LESSON 1: AUDIT PROGRAM FOR CASH (AUDIT ASSERTIONS / OBJECTIVES / PROCEDURES)

The audit must be performed in order to answer whether all management assertions are valid. The procedures must be
aligned with the objectives related to the assertions.
In the audit of cash, we usually test the following management assertions:

❖ Existence - Cash balances on the balance sheet really exist at the reporting date.

❖ Completeness - Cash balances include all cash transactions that have occurred during the accounting period. No
transaction is not recorded.

❖ Rights and obligations - Client owns and has title to the cash accounts as of the reporting date.

❖ Valuation or allocation - The recorded balances reflect the true value of the cash and cash equivalents.

❖ Presentation and disclosure - Cash is properly classified on the balance sheet and adequate disclosure has been made
in the notes to the financial statements.

ASSERTIONS OBJECTIVES SUBSTANTIVE PROCEDURES

Existence To determine whether cash exists at
year end and cash-related
transactions occur within the year.
▪ Scan through the entries and trace all the unusual
Completeness To ensure that there is no unrecorded
cash, and that all transactions are
recorded in the proper accounting
period.
Valuation To ensure cash balances have been
recorded at their proper valuations.
▪ Compare a sample of (cancelled) cheques with
Cut-off To ensure all transactions were
recorded within the correct reporting
period.
Classification To ensure all transactions have been
recorded within the correct accounts
in the general ledger.
▪ Select samples of cash receipts from cash book and
trace to remittance advices, pay-in slips, and bank
statement.
▪ Select samples of cash payments from cash book
and trace to payment vouchers (with supporting
documents) and bank statements.
items, like contra items, stopped payment items
and cancelled cheques, to support documents
and authorization.
▪ Trace a sample of remittance advices and pay-in
slip to cash receipt journal.
▪ Trace a sample of payment vouchers (with
supporting documents) to cash book.
▪ Compare a sample of remittance advices with
amount in cash receipts recorded in the cash
book.
amounts in cash recorded in the cash book.
▪ Compare the dates for recording a sample of
cash transactions with the dates of cash
deposited in bank or cheques sent.
▪ Examine a sample of cash receipts and payments
transactions for proper classification.

LESSON 2: SPECIFIC AUDIT PROCEDURES DISCUSSED:

✓ Get some info:

In our previous modules, you have learned that you have to obtain detailed knowledge of your client. During cash audit,
that would include knowing about the bank accounts, types of bank accounts and the purpose of each bank account, banking
facilities arrangements, overdraft facilities, bank guarantees, authorized signatories, bank payment and receipt process, and
petty cash processes.

✓ Bank Confirmation

Bank confirmation is one of the easiest things to do during cash audit. There are two main kind of confirmation, as follows:

Positive Negative
Type A Type B (Blank)

Requests that the customer
respond whether or not the
balance is correct
Requests that the customer
respond whether or not the
balance is correct
More common
approach, usually has a
better response rate
Asks the customer to indicate the
amount owed at a certain date
(i.e. fill in the blank)
Higher quality evidence but
usually has a lower response rate
Requests that the customer
respond only if the customer
disagrees with the stated
amount in the letter
Lower quality evidence than
positive confirmations

Firms usually have their own letter formats for bank confirmation. Bank confirmations are sent by the auditor, requesting
the bank to disclose the information directly to the auditor. In a bank confirmation letter, both the auditor and the client will
sign. The client’s authorized signatories will sign in the bank confirmation letter in order to authenticate the auditor’s
request. The bank confirmation letter will have to be printed in audit firm’s letterhead. Ask the bank to confirm the balances
directly to you, auditor. If the bank doesn't send you balance confirmation letters, you can arrange a conversation with the
bank officials and if possible, send the confirmation letters in scanned copy through e-mail. You may also perform
alternative procedures as long as it will result to same output.

✓ Bank Reconciliation/Proof of Cash

After the banks confirm the balances as per their record, you need to match the amounts confirmed with the client’s book
balances. You need to perform bank reconciliation, even when client does this on a monthly basis, for independent
verification. We will have to identify if there are any adjusting entries that are yet to be reconciled.

✓ Post year-end Procedures

After re-performing the bank reconciliations, you will have to check whether the reconciling items have been subsequently
cleared or not. You need to obtain bank statements for the first few months of the subsequent year. Check the items that
were not cleared in the year end and check if they were subsequently cleared. If not, inquire to the management.

✓ Physical Cash Count

You must have to attend during the physical cash count in the year end. Collect a cash certificate from the client and sign
off your worksheet as well by the client. In addition to that to check the control on petty cash balances, you can conduct a
surprise cash count.

✓ Bank Overdrafts

You will have to check the overdraft balances with the bank accounts. Make sure that overdraft balances are reflected in the
balance sheet as current liabilities, except those allowed by the standard to be deducted from asset.

✓ Authorization check

You may obtain from the bank a list of authorized signatories and check whether these signatories are the ones that actually
sign.
✓ Foreign Currency

If there are any foreign currency bank account exists, please do confirm that appropriate exchange rate is used for the
presentation of foreign currency account balances in the financial statements.

✓ Interest Income

Make sure that interest income is properly accounted for in accruals basis instead of cash basis.
LESSON 3: COMMON CASH WORK PAPERS
Work papers normally include the following:
a. An understanding of cash-related internal controls
b. Risk assessment of cash assertions at the assertion level
c. Documentation of any control deficiencies
d. Cash audit program
e. Bank reconciliations for each significant account
f. Bank confirmations