Auditing Cash Balance is probably one of the quick audit procedures.
The Major Audit procedures for Cash are as simple as sending confirmations.
Before understanding the substantive audit procedures for cash, let’s examine the cash balance risks.
Cash balance is subject to the inherent risk of being misappropriated by employees of the entity.
Further, the entity tends to overstate cash balance to portray a better financial position.
Ensuring proper segregation of duties mitigates these kinds of risks. Accurate Cash balance helps in making appropriate business-related decisions.
For example, the entity might go for a debt issuance based on the financial records. However, if the balance in the accounting records doesn’t reflect the true cash position then
- Management might conclude that the entity is short of cash for business activities
- This causes unnecessary debt issuance costs or interest charges
Cash Risk Assessment
Before performing audit procedures for cash, we need to assess the risk at both account balance and disclosure levels. Refer to the Debt audit article for an understanding of how to perform risk assessment.
Note: The Risk assessment procedures in the auditing debt article are not specific to debt or loans. Those are very generic and apply to any account balance risk assessment.
What are the supports requested by the audit team from the client?
It depends on the testing period. In General, the Cash balance is tested at year-end. However, there is no harm in testing in the interim as well. The nature, Extent, and Timing of testing depend on the risk associated with this account balance.
Supports requested by the audit team from the client:
- Listing of Bank Accounts as of testing date
- Bank Statements
- Bank Reconciliation Statements
Prerequisites for Cash/Bank Testing
Before sending confirmations, the auditor needs to test the listing of bank accounts for completeness and accuracy.
Are you having a Why question?
Listing of bank accounts is a support provided by the client. We need to test such support before relying on it and used for substantive procedures
How do we test the Accuracy and Completeness?
Test the accuracy by agreeing the banks per listing with the GL’s per Trial balance.
Ensure the completeness of Cash and Bank Accounts by agreeing on the bank account listing with the previous year’s testing workpapers. If it’s a first-year audit, agree the total of all bank account balances to the General ledger for testing completeness. Agreeing all the bank balances listed to the Trial balance and Bank statements confirms that the listing is complete.
Further, the auditor needs to review the board minutes to understand if there are any bank accounts that are not there in the listing.
Audit procedures for cash:
The following are the substantive audit procedures for cash:
- Confirmation: Sending Confirmations to all the bank accounts either physically or electronically. There is a website that acts as an intermediary for Auditors and Third parties confirming the balance. For example, Confirmation.com is one such intermediary.
- Reconciling items: Obtain the bank reconciliation statements for all the bank accounts and test the reconciling items. Reconciling items consists of additive items and subtractive items. Verifying the reconciling items through obtaining the subsequent month’s bank statements and tracing these reconciling items.
Points that merit consideration while using Confirmations.com
Runners Insight
Auditors are tending more towards electronic means of confirmation without the need to visit the banker/financial institutions physically. It’s just a click of a button. Need to mention the fact of virtual working environment, which made it nearly a mandatory way of sending the confirms through other than physical means. These factors helped confirmation.com to gain more popularity and use.
While sending confirmations through confirmation.com, auditors need to consider the following aspects:
1. Time
Confirmation.com takes at least 14 days time to respond to the confirmation. Considering the date of issuance of the audit report or filing, the auditor needs to plan to send confirms well in advance to avoid unnecessary issuances.
2. Choose the appropriate sender:
If the respondent details are incorrect then confirmation.com doesn’t provide any refund. The responsibility of ensuring to add correct details lies with the audit team.
How about an example?
Let us look into the below practical example to understand this better.
Example
Assume the Client’s bank account is held with ABC Bank, United States. The auditor directly sends the confirmation to ABC Bank in the US without confirming the respondent details with the client. There was no reply from the banker.
After a discussion with the Client, the following is noted
“The bank has a centralized system for sending the bank communications (emails or any other correspondence). The centralized system is located in Canada. ABC Bank in the US does not have authorization to respond. It’s with the Canada branch”.
So, confirmation should be addressed to the ABC Bank of Canada. The primary step before sending confirms is always to check with your clients for appropriate respondent details even in case of recurring audits.
Here, the point to be noted is time and dollars spent. Generally, the audit team needs to complete the work within 4 to 6 weeks from the period end. By the time the auditor realizes the confirmation is sent to the incorrect respondent then it would have been already very late. It results in unnecessary trouble at the last moment. So, this is causing unnecessary extra costs and time. Therefore, consider the above two best practices while sending confirms to avoid any intermittent issues.
Audit Procedures for Cash Conclusion:
Cash and Bank balances are subject to the inherent risk of being misappropriated. It’s a general practice to test the cash balance by sending confirmations directly to the banks or financial institutions that maintain the bank accounts. Bank reconciliation statements are verified to test the reconciling items (outstanding checks and deposits in transit). Accurate cash and bank balances help in making liquidity-related decisions such as issuance of debt in case of less cash available or repayment in case of availability of Excel cash.
