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, lets have a look into the risk relating to cash balance.
Cash balance is subject to inherent risk of being misappropriation by employees of the entity. Further, entity tends to overstate cash balance to portray better financial position. Ensuring proper segregation of duties mitigates these kinds of risks. Accurate Cash balance helps in making appropriate business related decision.
For example, entity might go for a debt issuance based on the financial records. However, if the balance in the accounting records isn’t reflecting the true cash position then
- Management might reach a conclusion that the entity is short of cash for business activities
- This it cause 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 level. Refer to Debt audit article for having a 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 in nature and applies for 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, Cash balance is tested at year end. However, there is no harm in testing at interim as well. Nature, Extent and Timing of testing depends on the risk associated with this account balance.
Supports requested by 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, 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 the bank account listing with previous year testing workpapers. If its a first year audit, agree the total of all bank account balances to General ledger for testing completeness. Agreeing all the bank balances listed to the Trial balance and Bank statements confirms that listing is complete.
Further, auditor needs to review the board minutes to understand if there are any bank accounts which are not there in 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 electronic means like “confirmation.com”.
- 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 bank statements and tracing these reconciling items.
Points that merit considerations while using Confirmations.com
Assume the Client bank account is held with ABC bank, United States. Auditor directly sends the confirm to ABC Bank at US without confirming the respondent details with client. There was no reply from the banker.
After discussion with the Client, the following is noted
“Bank has a centralized system for sending the bank communications (emails or any other correspondence). The centralized system is located in Canada. ABC bank at US does not have authorization to respond. Its with Canada branch”.
So, confirmation should be addressed to the ABC Bank at Canada. The primary step before sending confirms is always 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, audit team need to complete the work within the 4 to 6 weeks from the period end. By the time auditor realize the confirmation is sent to incorrect respondent then it would have been already very late. It result 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 balance are subject to inherent risk of being misappropriation. Its a general practice to test the cash balance by sending confirmations directly to the banks or financial institution which maintains the bank accounts. Bank reconciliation statements are verified to test the reconciling items (outstanding checks and deposits in transit). Accurate cash and bank balances helps 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.