Audit Procedures for Cash and Bank: Practical Guides

Introduction

In this article, we will cover the audit procedures for cash and bank. This includes the objective, key assertions as well as specific procedures for the audit of cash and bank.

Usually the inherent risk of cash is high because cash has several risky elements. The auditor need to obtain reasonable assurance that the cash and bank balance of the company presented in the financial statements is accurate and they should perform sufficient audit procedures for cash and bank.

Objective of Cash and Bank Audit

Cash and bank audit is considered an important part of the audit because all business transactions are settled through cash and bank accounts and cash is highly liquid asset of a company. The audit objective is auditors should pay more attention on the existence and completeness of cash and bank.

Key Assertions of Cash and Bank Audit

Key assertions for Cash and bank audit are described below:

Existence

Existence assertion is ensuring that the cash and bank balance on the balance sheet really exist at the reporting date.

Completeness

Completeness is ensuring that all cash and bank transactions are completely recorded. The completeness is testing that no cash and bank transactions are missed from the accounting records.

Accuracy

Accuracy is checking that the cash and bank stated on the reconciliation is accurate.

Valuation

Valuation is ensuring that the reported cash and bank balance truly reflect the underlying value of cash and bank.

Presentation and Disclosure

Auditors should check proper presentation and disclosure of cash and bank has been made as per relevant accounting standards.

Key Audit Procedures for Cash and Bank Audit

• The first important task for the auditor is to get a clear understanding of the client’s policy and procedure for cash and bank. This will help the auditor to plan audit procedures for ‘cash and cash equivalents’. They will need to get idea about the number of banks, types of bank accounts, authorized signatories, authorization matrix, bank payment process, petty cash payment process etc.
• The auditor will need to compare cash balances to the prior period in order to examine if there is any fluctuation of cash between the two periods. If there is any fluctuations the auditor will need to evaluate the reason behind it.
• Auditor should send bank confirmation letters to banks to confirm the year end balances. Bank confirmation letter is used for inquiry about the cash amount that the company has with the bank, contingent liabilities and any other outstanding interests. Then verify the balance as per the bank account to the bank confirmation letter.
• The auditor can perform a physical cash count or surprise cash count and obtain a cash count certificate from the client. Cash balance should be verified if there are any material or irregularity suspected. The cash count shall be performed at the same time and for all cash balances including the negotiable securities if any. After the cash count, auditor shall perform the reconciliation and investigate is any discrepancies. Bear in mind that, auditors shall not left alone during the cash counting procedure.
• For bank payments and petty cash payments auditors need to check whether controls are working effectively and the test can be performed on sample basis.
• The auditor should obtain the authorization matrix and the list of authorized signatories and match them. They should inquire whether there is any addition or deletion of authorized signatories in the list and if any they should check those addition or deletion have been informed to the bank.
• They should check the overdraft balances and ensure the balances are reflected in the balance sheet as current liabilities. In addition, auditors shall also consider if there is a legal right to set-off of overdraft balance against the positive bank balances.
• Auditors shall determine if the bank accounts are subject to any restrictions. This is done by inquiring with management. They also need to inquire management if there is any escrow accounts maintain in the company. The management of escrow accounts shall be in compliance with local regulation.
• They should inquire about fixed term deposits and ensure the fixed term deposits that are less than 3 months will be considered as cash and cash equivalents.
• Test for proper classification of cash need to be performed. If an entity has contractual obligations related cash collateral, auditor should examine those agreements to ensure proper classification.
• Analytical testing on the bank account balances need to be performed to see how much bank balances have been increased or decreased and inquiries with management are required about any significant variance.
• If there is any foreign currency bank accounts, auditors need to check the appropriate exchange rate is used for the presentation of those foreign currency account balances.
• Auditor should ensure interest income is correctly recorded in accrual basis rather than cash basis.
• Auditors need to test the bank reconciliation process. Generally, auditors review the bank reconciliation statement at the year-end to ensure the client has taken into account all adjusting and reconciling items. They should verify the reconciliation balances agree with general ledger balance at the year end and the proper reflection of the balance in the financial statements.  In addition, they also can perform the arithmetic check on the bank reconciliation performed by client to ensure the accuracy.
• Auditor shall trace outstanding check as per the bank reconciliation to the cash book prior to the year end and to the bank statement subsequent to the year end. In addition, auditors shall also review the bank reconciliation from prior year and trace the outstanding check to see if those have been cleared. Then, auditor shall obtain explanation for any large or unusual items that have not been cleared during the audit.
• Perform the review or inspection on the cash book and bank statements before and after the year end to see if there are any exceptional entries or transfers which have a material effect on the balance.
• All cash and bank audit procedures need to be properly documented and all audit documents should be dated with authorization of the preparer and reviewer.
• Finally, auditors shall review the disclosure note to financial statements relation to the cash and bank to ensure that it is in accordance with International Financial Reporting Standards or any local regulation.