Audit Cash

Overview

Cash is usually an inherently risky asset on the balance sheet when we audit cash accounts . This is due to cash may be inappropriately used without proper authorization and wrong account or incorrect timing of record may be made involving in cash transactions.

In the audit of cash, the inherent risk of cash is usually assessed as high risk because the nature of cash has several risky elements such as high volume, high liquidity, automation of transactions, debt covenants, high susceptibility of manipulation, etc.

In assessing the risk of fraud related to the cash, we need to consider how high the level of client’s business, control and policy related to incentives, opportunities to commit fraud, and rationalization.

For example, the staff having access to cash think they are being paid too low (incentive). Cash is physically available to employees (opportunity). And top management takes cash without proper recording of transactions (rationalization).

Test of Controls in Audit of Cash

The common controls over cash include segregation of duties, authorization, regular bank reconciliation, regular cash count, and limiting access to cash.

Usually, after we assess the inherent and fraud risks of cash that could lead to misstatements in financial statements, we will obtain an understanding of the control system that the client has in place. This is to make sure if the client’s internal control is effective in preventing or detecting the risks of material misstatements.

As auditors, we can gain an understanding of the client’s internal control by performing a walkthrough of the process, making an inquiry to the client’s personnel, observing the control procedures performed by the client’s personnel, and inspecting the supporting documents. This understanding provides us with a basis for making a control risk assessment.

Analytical Procedures in Audit of Cash

Financial statement line item like cash doesn’t have a very predictable relationship with other accounts or non-financial information such as sales with the cost of goods sold or salaries expense with the number of employees. As a result, there won’t be many analytical procedures available to use in the audit of cash.

However, we may perform analytical procedures by comparing cash to prior-period and budgeted figures, as they are useful in alerting to the risks.

Comparing cash to prior-period

In the audit of cash, comparing balances to the prior-period is very useful to examine the fluctuation of cash between the two periods. This way, we can evaluate the reasons behind any major fluctuation of cash balances in order to alert to the risks involving cash.

Also, it is very useful in the audit of petty cash this way. This is due to petty cash should always be the same as the prior period. For example, in a normal circumstance, the petty cash balance at the end of last period should be the same as the petty cash balance at the end of the current period; it is because of the imprest system.

We usually discuss with the client’s management when there is any significant fluctuation in the balances of cash comparing to the prior-period balances.

Checking cash against budgeted figures

In this way of audit cash, we compare the actual cash balances with budgeted figures including cash from anticipated payments on accounts receivable, cash receipts, and proceeds from debt and equity.

If there is a big difference between the actual figures and the budgeted figures, we need to enquire management about the reasons behind. Additionally, the sampling size of the test, for example in revenues transactions, may also need to be increased. This is so that we make a better evaluation of whether there are any cash receipts that were not appropriated leading to the misstatement.

Audit Procedures for Cash

Bank Confirmation

In the audit of cash, bank confirmation is the process to ask for verification or confirmation to the third party, which is the bank, on the cash accounts and balances that the company has at the bank. It is done through bank confirmation letter which is usually used for inquiry about outstanding interests, contingent liabilities and guarantees in addition to the cash amount that the company has with the bank.

Bank confirmation letter is usually sent out at the early date of the audit fieldwork as the confirmation process may take sometimes. The request for confirmation from the bank may also include loans and other accounts in addition to the client’s cash.

The following procedures are usually performed for bank confirmation in audit cash:

• Obtain written authority from the client to have in bank confirmation letter in order for the bank to disclose the necessary information.
• Send bank confirmation letter in a standard format to the bank
• When the confirmation letter is received from the bank, check whether the bank has answered all the questions requested for confirmation in the letter
• Follow up all points in the bank letter

Bank Reconciliation

The client usually performs bank reconciliation at the end of the month by comparing the cash balances on its bank statement with the cash balances in the accounting records. In the procedures of audit cash, we usually review the bank reconciliation statement at the year-end to make sure that client has taken into account all adjusting and reconciling items, such as deposits in transit, outstanding check, and bank charges, into the bank reconciliation. In addition, we also need to check and verify that the adjusted items have been corrected recorded in the balance sheet.

Following procedures are usually used for bank reconciliation in audit cash:

• Check and agree the balances per bank statement shown on the reconciliation to the bank statement and to the balances shown on confirmation letter received from the bank
• Recasting the bank reconciliation to test arithmetic
• Review the last period bank reconciliation to see whether they are cleared or carried to the current period
• Trace and verify the adjusting and reconciliation items, such as deposits in transit, outstanding check, and bank charges to see if they are properly accounted for
• Get a cutoff bank statement that shows the transactions after the end of the period to trace and check on items such as deposits in transit and outstanding check to see if they have been cleared after year-end
• Verify that balances per accounting records shown on the reconciliation agree with the general ledger account balance the year-end and that this has been properly reflected in the financial statements.