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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).

Audit Assertions for Cash

In the audit of cash, we usually test the audit assertions included in the table below:

Audit assertions for cash

Cash balances on the balance sheet really exist at the reporting

Existence
date.
 Completeness Cash balances include all cash transactions that have occurred
during the accounting period.

Rights and The company has title to the cash accounts as of the reporting
obligations date.

Valuation or The recorded balances reflect the true underlying economic value
allocation of the cash and cash equivalents.

Cash is properly classified on the balance sheet and adequate

Presentation and
disclosure has been made in the notes to the financial
disclosure
statements.

In the audit of cash, we usually focus more on the existence and completeness assertions
as we concern more about whether the cash does actually exist and that cash
transactions that should have been recorded have actually been recorded.

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.
Related Posts:
1. Substantive Audit Procedures
2. Risk of Material Misstatement for Cash
3. Audit Accounts Receivable
4. Audit Accounts Payable
5. Why Cash is High-Risk

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