Chapter 7 – Substantive Test of Cash: Reflection

Today I learned about the different categories of management assertions, how to

identify the audit objectives for cash and cash equivalents, to describe the primary
substantive audit procedures for cash and cash equivalents and to identify assertions
addressed by audit procedures for cash and cash equivalents.

Cash is one of a company's most valuable assets. Almost all of the entity's
transactions end in the receipt or payment of cash. Cash is typically comprised of cash
in the bank, cash on hand, and cash equivalents. Cash equivalents are short-term,
highly liquid instruments that can be easily converted to cash. Petty cash fund, payroll
fun, money orders, cashier's checks, treasury bills, and other examples of cash and
cash equivalents include, but are not limited to, petty cash fund, payroll fun, money
orders, cashier's checks, treasury bills, and others.

Management assertions are statements made by members of management

about specific aspects of a business. The term is most commonly associated with the
audit of a company's financial statements, in which the auditors rely on a variety of
assertions about the business. Auditors conduct a number of audit tests to determine
the validity of these assertions. Management assertions are divided into three
categories.

The five items listed are classified as assertions related to transactions and
events, mostly in relation to the income statement: Occurrence, The claim is that
recorded business transactions occurred. Completeness, the assertion is that all
business events experienced by the company were documented. The assertion is that
the full amounts of all transactions were recorded accurately. The assertion is that all
transactions were recorded within the appropriate reporting period. Classification, The
assertion is that all transactions have been recorded in the correct general ledger
accounts.
 The following four items are classified as assertions related to the ending
balances in accounts and thus primarily relate to the balance sheet: Existence, The
assertion is that all account balances for assets, liabilities, and equity exist. Rights and
obligations, the assertion is that the entity has rights to the assets it owns and is
obligated under its reported liabilities. Completeness, the assertion is that all reported
asset, liability, and equity balances have been reported completely. The assertion is that
all asset, liability, and equity balances have been recorded at their appropriate
valuations.

The following four items are classified as assertions related to the presentation of
information within the financial statements and the accompanying disclosures:
Occurrence, the assertion is that the disclosed transactions occurred. Completeness,
the assertion is that all transactions that should have been disclosed. Classifications
and understandability, the assertion is that the information in the financial statements
has been presented appropriately and is clearly understandable. Accuracy and
valuation, the assertion is that all information disclosed is in the correct amounts and
reflects their correct values.

When auditors test for cash and cash equivalents, they must ensure that they
can cover the respective assertions for cash on the following grounds:

Existence: This is to determine whether or not the cash balances on the balance
sheet exist at the date of financial statements. This is checked by ensuring that the bank
statements issued by the bank have the respective balance that the company has
declared on the balance sheet or not.

Completeness: This metric determines whether the cash balances accurately

reflect all cash transactions that occurred during the accounting period. All records are
kept in the case of transactions that take place within the company. A sales invoice, for
example, would be proof that the debit transaction in the company's books is actually
due to sales income.

Rights and Obligations: This is to ensure that the company has the legal authority
to declare the amount of cash declared on the reporting date. This necessitates that
businesses provide sufficient proof that they own that specific cash or cash equivalent.
They cannot, for example, declare money not yet received from a customer as cash or
cash equivalent.

Values/Allocation: This assertion confirms that the recorded balances accurately

reflect the underlying economic value of cash. This amount should not be overstated
and should be included in accordance with the existing value in the company's bank
accounts or equivalents. Cash should be properly disclosed in the balance sheet, with
adequate and required disclosure made in the notes to the statements. All cash
sources, as well as any other information relevant to shareholders, should be properly
disclosed. Cash and cash equivalents should be divided into cash in the bank and any
other cash that the company may have on the reporting date.

To audit "Cash and Cash Equivalents," you must first understand the bank
accounts, types of bank accounts, number of bank accounts, purpose of each bank
account, banking facility arrangements and agreements, overdraft facilities, bank
guarantees, Authorized signatories, Authorization matrix, bank payment process, bank
receipt process, petty cash payment process, and petty cash top up process, as well as
the daily petty cash holding limit. Sending confirmation letters to banks to ensure year
end bank balances from a third party is the simplest thing for me to do. Typically, each
CA firm has its own letter format for bank confirmation. You must reconcile the bank
statement balances with the bank book balances here. Bank reconciliations are typically
prepared on a monthly basis by your client. However, you must re-perform the bank
reconciliation for at least two months, including the last month of the accounting period
under audit. After re-running the bank reconciliations, you must determine whether the
"Reconciling Items" have been cleared or not. To accomplish this, you will need to
gather bank statements from the post-year-end period. Select the items that were not
cleared at the end of the fiscal year and see if they were cleared later. If not, consult
with management.

In conclusion, substantive testing is an audit procedure that looks for errors in

financial statements and supporting documentation. These tests are required as
evidence to support the assertion that an entity's financial records are complete, valid,
and accurate. An auditor can employ a variety of substantive tests. Cash auditing is a
complete or partial examination of cash transactions carried out by your company within
a specific time frame. A cash audit is a review of cash transactions between a specified
start and end date in accordance with generally accepted accounting procedures and
your company's policies. Cash audits assist in obtaining and verifying the mathematical
accuracy of cash transactions by tracing opening balances to previous year's
documents and reviewing cash activity in general ledger accounts. An audit can help to
uncover errors such as kiting, which occurs when you record deposits but omit
withdrawals, resulting in an overstatement of cash.