Cash is an inherently risky asset. It can be easily misappropriated because:
- Individual transactions vary greatly in size
- Cash is the most negotiable financial instrument
- It can be used for unauthorized purposes
- Cash transactions may be posted to the wrong customer’s account or not recorded on a timely basis
To minimize the risks stated above and any potential misstatements of cash, the auditors expects to find appropriate internal controls such as:
- Segregation of duties
- Customer cheques received by someone who is not posting the entries
- Independent bank reconciliations
- Computerized controls and audit trails
- Authorization of transactions
- Prenumbered cash receipt documents
When auditing cash, we determine whether:
- All cash on the balance sheet is held by the entity or by others (for example, a bank) for the entity (Existence assertion)
- All cash owned by the entity at the balance sheet date is included on the balance sheet (Completeness assertion)
- Cash is stated at its realizable value (Valuation assertion)
- The entity owns, or has a legal right to, all the cash on the balance sheet at the balance sheet date – All cash is free of restrictions on use, liens, or other security interests or, if not, such restrictions, liens, or other security interests are identified (Rights and Obligations assertion)
- Cash is properly classified, described and disclosed in the financial statements in accordance with the applicable financial reporting framework (Presentation and Disclosure assertion)
Cash substantive procedures
In this article, we will talk about bank confirmation as part of our cash substantive procedures. There are many other substantive procedures, such as bank reconciliations, cash cut-off, GL unusual items review, overdraft implications, interest received/paid, deposit slips, and many more. Get our cheatsheet for auditing cash here. Where you can find 30 substantive procedures for the cash audit.
First, obtain a complete list of bank accounts (debit and credit balances) from the client. At a minimum, confirmations of bank balances should include all major depository and disbursement accounts, including bank accounts closed during the period.
Select other accounts for confirmation as appropriate, based on the nature of the accounts (e.g., we may decide not to confirm some imprest bank accounts, pass-through bank accounts, or non-operating bank accounts with limited activity). Other than the balances, you as the auditor should understand the relationship with the bank including contingencies, liens, pledges, restrictions on the entity’s assets, guaranteed amounts, etc.
Prepare a lead sheet that lists the cash balances, including any credit balances. Agree each amount to the book balance in the bank reconciliation and to the general ledger.
Compare the balances as of period end with that at the prior period end. When we identify any unusual or unexpected changes or the lack of expected changes, obtain an understanding of the reasons for the fluctuation and determine the impact on our planned substantive procedures.
Requesting for confirmation differ between banks. Some banks such as HSBC, JP Morgan and SCB are using www.confirmation.com for auditors to request the bank balance as at year end. Whereas for some banks, they are still using the old paper way. As auditors, you should control the preparation and the distribution (e.g., mailing, Email, fax, use of third-party service providers, use of web portals) of the confirmation request.
Next, when you have received the bank confirmation, agree the cash balance in the confirmation to the bank statement balance used in the entity’s bank reconciliation. When an exception exists, obtain an explanation from the entity and document our corroboration of the explanation to supporting evidence.
Review the returned confirmation for details of other relationships with the bank such as contingencies, liens, pledges, derivative products, restrictions on the entity’s cash and any third-party guarantees. Agree details of such items with the entity. Document our consideration of the adequacy of the disclosure of these matters in the financial statements.
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