A business entity can not run its operations without enough cash, cash equivalents, and bank balance. Therefore, cash is called the lifeblood of a business. A business can generate cash for meeting short-term & long-term expenses, making investments, or purchasing assets in several ways.
Considering the importance of cash and bank balance for any business entity, it wouldn’t be wrong to say that having an extra check on cash is also necessary. Cash audit and verification are necessary as all the financial transactions of a company will ultimately affect the cash or bank balance of the company.
The cash audit is also necessary to ensure that there is no cash theft, fraud, or intentional misappropriation to exploit the financial statements. Today’s article will walk you through the complete audit program and its foundations for a business entity’s cash and bank balances. We will also discuss the objectives and assertions for cash audits of any business, small or large. So let’s get into it.
Objectives of Cash Audit
First things first, it is imperative that we understand the general and specific objectives of performing cash and bank audit for any company. The primary objective of any kind of audit is to get an independent opinion on the financial statements of any business entity. Whether an auditor is performing a cash or revenue audit, the main objective is to ensure that the statements show a true and fair view of the business.
Besides the general objectives of an audit, the specific objectives behind performing cash and bank balance audit for a small business or a large company are as follows:
- Verification of the cash and bank balances recorded on the balance sheet date exists.
- The cash balances should reflect all the cash in hand, cash equivalents in hand, cash in transit, or deposited with third parties.
- Another objective of performing a cash audit is to ensure the mathematical accuracy of all the transactions recorded in a business entity’s books of accounts and financial statements.
- The fourth objective of performing the cash and bank audit is to ensure that classifications of cash & bank balance in the balance sheet and cash book are appropriately disclosed.
- The fifth objective of cash and bank audit is that the cash recorded on the balance sheet and cash book is realizable.
The cash and bank audit objectives are derived from the audit assertion. Or it would be appropriate to say that the assertions of the audit define the objectives of the audit. In the coming sections, we will discuss the cash and bank balance audit assertions.
Audit Risks For Cash and Bank
When an auditor is about to perform any kind of audit, certain risks must be addressed in designing the audit program. There can be inherent risks, control risks, detection risks, or risks of mistreatment.
Here are the risks associated with cash and bank balance which auditors should be well aware of:
Cash Theft
Cash is a liquid asset of the company and is more likely to be stolen or embezzled by fraudulent activities. Therefore, when it comes to cash audits, there is a very high inherent risk for several audit assertions like completeness, accuracy, and existence.
Intentional Overstatement
As mentioned earlier, the relevant person might overstate the cash to cover up the theft. Therefore, it is a primary risk that auditors should be aware of.
Errors in Bank Reconciliation
There is yet another primary and common risk of errors in bank reconciliation. It can result in a material misstatement of cash in the books of accounts.
Misstatement Due To Wrong Cut-Off
The risk of misstatement is not limited to errors; improper cut-offs can also lead to misstated balances in the books of accounts. Therefore, auditors have to ensure that the risk of mistreatment due to cut-offs is properly addressed in the audit procedures.
Assertions For Cash Audit
We can define audit assertions as the claims of the business owner or management that all the financial statements are accurate and all agreed-upon procedures have been followed to arrive at the end results. The assertions also include the claim about the true and fair view of a business through financial statements. It’s the job of the auditor to design an audit program to test & verify the assertions.
Let’s discuss the assertions for cash and bank audits, as these assertions are the driving force of the audit program and audit objectives for any business entity.
Existence
Existence assertion implies that the auditor has to ensure that the amount of cash and bank balance reported is actually in existence and ownership of the company on the date of the balance sheet.
Accuracy
The accuracy assertion for cash means that the cash in the bank, as reported in the bank reconciliation statement, should be accurate arithmetically.
Completeness
The completeness of the cash book and the cash reported in the balance sheet is the third assertion for cash audit. It implies that there should not be any unrecorded transaction or cash up till the date of the balance sheet.
Cut-Off
Cut-off means the period ending date and the transactions recorded till that date. For instance, the balance sheet is prepared on the ending date of a financial period. So, the cut-off assertion for cash audit will mean that the right cash transaction is recorded in the right period. There should not be a delay in recording a transaction and vice versa.
Presentation and Disclosure
Presentation and disclosure assertion for cash audit means recording cash transactions and balances in all financial statements according to the accounting standards and agreed-upon procedures.
Control Procedures For Cash and Bank Balances
As mentioned earlier that the assertions of an audit define the audit procedure. However, the role of internal control procedures is also important when designing an audit program and defining the relevant procedures. Here are the internal control procedures for the cash and bank balance of any business entity:
Cash
For cash in hand, the following internal controls are adopted:
- Proper segregation of duties when it comes to recording, custody, authorization, or replenishment of cash in hand
- Pre-numbered petty cash vouchers can be a helpful tool to avoid any missing or unrecorded cash transaction
- Independent cash counts should be arranged to make sure that no cash is leaking from the system
- Imprest petty cash fund system should be implemented
Bank and Cheques
For checks and bank balances, the following internal controls can be helpful:
- Clear division of duties and line of command for check handling, be it receipts or outgoing checks
- No intentional delay in listing and endorsing the incoming checks
- The checks received should be deposited on a daily basis without any delay
- Independent review of bank reconciliation statement to highlight any error
Audit Procedures
Any audit will have analytical tests, substantive tests, tests of details, and tests of control procedures. It is not much that an auditor does for cash and bank to run analytical tests except compare year-on-year basis cash balances, investigate outstanding checks, etc.
So here are different audit procedures that will be followed:
Tests Of Control Procedures For Cash and Bank
The test of control procedures for handling cash and bank will include the following:
Walkthrough Test
Cash walkthrough to identify what can be wrong with the balances. It can either be an intentional wrongdoing or a mistaken one. Cash walkthrough includes asking questions like:
- Were bank reconciliations performed timely and by the relevant personnel?
- Have independent or senior accounting staff reviewed the bank reconciliation?
- Does the general ledger record all bank accounts?
- Were all transactions appropriately recorded, asserting the proper cut-offs?
- Were any checks held at the period end?
The walkthrough test will be a good measure to check the effectiveness of the internal control procedures for cash and bank balance. The results of the cash walkthrough help decide the further substantive audit procedures.
Observation and Inspection Of Documents
Inspecting the relevant documents, like bank reconciliations, cash books, general ledgers, etc., will also help to test the internal control. It will also give information about who is doing what.
Substantive Audit Procedures For Cash and Bank
The substantive audit procedures for the obvious errors in the general ledger, cash book, and bank reconciliation might be addressed by the substantive tests, which include the following:
Confirmation Of Cash Balances
It involves checking and comparing the pay-in slips and payment vouchers to confirm that the total agrees with the general ledger.
Supporting Evidence
An auditor must select some entries from cash receipts and payments and compare them to the pay-in slips, payment vouchers, and bank statements to confirm the actual transactions.
Inspection Of Cut-Off Dates
Comparing the dates of recording cash transactions and the dates of deposits or payments with the bank statements
Examination For Cash Classification
Usually, the classification of cash is not an assertion in the cash audit because the nature remains the current asset. However, an auditor can confirm the classification by selecting a sample of receipts and payments.
Bank Reconciliation
The audit procedure for the bank reconciliation statement will include checking the arithmetical accuracy of the transactions and confirmation of the cash book balance. It also includes the bank confirmation and bank reconciliation balance matching.
Besides, an auditor will also check that any charges on the bank statement agree to bank reconciliation, the adjusted book balance on the cash account lead schedule agrees to bank reconciliation, and any irregular items or bank transactions for the last or first week of the year.
Final Words
Based on the results of the substantive procedures, the auditor might decide to perform tests of details. If the auditor finds sufficient evidence, he might decide to run the audit procedures for cash fraud or embezzlement. It might include the proof of cash test, test of kiting, or test of lapping.
We will leave the fraud-related audit procedures for yet another blog post. We hope the audit procedures and internal controls for cash and bank balances will be helpful for you and your business entity.