AUDITING AND ACCOUNTING AUDITING CASH &

BANK BALANCES
Liquid assets and include: notes and coins, bank current accounts, bank deposit accounts.
 Vulnerable assets because of its liquidity.
 Easily verified because they can be confirmed directly by third parties or by physical counts.
OBJECTIVE
Completeness: to ensure that there is no unrecorded cash. This means reconciling cash balances to records,
ensuring that proper sales cut off has been performed.
Accuracy of measurement: to ensure that amounts are correctly recorded in the proper accounting period. This
means that cut off is correct.
Existence: to ensure that the cash exist at a given date. The related evidence includes cash count.
Rights and obligations: to ensure that the company has a right to the cash.
Occurrence: to ensure that the cash belongs to the company at the year end date. This means checking to
ensure no cash receipt are post dated.
Presentation and disclosures: to ensure that the cash balance and related income statement entries are
correctly disclosed in the FS in accordance with legislation and accounting standards.

Proof of cash
A proof of cash is used to reconcile the cash receipts and disbursements recorded on the client’s books with the
cash deposited into and disbursed from the client’s bank account for a specific time period. The purposes of the
proof of cash are to ensure:
(a) All cash receipts recorded in the client’s accounting records were deposited in the client’s bank account.
(b) All cash payments recorded in the client’s accounting records have been cleared.
(c) No bank transactions have been omitted from the client’s accounting records.
Testing for kiting
When cash has been stolen by an employee, he can conceal the cash shortage by means of kiting. This involves
an employee covering the cash shortage by transferring money from one bank account to another and recording
the transactions improperly on the client’s books.
The cash shortage can be covered up by preparing a cheque on one account just before year end; however, this
transaction is not recorded until the next period. The cheque is deposited in a second account just before year-
end and recorded as a cash receipt in the current period.
Testing for lapping
Additional procedures can be performed to try to detect attempts at lapping accounts receivable collections
include:
(a) Obtaining a cut-off bank statement and checking the proper listing of outstanding cheques and deposits in
transit on bank reconciliation.
(b) Checking the details of customer payments listed in bank deposits in comparison to details of customer
payment in daily remittance list or other record of detail postings.
(c) Comparing the cheques listed on a sample of deposit slips from the reconciliation month to the detail of
customer credits listed on the day’s posting to customer accounts receivable.
Agree balance on bank confirmation with bank reconciliation and cash book.Occurrence, completeness and
valuation
Trade deposits in transits, outstanding cheques and other reconciling items to cut-off bank statements.
Check calculation of bank reconciliation and agree with book balance on cash book and general
ledger.Accuracy
For cash receipts, observe cash count for the last day of the year end and trace deposits to cash receipts journal
and cut-off banks statement.Cut-off
For cash disbursement, record the last cheque issued at the year end date and trace to cash payments in the cash
book; and trace outstanding cheques on bank reconciliation and investigate any cheque clearing after a long
delay.
Review board of directors’ minutes, bank letter, loan agreement or other documents for any restrictions on
cash.Classification, presentation and disclosure
Ensure bank loans and overdrafts are not offset against positive bank balances in the financial statements.
Analytical Procedures
Cash and/or bank balance can be compared with the previous year respective balance and if there are any
material deviations from the previous financial period, management explanations needs to be obtained by the
auditor for such variances.
Calling Confirmations
Calling confirmation is one of most critical audit procedure in verifying cash & bank balances. In particular the
auditor must ensure that the bank confirms all the bank balances and related off balance sheet items such as
Letter of credit facilities etc.
Therefore the best way to do this is to sending and letter by the auditor himself to the bank with the approval of
the management, requesting necessary information.
Further it should note that in the current practice some international banks (Ex. HSBC) outsourced the
confirmation activities and therefore auditors can obtain confirmation through online process.
Reviewing Bank Reconciliations
Same as calling confirmation this is also a critical audit procedure whereby the auditor can obtain a reasonable
assurance on the completeness assertion of the Bank balance.
In this audit procedure auditor obtains the bank reconciliation prepared by the management and check the
accuracy of the reconciliation by considering the balances used for the reconciliation and the appropriateness of
the reconciling items (Ex. represented cheques, Unrealized deposits)
Physical verification
with regard to the cash in hand balances, specially petty cash balances surprise physical verification can be
arranged so that the auditor can ascertain whether such book balance of cash in hand is physically exists.
Verify the Cash Valuation
In a case where the cash and bank balances are maintained other than reporting currency, such balances needs to
be converted to the reporting currency using appropriate exchange rates. Thus the auditor needs to check the
accuracy of the conversion of such cash & bank balances in to reporting currency.
The reporting currency of the company "A" is US $ while it holds bank balances in Euros. Thus such balances
carried in Euro needs to be converted to the US $ in the financial statements using appropriate exchange rate.
Cut off testing
Cut off testing are used as both substantive procedure and Test of controls. by performing cut off test auditor
can ensure that all the payments and receipts that should have recorded in the current financial period were
recorded and all the payments and receipts that should have recorded in next financial period were recorded
properly.
The auditor selects last 5 payments and receipts recorded in the current year bank book and check whether such
transactions are recorded in the proper period. further he select first 5 payments and receipts recorded in the
next financial period and ensure that those transactions are recorded in the proper period.