07/17/2024

AUDIT - Cash and Cash Equivalents

Topic outline
Introduction to audit of cash & cash equivalents
Management assertions
Audit objectives
Primary substantive procedures for cash
Summary of audit procedures per assertion

Important note
Before performing the substantive testing in any
account, always reconcile first the amount in the trial
balance/unaudited FS versus the amount in the book
(GL)

Introduction
Cash is one of the most important assets of a business
Because of the very nature of cash, it is considered a high-risk area or most vulnerable to
misappropriation than other assets
It requires good internal controls and careful monitoring
Due to its high degree of inherent risk, more audit time is devoted to the audit of the account than is
indicated by its peso amount.

Management Assertions
Assertions are representation made by the entity’s management
When auditing an account balance, the auditor should use assertions for :
1. Classes of transactions
2. Account balances
3. Presentation and Disclosures
The auditor uses assertions in assessing risks by considering the different types of potential
misstatements that may occur and thereby designing audit procedures that are responsive to the
assessed risks.

CATEGORY 1 = assertions pertain to assertions in the Statement of Comprehensive Income

CATEGORY 2 = assertions pertain to assertions in the Statement of Financial Position
CATEGORY 3 = assertions pertain to the whole Financial Statements

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 3 categories of management assertions
CATEGORY 1 CATEGORY 2 CATEGORY 3

OCCURRENCE AND RIGHTS &

EXISTENCE - assets liabilities and
OCCURRENCE - transactions and OBLIGATIONS - disclosed events,
equity interests exist
events that have been recorded have transactions, and other matters
RIGHTS & OBLIGATIONS - the entity
occurred and pertain to entity have occurred and pertain to the
holds or control the rights to assets,
COMPLETENESS - all transactions and entity
and liabilities are the obligations of
events that should have been COMPLETENESS - all disclosure
the entity
recorded have been recorded that should have been included in
COMPLETENESS - all assets,
ACCURACY - amounts and other data the financial statements have been
liabilities and equity interests that
relating to recorded transactions and included
should have been recorded have
events have been recorded CLASSIFICATION AND
been really recorded
appropriately UNDERSTANDABILITY - financial
VALUATION & ALLOCATION - all
CUT-OFF - transactions and events information appropriately
assets, liabilities and equity interests
have been recorded in the correct presented and described, and
are included in the financial
accounting period disclosures are clearly expressed
statements at appropriate amounts
CLASSIFICATION - transactions and ACCURACY & VALUATION -
and any resulting valuation or
events have been recorded in the financial and other information are
allocation adjustments are
proper accounts disclosed fairly and at appropriate
appropriately recorded
amounts

Audit objectives for cash and cash equivalents

ASSERTIONS AUDIT OBJECTIVES

All cash on the statement of financial position at a given date is held by the entity or by others (ex.
EXISTENCE
a bank) for the entity.

All cash owned by the entity at the reporting date is included on the statement of financial
COMPLETENESS
position.

VALUATION &
Cash, including bank balances, is stated at realizable value and agrees with supporting schedules.
ALLOCATION

RIGHTS & The entity owns, or has a legal right to, and has unrestricted use on all the cash on the statement
OBLIGATIONS of financial position at the reporting date.

Cash, including bank balances, is properly classified, described, and disclosed in the financial
PRESENTATION & statements, including notes, in accordance with PFRS.
DISCLOSURE Lines of credit, loan guarantees, compensating balance agreement, and other restrictions (liens)
on cash balances are appropriately identified and disclosed.

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 Primary

Bank Confirmations (important notes)

1. Primarily addresses the following assertions :
a. Rights & Obligations
b. Existence
2. It also provides evidence about the gross valuation of cash in bank.
3. It also addresses the search for undisclosed liabilities and commitments
4. When confirmation the cash in bank, materiality of the account balance is not a
consideration

HOW TO DO THE BANK CONFIRMATION?

1. The request for bank confirmation should be issued on auditor’s letterhead and sent to all
banks where the client has dealings.
2. The request should be clear and concise.
3. Control over the content and dispatch of requests for confirmation is the responsibility of the
auditor (with the client’s authorization for the disclosure of the relevant information)
4. Replies should be sent directly to the auditor enclose a stamped or business reply envelope
addressed to the office of the auditor.
5. Auditor will review the bank confirmation reply (details of security, guarantees and
restrictions over he entity’s use of its cash)
6. Check pledging if properly disclosed in the notes to the FS.

Cash Count Procedures (Important notes)

1. Assertions addressed : Existence, valuation and rights.
2. Performed for cash on hand (undeposited cash receipts, petty cash fund and change fund).
3. Conducted before or after the reporting date.
4. Should cover all branches (and if possible all custodians and tellers).

HOW TO PERFORM CASH COUNT?

1. Surprise cash count.

2. Control all cash fund to prevent transfer or substitution of floats to hide discrepancies.
3. Count in the presence of the custodian to ensure the auditors cannot be blamed for any
shortage.
4. List each item in the fund showing the denominations of notes and coins.
5. The custodian should sign the record as evidence of the return of all funds.
6. Agree the total to the cash book balance and investigate any differences.

Test of Bank Reconciliation (Important notes)

1. Primary addresses the following assertions : Existence, Valuation, Completeness and Rights.
2. Bank reconciliation is customarily prepared on a monthly basis by the client as part on
internal control over cash.
3. The auditor’s role is to obtain the copy of the bank reconciliation prepared by the client.

HOW TO TEST THE BANK RECONCILIATION STATEMENTS?

1. Verify the cash balance used in the bank reconciliation ; (a) TRACE balance per book in the
ledger, CRJ and CDJ; (b) TRADE the balance per bank in the balance per bank statement,
reply to the bank confirmation and cut-off bank statement.
2. Check the accuracy of the footing in the bank recon.
3. Obtain the supporting documents for any book and bank reconciling items (can be verified
by obtaining bank cut-off statement)

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IMPORTANT CONSIDERATION

1. Focus on items that may be omitted in the bank recon to conceal cash shortage or
misappropriation (normally, outstanding checks)
2. Check the long-outstanding checks for a year or more.
3. Focus on any large or unusual transactions (checks payable to directors, officers, employees,
affiliated companies or even pay to “cash”.

Proof of Cash
IMPORTANT CONSIDERATION

1. If auditor assessed that the internal control over cash receipts and cash disbursements as
weak or ineffective, you can perform this procedure.
2. Also called as Four-column bank reconciliation
3. This is prepared not only to verify the account balance but also the account transactions
occurring during a specified period.
4. Essentially a fraud detection procedure that may be used for any months during the year.

SO WHAT’S THE USED?

IT HELPS TO IDENTIFY :
1. CR & CD recorded in the books but not in the bank statement.
2. CR & CD recorded on the banks statement but not on the books.
3. CR & CD recorded at different amounts by the bank than in the books.

Tracing Bank Transfers

1. It addresses the following assertions : Existence, Completeness, Rights.
2. To detect Kiting. Concealing of cash shortage by taking advantage of the clearing period of
checks

HOW TO PERFORM THIS?

1. Obtain a bank cut-off directly from the bank.
2. Prepare a schedule of bank transfers showing all transfers between the client’s bank
accounts the last week of the audit period and the first week of the subsequent period.
3. Trace all the check, deposits and other cash changes from the cut-off statement to CRJ and
CDJ, paying particular attention to the dates and amounts.

CASH CUT-OFF TESTS

1. Obtain a bank cut-off directly from the bank.
2. Prepare a schedule of bank transfers showing all transfers between the client’s bank
accounts the last week of the audit period and the first week of the subsequent period.
3. Trace all the check, deposits and other cash changes from the cut-off statement to CRJ and
CDJ, paying particular attention to the dates and amounts.

HOW TO PERFORM THIS?

1. Compare deposits on the bank statements immediately before and
after the reporting date with entries in the CRJ (to establish the
reasonableness of the deposits in transits at the reporting date)/
2. Compare the dates of the disbursement and receipts of
intercompany payments or interbank transfers immediately before
and after the reporting date (to establish that both receipts and
disbursements are recorded in the proper periods.)

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 CASH VALUATION
1. It addresses the following assertions : Valuation, Presentation and Disclosure
2. Auditor should test the valuation of cash (if there are foreign currencies).
3. Determine whether the cash is stated at its realizable value.

HOW TO PERFORM THIS?

1. Obtain the period-end foreign exchange rate from an independent source.
2. Re-perform the conversion using the current rate.
3. Compare the result of amount to the account balance in the General Ledger and Accounting
for differences.

Analytical Procedure
WHY & HOWTO PERFORM THIS?
1. To obtain reasonableness of cash reported in the FS.
2. Compare the listing of cash accounts with those prior periods and investigate any
unexpected changes (ex. CR balances, unusual large balances, new accounts, closed
accounts) or absence of expected changes.
3. Review interest received or paid in relation to the average cash balances.
4. Investigate unusual fluctuations/significant differences.

Audit Procedures Classified per assertion

Summary of Audit Procedures Classified per assertion
ASSERTION
PRIMARY AUDIT PROCEDURE
CATEGORY

Sending confirmation to banks or financial institutions

Surprise cash count
EXISTENCE Obtaining and testing bank recon. and preparing proof of cash (if appropriate)
Obtain bank cut-off statement and tracing bank transfers
Cash cut-off test

Obtaining and testing bank recon. and proof of cash (if appropriate)
COMPLETENESS Obtaining bank cut-off statement and tracing bank transfers
Cash cut-off test

Sending confirmation to banks or financial institutions

VALUATION & Surprise cash count
ALLOCATION Obtaining and testing bank recon. and preparing poof of cash (if appropriate)
Checking appropriate valuation of cash

Sending confirmation to the banks or financial institutions

Surprise cash count
RIGHTS &
Obtaining and testing bank recon. and preparing proof of cash (if appropriate)
OBLIGATIONS
Obtain bank cut-off statement and tracing bank transfers
Cash cut-off test

PRESENTATION Sending confirmation to banks of financial institutions

& DISCLOSURE Checking appropriate valuation of cash

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REFERENCE
Applied Auditing
authors :
1. Asuncion
2. Ngina
3. Escala