SUBSTANTIVE OF CASH

Because of the very nature of cash, it is considered a high-risk area - most vulnerable to misappropriation than other
assets - that 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 about classes of transactions and events for the period under audit:
a) OCCURRENCE – transactions and events that have been recorded have occurred and pertain to the entity
b) COMPLETENESS – all transactions and events that should have been recorded have been recorded
c) ACCURACY – amounts and other data relating to recorded transactions and events have been recorded
appropriately
d) CUTOFF – transactions and events have been recorded in the correct accounting period
e) CLASSIFICATION - transactions and events have been recorded in the proper accounts

This pertains to assertions in the statement of comprehensive income (SCI), statement of cash flows (SCF), and
statement of changes in equity (SCE)
Assertions about account balances at the period end:
a) EXISTENCE – assets, liabilities, and equity interests exist
b) RIGHTS AND OBLIGATIONS – the entity holds or controls the rights to assets, and liabilities are the obligations
of the entity
c) COMPLETENESS – all assets, liabilities, and equity interests that should have been recorded have been
recorded
d) VALUATION AND ALLOCATION – assets, liabilities, and equity interests are included in the financial statements
at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded

This pertains to assertions in the statement of financial position (SFP).

Assertions about presentation and disclosure
a) OCCURRENCE AND RIGHTS AND OBLIGATIONS – disclosed events, transactions, and other matters have
occurred and pertain to the entity
b) COMPLETENESS – all disclosures that should have been included in the financial statements have been
included
c) CLASSIFICATION AND UNDERSTANDABILITY – financial information is appropriately presented ad described,
and disclosures are clearly expressed
d) ACCURACY AND VALUATION – financial and other information are disclosed fairly and at appropriate amounts

This can be found in all the component of the complete set of financial statements.

The cut-off assertion addresses the issue that transactions and events should have been recorded in the correct
accounting period, however, it also addresses:

 the existence or occurrence assertion when the auditor concerns transactions of the subsequent period being
recorded in the current period
 the completeness assertion when the auditor concerns transactions for the current period being recorded in the
subsequent period.

Valuation vs. Allocation

Although these two assertions are considered similar and both relate to the account balances at period end, these can
be distinguished as follows:
  Valuation applies to both initial and subsequent measurement of an asset or liability (e.g., initial valuation of
financial assets, subsequent valuation of inventories, etc.)
 Allocation relates more on subsequent measurement of prepayments (deferrals), precollection, intangible asset,
wasting asset and depreciable asset which is allocated for more than one period.

The Use of Assertions in Obtaining Audit Evidence

Management assertions are used by the auditor in formulating audit procedures. They serve as
“targets” over which audit procedures to be formulated should be directed.
Audit procedures are acts to be performed in order to obtain audit evidence.
The set of audit procedures prepared to test assertions for a component of the financial
statements is called “audit plan” or “audit program”.

AUDIT PROCEDURES FOR CASH

1. Sending confirmation to  Testing the existence and rights and obligations
banks or financial of reported cash in bank (savings and checking
institutions account)
Requests for bank confirmation  Also provides evidence of the accuracy of gross
should be issued on the auditor’s valuation of cash in bank
letterhead and sent to all banks  One objective when confirming bank accounts is
where the client has dealings. to search for undisclosed liabilities and
commitments
Replies should be sent directly to the The materiality of the account balance is not a consideration in confirming
auditor who should enclose a a bank account.
stamped or business reply envelope  Instead, consider the volume of transactions passing through the
addressed to the office of the auditor account and the purpose of the account
to facilitate a speedy response.  Auditor should also consider confirming those accounts that have
been closed during the period

The auditor should review documents such as minutes and agreements,

during the course of audit to establish the existence of any restrictions over
the entity’s use of its cash.

Loan Agreements
- Amount pledged as security for the loans should be checked by the
auditor if it’s properly disclosed in the notes to financial statements

Bank Overdrafts
 - Auditor ordinarily verified bank overdrafts through bank
confirmations

2. Conducting surprise cash Cash count can be either conducted before or after the reporting
counts date. In other words, cash counts should be conducted throughout
the year and should cover all branches and, if possible, all teller or
cash custodian.

The auditor should plan to count all cash and should consider the
following:
a. Surprise cash count. Custodian must not be informed in
advance.
b. Control all cash funds, including marketable securities and
other negotiable assets to prevent any ‘transfers’ or
‘substitution’ of floats to hide discrepancies, until the
completion of the count
c. Count in the presence of the custodian to ensure the
auditors cannot be blamed for any shortage
d. List each item in the fund showing the denomination of
notes and coins
e. The custodian should sign the cash count sheet as evidence
of the return of all funds; and
f. Agree the total to the cash book balance and investigate any
differences
3. Obtaining and testing bank When auditing bank reconciliations, the auditor would obtain a copy of
reconciliation and if bank reconciliation prepared by the client and should:
appropriate, preparing proof a. Verify the cash balance used in the bank reconciliation
of cash  Trace balance per books in the ledger, cash receipts and
cash disbursement journal
 Trace balance per bank in the bank statement and/or reply
to bank confirmation
b. Check the accuracy of the footing in the bank reconciliation
c. Verify book reconciling items in supporting documents
d. Verify bank reconciling items:
 Fiscal Bank Reconciliation (first 11 months bank
reconciliation)
 Deposit slips, next month’s bank statements, check
voucher package, passbook
 Year-end bank reconciliation (last month bank
reconciliation)
 Bank cutoff statement – normally prepared 8-10
business days after the reporting date.
e. Examine whether there is an adjusting entry to reflect the book
reconciling items

When testing bank reconciliation, auditors should place more importance

on:
 Items that may be omitted in the bank recon to conceal cash
shortage or misappropriation of cash and any unusual transactions
 Investigate any long outstanding checks including stale checks
 Any large or unusual transactions must be carefully reviewed to
 determine if these are properly authorized, recorded and
adequately disclosed in the financial statements

Proof of Cash
The auditor may consider preparing proof of cash as an additional audit
procedure aside from testing bank reconciliation.
A proof of cash is essentially a fraud detection procedure that may be used
by the auditor and the client, for any months during the year.
4. Obtaining bank cutoff To detect kiting, the auditor ordinarily performs the following
statement and tracing bank procedures:
transfers a. Obtain a bank cutoff statement directly from the bank or the
next period banks statement if already available
b. Prepare a schedule of bank transfers showing all transfers
between the client’s bank accounts during the last week of
the audit period and the first week of the subsequent period.
c. Trace all checks, deposits, and other cash changes from the
cutoff statement to cash receipts and disbursements records,
paying particular attention to dates and amounts.

The following rules should be observed by the auditor when tracing

bank transfers:
a. Book entries for receiving and disbursing should have been
made within the same month
b. Book entries compared with the bank entries may be made in
an earlier month but not in a later month; and
c. The receiving per bank should not be in an earlier date than
the disbursement per book.
5. Performing cash cutoff tests The auditor should perform cutoff procedures on cash receipts,
disbursements, and transfers to determine if these transactions are
reflected in the proper period.

When testing cutoff of cash receipts and cash disbursements at the

reporting date, audit procedure might include:
1. Comparing deposits on the bank statements immediately before
and after the reporting date with entries in the cash receipts
journal to establish the reasonableness of the deposits in transit at
the reporting date; and
2. Comparing the dates of the disbursement and receipt of
intercompany payments or interbank transfers immediately before
and after the reporting date to establish that both receipts and
disbursements were recorded in the proper periods.
6. Checking the appropriate If the bank account being reconciled is in a foreign currency, the
valuation of cash auditor should test the conversion of the cash balance to the
presentation currency to determine whether cash is stated at its
realizable value.

The auditor ordinarily should:

a. Obtain the closing foreign exchange rate from an
independent source
b. Re-perform the conversion of the cash balance into the
 currency using this rate; and
c. Compare the resultant amount to the account balance in the
general ledger and account for any differences.
Cash deposits in closed bank
- In considering the amounts to be reported in the statement
of financial position, the auditor should consider that
deposits in closed bank may be covered under Philippine
Deposits Insurance Corporation (PDIC).
- Auditor should ensure that cash in closed bank should not be
included as part of “cash and cash equivalents” rather it
should be part of non-trade receivable.
7. Performing analytical The auditor may:
procedures to assess the a. Compare the listing of cash accounts with those of prior
reasonableness of reported periods and investigate any unexpected changes or the
cash absence of expected changes
b. Review interest received and/or paid in relation to the
average cash balances and/or bank overdrafts; and
c. Investigate any unusual fluctuations and significant difference

Special Audit Consideration

1. Kiting
o Overstatements of cash is created by a cash transfer between bank accounts
o Recording the transfer to the other bank as cash receipts but the disbursement is not recorded
o It occurs due to lack of segregation of duties between accounting and cash custody

To detect, the auditor may test the cutoff bank statement and trace bank transfers.

2. Lapping
o done by misappropriating collections from one customer and concealing this defalcation by applying a
subsequent collection made from another customer
o used to conceal cash shortage
o this can be detected by bank confirmation, surprise cash count and comparing details of cash receipts
journal entries with the details of corresponding daily deposit slips
3. Window Dressing
o any deliberate misstatement of the assets, liabilities, equity, income and expenses
o It is usually accomplished by:
 Recording as of the last day of the accounting period collections made subsequent to the close
of the period
 Recording as of the last day of the accounting period payments of accounts made subsequent to
the close of the period

To detect, the auditor will ordinarily verify cash cutoff of cash receipts and disbursements.