Audit procedures are considered integral in facilitating a smoothly conducted audit process that can deliver the required results.
Given the high degree of importance tied to the audit process, it is imperative that planning within the audit function is taken care of seriously so that planning and execution within the audit process are carried out in a better manner.
During the audit process, it can be seen those audit procedures are designed to obtain sufficient groundwork so that reasonable assurance can be gathered before making a statement.
As far as cash is concerned, it can be seen that it is regarded as a relatively risky asset stream because of the reason that it might be used without proper authorization.
Given the liquid nature of the cash assets, it can be seen that there is a need to ensure that this is properly audited, because of its vulnerability to being under fraud, or malpractice.
Audit Procedures for Cash and Cash Equivalents
Firstly, when deciding upon the audit procedures that are used for cash, there is a need to ensure that there is proper clarity regarding the existing business model of the client, as well as internal control policies that are in place to ascertain the groundwork that needs to be covered in this regard.
When auditors test for cash and cash equivalents, there is a need to ensure that they can cover the respective assertions for cash, on the following grounds:
- Existence: This is to check if the cash balances on the balance sheet exist at the date of financial statements. This is checked by ensuring that the bank issues’ bank statements have the respective balance declared on the balance sheet by the company.
- Completeness: This measure checks if the cash balances include all the cash transactions that have taken place during the accounting period. In the case of transactions taking place within the company, all records are duly maintained. For example, a sales invoice would prove that the debit transaction in the company’s books is because of sales income.
- Rights and Obligations: This is to verify that the company has the legal right to declare the amount of cash it has declared, on the reporting date. This calls for companies to have sufficient proof that they own that particular cash or cash equivalent. For example, they cannot declare money not yet received from a customer as cash or cash equivalent.
- Values/ Allocation: This assertion verifies that the recorded balances reflect cash’s true underlying economic value. This amount should not be overstated and included as per the existing value in the bank accounts or the company’s equivalents.
- Presentation and/or Disclosure: Cash should be properly disclosed in the balance sheet with adequate and required disclosure made in the notes to the statements. All the sources of cash should be appropriately disclosed, with any other information that is relevant to the shareholders. The cash and cash equivalents should be broken down into cash in the bank, and other cash that the company might have on the reporting date.
Keeping these assertions in mind, the auditor should check for various cash procedures, including the following.
Perform Bank Confirmation:
This process is mainly undertaken to ask for verification or confirmation from the external party, primarily cash, as well as the underlying balances the company holds at the bank.
To verify the balance at the bank, it is rudimentary for the company to ensure that they can obtain a formal, writer authority from the relevant bank so that the bank can disclose the respective information to the client with properly information.
Furthermore, once the authorization process has been covered, it is important to follow up on all the points of the bank confirmation.
Perform Bank Reconciliation:
This tends to be another integral component of the audit procedure for cash and cash equivalents.
This is because after the bank confirmation and statements have been issued, the auditor is supposed to compare the bank statements sent by the bank and the cash statement prepared to check for any discrepancies.
In this regard, they are supposed to check and agree with the balances per bank statement shown on the reconciliation to the bank statement and balances that are shown otherwise.
This also tests these balances arithmetically, to ensure that there are no discrepancies in the calculation.
These audit procedures to check for cash and cash equivalents are created to ensure no differences in the actual amount the company owns, and the amount it has disclosed on the balance sheet.
In the same manner, this backward trail also helps to identify any leakages or potential areas of fraud within the cash system of the company.
What Are the Key Risks When Auditing Cash and Cash Equivalents?
When auditing cash and cash equivalents, the key risks include inadequate internal controls over cash receipts, incorrect classification of cash and related accounts, misstatements in the reconciliation of bank statements, and misclassification of unsupported or unrecorded items.
Additionally, auditors must consider the potential impact of fraud or theft and any other external factors that may affect the accuracy of financial records.
It can be seen that audit procedures for cash and cash equivalents can be considered an integral part of the audit.
This is because the audit procedures are conducted to ensure that there are no existing discrepancies and that the work is carried out as per the required standards.
In this regard, it is imperative that auditors take their time in evaluating these procedures so that there is no ambiguity, and any chances of errors or fraud can be discovered well in time.