Audit of Cash - Expected Audit Procedures

Cash typically includes physical cash or petty cash fund, bank balances, and highly liquid deposits that can be readily used by the business. Because cash transactions occur frequently and involve many parts of a company’s operations, auditors must ensure that there is an appropriate and sufficient audit evidence to support the cash balance.

Key Audit Objectives

When auditing cash, auditors generally aim to confirm the following (covering the completeness, existence, accuracy, ownership and presentation/disclosure in the financial statements):

-        Cash balances exist and are owned by the entity

-        Cash balance as of year-end is complete and accurate

-        Cash balances are accurately presented in the financial statements

Any restrictions on cash balances are properly disclosed

These objectives align with the principles of ISA 200 – Overall Objectives of the Independent Auditor, which requires auditors to obtain sufficient appropriate audit evidence to support their opinion.

Expected Audit Procedures for Cash

To ascertain these objectives, auditors perform several procedures during the audit.

1. Bank Confirmations

Auditors often send confirmation requests directly to banks to verify account balances, loan balances, and other banking arrangements. This provides independent evidence regarding the existence and accuracy of cash balances.

This procedure is supported by ISA 505 – External Confirmations, which provides guidance on obtaining direct confirmation from third parties such as financial institutions.

2. Bank Reconciliation Testing

Auditors obtain and test the client’s bank reconciliations to ensure the accounting records agree with bank statements. Reconciling items such as outstanding cheques and deposits in transit are examined to confirm they are valid and recorded in the correct period.

These procedures are generally performed as part of the auditor’s evidence gathering process under ISA 500 – Audit Evidence.

3. Physical Cash Count

If the entity maintains petty cash or physical cash balances, auditors may perform a physical cash count to verify the amount on hand and reconcile it to accounting records.

4. Review of Internal Controls (when control testing is relevant)

Auditors also evaluate internal controls over cash management, including segregation of duties, authorization processes, and reconciliation procedures. Weak controls increase the risk of misappropriation or error.

Key Takeaway

The audit of cash is a fundamental component of a financial statement audit. By performing procedures such as bank confirmations, reconciliation reviews, and control evaluations, auditors can obtain sufficient appropriate evidence to conclude whether cash balances are fairly presented.

Documenting these procedures clearly in audit workpapers is also essential, as required by ISA 230 – Audit Documentation, which emphasizes the importance of maintaining a clear record of audit work performed and the conclusions reached.

References

International Standards on Auditing (ISA):

• ISA 200 – Overall Objectives of the Independent Auditor

• ISA 230 – Audit Documentation

• ISA 500 – Audit Evidence

• ISA 505 – External Confirmations

Financial Reporting Council (FRC):

• International Standards on Auditing (UK)

• Guidance on audit quality and professional standards