AUDIT OF CASH ON HAND AND IN BANK

 Cash has a higher degree of INHERENT RISK; more audit time is devoted to the audit of the account than is indicated by its
peso amount.
o The susceptibility of cash to defalcation is greater than for other types of assets because most other assets must be
converted to cash to make them usable.
 Misstatements which results in the improper payout of or failure to received cash
1. Failure to bill a customer
2. Billing a customer at a price lower than called for by company policy Audit of the Revenue and Cash Receipts
3. Abstraction of cash receipts from customers before they are recorded Cycle
4. Duplicate payment of a vendor’s invoice
5. Improper payments of officers’ personal expenses Audit of the Acquisition and Payment
6. Payment for merchandise or goods that were not received Cycle
7. Payment to an employee for more hours than he has worked Tests of the Payroll &
8. Payment of interest to a related party for an amount far exceeding the going rate. Personnel Cycle, and
Financing and Investing
Substantive Testing of Cash Cycle
Assertions Audit Objectives Audit Procedures
I. Existence or Occurrence A. To determine whether cash exists 1. Obtain analysis of cash
at year-end and cash-related balance and reconcile to the
transactions occur within the general ledger.
year. 2. Confirm bank balances as of
B. To determine that all cash statement of financial position
balances of the client are date.
reflected on the statement of 3. Perform cash count procedures
financial position at year-end. for cash on hand.
4. Obtain (prepare) bank
reconciliations as of the
statement of financial position
date.
5. Trace all transfers occurring
between banks near year-end.
II. Completeness C. To determine whether all cash 6. Obtain a cutoff bank statement
transactions are recorded in the containing transactions several
proper accounting period. days subsequent to the
statement of financial position
date. Examine items returned
with the cutoff bank
statements.
7. Prepare proof of cash and
reconcile cash transactions
occurring during a specified
period as they are recorded by
the bank and the client.
8. Verify the client’s cutoff of
cash receipts and cash
disbursements.
III. Rights and Obligations D. To determine that cash balances 9. Review bank statements and
are available for use without the bank replies to
restrictions or with restrictions, confirmation letters.
properly indicated in the
statement of financial position.
IV. Valuation or Allocation E. To determine if cash is recorded 10. Verify existence of cash in
and presented at the proper banks under receivership, cash
amount. subject to court’s restraining
order, in foreign banks and in
foreign currency. This is in
addition to the foregoing
procedures which will enable
the auditor to verify proper
valuation of cash.
V. Presentation and Disclosure F. To determine whether cash is 11. Investigate any checks
presented in accordance with representing large or unusual
generally accepted accounting payments to related parties.
principle. 12. Evaluate proper financial
statement presentation and
disclosure of cash
 Obtain analysis of cash balance and reconcile to the general ledger.
- This schedule will typically list the bank, the account number, account type and the year-end balance per
books.
- This balance will then be traced and reconciled to the general ledger as necessary.
 Confirm bank balances as of statement of financial position date.
- A direct approach in proving existence of cash is to confirm amounts on deposit by communicating with
financial institution officials.
- To assist the financial institution in completing the form, information identifying accounts, loans and their
balances are typed by the auditor.
o Other information such as additional accounts, loans, may be provided by the financial institution.
- Bank confirmation request should be
a. Sent to all banks in which the client has an account
b. Signed by the client
c. Mailed by the auditor, and returned directly to the auditor.
 Perform cash count procedures for cash on hand.
- Existence of undeposited collections, petty cash funds and other funds may be verified by conducting a
surprise count of these funds.
- In conducting the cash count the auditor should follow these procedures:
1. Control all cash and negotiable instruments held by the client until all funds have been counted.
2. Insist that the custodian of the cash be present throughout the count.
3. Obtain a signed receipt from the custodian on return of the funds to the client.
4. Ascertain that all undeposited checks are payable to the order of the client either directly or through
endorsement.
 Obtain (prepare) bank reconciliations as of the statement of financial position date.
 - If the client provides the auditor with reconciliation of the balance per the bank statement at the statement of
financial position date with the balance per the company’s accounting records, he should examine such in
detail to satisfy himself that is has been properly prepared.
- A careful review of the client’s reconciliation is important because a cash shortage may be concealed by
omitting a check from the outstanding checks list or by purposely making an error in addition on the
reconciliation.
- The examination of the client-prepared bank reconciliation should also include:
a. Tracing bank balances to bank confirmation responses
b. Verifying the validity of the reconciling items
c. Scanning the bank statements for erasures and alteration.
 Trace all transfers occurring between banks near year-end.
- Tracing bank transfers is an effective procedure to disclose overstatement of cash balances resulting from
kiting.
- Kiting is an irregularity involving transfer of cash between banks, checks drawn on one bank is deposited in
another, several days (called the float period) usually pass before the check clears the bank on which it is
drawn.
o During the period, the amount of the check is included in the balance on deposit at both banks.
o Bank balances are temporality overstated to conceal a cash shortage or meet short-term cash needs.
- Kiting can be prevented by segregation of functions; it can be detected by
a. Obtaining and using a bank cutoff statement and
b. Tracing bank transfers
 Obtain a cutoff bank statement containing transactions several days subsequent to the statement of financial
position date.
- Cutoff Bank Statement is statement covering a specified number of business days (usually 7 to 10) following
the end of the client’s fiscal year.
- This statement should be sent directly by the bank to the auditor. Upon receipt of the statement, the auditor
should:
a. Trace all prior year dated checks to the outstanding checks listed on the bank reconciliation.
b. Trace deposits in transit on the bank reconciliation to deposits on the cutoff statement.
c. Scan the cutoff statement and enclosed data for unusual items.
 Prepare proof of cash and reconcile cash transactions occurring during a specified period as they are recorded
by the bank and the client.
- Proof of Cash is a simultaneous reconciliation of bank transactions and balances with corresponding data per
books for a specified time period.
o It is a substantive test that is generally prepared only when internal control over the recording of cast
receipts and disbursements is considered weak.
o This is essentially a fraud detection procedure which may be used for the last month of the year or for
selected months during the year.
 Verify the client’s cutoff of cash receipts and cash disbursements.
- If a cash count cannot be done on the statement of financial position date to verify the accuracy of the client’s
cutoff of cash receipts. The auditor can trace the deposits in transit on the year-end bank reconciliation to the
credits on the bank statement on the first business day of the new year.
- To ensure an accurate cutoff of cash disbursement, the auditor should determine the number of the last check
prepared on each bank account on the statement of financial position date and verify whether all checks up to
this number have actually been mailed.
- For cash receipts, the auditor should verify the number of the last official receipt and cash sales invoice used
on the statement of financial position date.
 Review bank statements and the bank replies to confirmation letters
- The auditor should review any bank overdrafts and note the existence of any funds that may be subject to
withdrawal restrictions in order to determine the effects (if any) on financial statement presentation.
 Verify existence of cash in banks under receivership, cash subject to court’s restraining order, in foreign
banks and in foreign currency.
- This can be done through examination of minutes, loan agreements and confirmations.
 Investigate any checks representing large or unusual payments to related parties.
- Any large or unusual checks payable to directors, officers, employees, affiliated companies should be carefully
reviewed to determine if whether the transactions were properly authorized recorded and adequately disclose
in the financial statements.
 Evaluate proper financial statement presentation and disclosure of cash
- Review financial statements to make sure
a. Material savings accounts and certificates of deposit are disclosed separately from cash in the bank,
b. Cash restricted to certain uses and compensating balances are adequately disclosed. And
c. Bank overdrafts are included as current liabilities.

PROOF OF CASH (FOUR-COLUMN RECONCILIATION)

 It incorporates the monthly cash receipts and payments to test the internal control over cash and provides additional
evidence of the accuracy of the cash balance.
 It identifies the sources of difference between the company records and the bank statement.
 It provides FOUR separate reconciliations:
a. The reconciliation of the bank and book balance for the previous month.
b. The reconciliation of the receipts recorded by the bank for the current month with the receipts recorded on the
books.
c. The reconciliation of the payments recorded by the bank for the current month with the payments recorded on
the books.
d. The reconciliation of the bank and book balances for the current month.