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Substantive Test of Cash: Audit of Cash On Hand and in Bank

The audit of cash is important because cash transactions ultimately settle other accounts and cash has high inherent risk of misappropriation. Common cash misstatements include failure to bill or collect, duplicate payments, and improper personal expenses. Auditors test cash controls and transactions to identify such misstatements. Key cash assertions are existence, completeness, accuracy, cutoff, presentation, and detail tie-in. Audit procedures include cash counts, bank confirmation, obtaining bank reconciliations, cutoff statements, and inspecting savings accounts.

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968 views

Substantive Test of Cash: Audit of Cash On Hand and in Bank

The audit of cash is important because cash transactions ultimately settle other accounts and cash has high inherent risk of misappropriation. Common cash misstatements include failure to bill or collect, duplicate payments, and improper personal expenses. Auditors test cash controls and transactions to identify such misstatements. Key cash assertions are existence, completeness, accuracy, cutoff, presentation, and detail tie-in. Audit procedures include cash counts, bank confirmation, obtaining bank reconciliations, cutoff statements, and inspecting savings accounts.

Uploaded by

lovely abinal
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 9

SUBSTANTIVE TEST OF CASH


Audit of Cash on Hand and in Bank
The audit of cash is considered an important part of an audit mainly due to two reasons:
a. Almost all business transactions will be ultimately settled through the cash
accounts, the audit of cash accounts also assists in the verification of other asset
and liability accounts as well as revenue and expenses.
b. Cash is the highly liquid asset in a company and it is an area of high inherent risk
since there is a relatively high risk of misappropriation.
The following misstatements which result in the improper payment of or failure to
receive cash may be uncovered through the test of controls and substantive test of
transactions.

 Failure to bill a customer


 Billing a customer at a price lower than called for by company policy
 Abstraction of cash receipts from customers before they are recorded
 Duplicate payment of vendor’s invoice
 Improper payments officers’ personal expenses
 Payment for merchandise or goods that were not received
 Payment to an employee for more hours than he or she has worked
 Payment of interest to a related party for an amount far exceeding the going rate

The first three misstatements could be uncovered as part of the audit of the revenue
and cash receipts cycle, the next three in the audit of the acquisition and payment cycle
and the last two in the tests of the payroll and personnel cycle and the financing and
investing cycle, respectively.
Assertions for Auditing Cash and Bank balances

Assertions Descriptions
1.   Existence  To ensure that the cash is actually in existence and belong
to the company at a given date or at the year-end date.
2.   Completeness  To ensure that there is no unrecorded cash.
3.   Accuracy  To ensure that cash at bank stated on the reconciliation is
accurate.

4.   Cut-off  To ensure that amounts are correctly recorded in the proper


period.
5.   Presentation  To ensure that the cash balance and related statement of
and disclosure comprehensive income entries are correctly disclosed in the
financial statements in accordance with legislation and
accounting standards.
6.   Detail tie-in  Cash in the bank as stated on the reconciliation foots
correctly and agrees with the general ledger.
Audit Procedures
1. Conduct a cash count of undeposited collections, petty cash and other funds
2. Confirm bank balance by direct correspondence with all banks in which the client
has had deposits and loans during the year
3. Obtain bank reconciliation
4. Obtain cutoff bank statement showing the client’s transactions with the bank at
least one week after the reporting date
5. Obtain list of interbank transfers of funds a few days before and after the
reporting date
6. Test reasonableness of cutoff
7. Inspect savings account passbook and certificates of deposits
8. Determine any restrictions on availability of cash
9. Determine propriety of financial statement presentation and adequacy of
disclosures.

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