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How to audit Cash and Cash
Equivalents: Basic Audit
procedures
Published on September 28, 2015
LikeHow to audit Cas h and Cash Equivalen ts: Basic Aud it procedures

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Sabbir Ismail
FollowSabbir Ismail
Investment Banker

Main area of focus for audit of Cash and cash equivalents:

1. Types of bank account and facilities provided by bank.

Audit procedures in details:

1. The first and most important task above all is to get a clear
understanding about the processes and procedures that the
organisation applies. So at the very beginning of the audit and to
make a effective audit plan, you will have to talk with the
 management about the business processes. To audit Cash and
Cash equivalents, you will need to get a clear idea about the bank
accounts, types of bank accounts, number of bank accounts,
purpose of each bank account, banking facilities arrangements and
agreements, overdraft facilities, bank guarantees, Authorized
signatories, Authorization matrix, bank payment process, bank
receipt process, petty cash payment process and petty cash top up
process., daily petty cash holding limit.
2. For me, the easiest thing to do is to send confirmation letters to
banks to ensure year end bank balances from a third party. Usually
all the CA firms have their own letter formats for bank
confirmation. Always bank confirmations are sent by the Auditor,
requesting the bank to disclose the information directly to the
auditor. In a Bank confirmation letter, both the auditor and the
client will sign. The clients authorized signatories will sign in the
bank confirmation letter in order to authenticate the auditors
request. The bank confirmation letter will have to be printed in
Audit firms letterhead. So the task is simple. Request the client to
give their bank account details, name of the contact persons in the
bank (to whom you will send confirmation letter), get the contact
details of the banks, prepare the confirmation letters for each bank
(not for each bank account, An organisation might have several
bank accounts in a single bank and usually the banks disclose the
information related to all bank accounts and banking facilities
arrangements that your client have with them), request the client to
sign the confirmation letters and send them to the banks.
Remember, sometimes client might ask you to handover the bank
 confirmation letters to them and might suggest you that they will
send the confirmation letters for your convenience. Sometimes the
client may insist that they will collect the confirmation letters from
the bank and will send it to you by claiming that they have good
relationship with the bank and the bank will feel comfortable to
send the confirmation letters directly to the client. In the above
circumstances, do not allow your client to send the confirmation
letters to the bank or to ask them to collect the confirmation letters
for you. It is the responsibility of the auditors to send the
confirmation letters directly to the bank and ask the bank to
confirm the balances directly to you. If the bank doesn't send you
balance confirmation letters, you can arrange a conversation with
the bank officials and if possible, send the confirmation letters in
scanned copy through e-mail.
3. Now, the bank will confirm the balances as per their record and it
is usual that the amount the bank confirmed will not match with
the organisations bank book balances. Here you will need to
reconcile the bank statement balances with the bank book balances.
Usually your client will prepare bank reconciliations on a monthly
basis. But you will have to re-perform the bank reconciliation at
least for two months including the last month of the accounting
period that you are auditing. If after re-performing bank
reconciliation, you can confirm the accuracy of the record of the
bank book, all you will have to do is to cross match the amounts
with the figures that bank confirmed via bank confirmation letter.
We will have to identify if there are any adjusting entries that are
 yet to be reconciled. If we find any items that are yet to be
reconciled, must be reconciled.
4. After re-performing the bank reconciliations, you will have to
check whether the Reconciling Items have been subsequently
cleared or not. So to do this you will have to collect the bank
statements of post year end period. Pick the Items that were not
cleared in the year end and check if they were subsequently
cleared. If not, inquire to the management.
5. If you have started auditing before the end of the accounting
period, you must have to attend during the physical cash count in
the year end. This is must. Collect a cash certificate from the client
and sign off your worksheet as well by the client. In addition to
that to check the control on petty cash balances, you can conduct a
surprise cash count.
6. To test whether controls are working effectively over bank
payments and petty cash payments, you can perform a control test
on sampling basis. But before performing a control test, you must
find the control points first.
7. You can collect the list of authorized signatories (which was
submitted to the bank) and match it with the authorization matrix.
8. You will have to check the overdraft balances with the bank
accounts. You will have to make sure that overdraft balances are
reflected in the balance sheet as current liabilities.
9. Inquiry about fixed deposits, ensure fixed term deposit status ( for
interest rate and amount) from bank confirmations. ( A fixed term
deposit for less than 3 months, will be considered as Cash and
cash equivalents)
 10. You will have to collect copies of insurance policy coverage
for Cash in transit and Burglary & housekeeping.
11. Companies policy regarding payments made by cheque and
petty cash payment limit.
12. If there are any foreign currency bank account exists, please
do confirm that appropriate exchange rate is used for the
presentation of foreign currency account balances in the financial
statements.
13. When it comes to recognize interest income, please make
sure that interest income is properly accounted for in accruals basis
instead of cash basis.

The points I have discussed here, are more like basic audit procedures to
audit cash and cash equivalents. There could be more depending on the
business and operation type. I have ignored the name and types of
workings required as that depends on firms practice. Discuss with your
seniors regarding the disclosure and presentation of cash and cash
equivalents in the accounts. Whenever you will find any observations,
please do communicate with your team first and then the client if
required.

Correct me If I am wrong. And please add something if required.

Thank you

Regards,
Sabbir Ismail

ACCA Student

Disclaimer: Please dont consider the audit procedures stated above as