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 client’s authorized
signatories will sign in the bank confirmation letter in order to authenticate the auditor’s request. The bank
confirmation letter will have to be printed in Audit firm’s 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 organisation’s 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 firm’s 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.