1.

​ Introduction
In auditing and assurance, substantive procedures are detailed audit tests
designed to gather evidence about the integrity of financial statement assertions. These
procedures encompass analytical techniques and tests of details to verify specific
balances and transactions. For cash at banks, substantive procedures typically include
confirming balances with financial institutions, reconciling bank statements, and
analyzing significant reconciling items such as deposits in transit or outstanding
checks (Messier, Glover, & Prawitt, 2016).

The role of substantive procedures for cash at banks is multifaceted. Firstly,

these procedures aim to ensure that cash balances are reported accurately in the
financial statements. Secondly, they verify that all transactions involving cash are
properly authorized and comply with established guidelines. Thirdly, substantive
procedures are designed to detect any potential errors or fraudulent activities related to
cash at banks. Additionally, these procedures enable auditors to assess the reliability
and effectiveness of the entity’s internal controls over cash management. Furthermore,
they help identify potential risks associated with cash handling and reporting. Lastly,
substantive procedures provide critical assurance to stakeholders by enhancing the
credibility of financial information and reducing concerns related to liquidity and
operational integrity (ICAEW, 2019).

This discussion will analyze the substantive procedures used in auditing cash at
banks. It will cover definitions of cash and cash equivalents, major cash transactions,
and types of bank accounts. Key topics include the risks associated with cash, relevant
assertions, and substantive analytical procedures. The discussion will also explore
detailed testing methods for cash transactions and balances. Finally, it will highlight
crucial auditing procedures, such as bank confirmations and reconciliations,
emphasizing their importance in financial reporting and stakeholder trust.

2. Overview of cash at bank

Cash at bank is an important item affected by most of an entity's accounting

transactions. The main sources of cash receipts typically come from the revenue
process, the sale of property, plant, and equipment, and the issuance of long-term debt
or equity, while cash disbursements are primarily related to the purchasing and human
resources management processes. During the audit of cash at the bank, auditors will
consider potential risks and related assertions.

The line item “cash” reported in the financial statements represents currency on hand
and cash on deposit in bank accounts, including certificates of deposit, time deposits,
and savings accounts. Frequently, certain “cash equivalents” are combined with cash
for presentation in the financial statements. FASB ASC Topic 230, “Statement of Cash
Flows,” defines cash equivalents as short-term, highly liquid investments that are
readily convertible to cash and so near their maturity that there is little risk of change
in their value. (Cash 2, n.d., 530)

2.1. Major cash transactions

Virtually, all accounting transactions pass through the cash account as part of their
“cradle-to-grave” cycle, cash is affected in one way or another by all of the entity’s
business processes. (Cash 2, n.d., 530)

The main source of cash receipts is the revenue process, other sources of cash include
the sale of property, plant, and equipment and the proceeds from issuing long-term
debt or capital stock. (Cash 2, n.d., 530)

The main sources of disbursements from cash are the purchasing and human resource
management processes(Payroll). Generally, large payments initiated in the purchasing
process are for acquisitions of inventory and property, plant, and equipment. Payments
on long-term debt and repurchase of stock(stockholders’ equity) are other types of
cash disbursements. (Cash 2, n.d., 530)

2.2. Types of bank accounts

In order to optimize its cash flow and control cash, entities need to use a variety of
different types of bank accounts. This helps entities more effectively manage cash
flows in and out, while enhancing internal control over cash. The following types of
bank accounts are typically used:

●​ General cash account.

●​ Imprest cash accounts.
●​ Branch accounts.
-​ General cash account: (Cash 2, n.d., 531)
+​ This is the main cash account for most entities.
+​ The major source of cash receipts for this account is the revenue process, and
the major sources of cash disbursements are the purchasing and human
resource management processes.
+​ This cash account may also be used for receipts and disbursements from other
bank accounts maintained by the entity. For many small entities, this is the only
cash account maintained.
 +​ Example: For example, a retail company may receive money from sales
revenue into this general cash account and use it to pay for the supplier of
goods or pay salaries to employees.
-​ Imprest cash accounts: (Cash 2, n.d., 531)
+​ An imprest bank account contains a stipulated amount of money to be used for
a specific purpose.
+​ Use of imprest accounts also minimizes the time required to reconcile the
general cash account
+​ For example, separate imprest accounts are frequently used for disbursing
payroll and dividend checks. In the case of payroll, a separate bank account is
established for disbursing payroll. Prior to the disbursement of payroll to
employees through check or direct deposit, funds sufficient to cover payroll are
transferred from the general cash account to the payroll imprest account. The
payroll is then drawn on this imprest account, which reduces the imprest
account balance back to a specified minimum amount required to keep the
account open and active with the bank. Thus, the payroll account serves as a
clearing account for payroll payments and facilitates the disbursement of cash
while also helping to maintain adequate control over cash.
-​ Branch accounts:
+​ Companies that operate branches in multiple locations may maintain separate
accounts at local banks. This allows each branch to pay local expenses and to
maintain a banking relationship in the local community.
+​ Branch cash accounts can be operated in a number of ways:
●​ In some cases, the branch accounts are nothing more than imprest accounts for
branch payments in which a minimum balance is maintained. The branch
submits periodic cash reports to headquarters, and the branch account receives
a check or transfer from the general cash account.
●​ In other cases, the branch account functions as a general cash account by
recording both cash receipts and cash disbursements.
+​ For proper control, branches should be required to submit periodic cash reports
to their headquarters, and entity management should carefully monitor the
branch's cash requirements and account balances.

Based on the understanding of the above account types, our group believes that the
general cash account is the most common type of account among entities. The reason
is that it serves as the center for most of the entity's cash transactions, from core
business activities (revenue and purchasing expenses) to other operations. While
imprest and branch accounts serve specific purposes and are usually fewer in number,
the general cash account is the foundation for daily cash flow and the place where the
majority of the entity's monetary activity is concentrated. Even entities that use
multiple accounts still need a general account to manage overall cash flow and
execute large transactions. However, it should be noted that this is just a personal
opinion based on the analysis of the function of each account type.

2.3. Assertions:
●​ Assertions about classes of cash transactions (cash receipt and cash
disbursement transactions):
-​ Occurrence: Cash transactions have indeed occurred and are related to the
entity.
-​ Completeness: All transactions and events that have occurred should have been
recorded.
-​ Accuracy: Amounts and other data relating to recorded cash transactions and
events have been recorded appropriately and correctly.
-​ Cut-off: Cash transactions and events have been recorded in the proper
accounting period.
-​ Classification: Cash transactions and events have been recorded in the proper
accounts.

●​ Assertions about account balances:

-​ Existence: Actual bank deposit balance existing at the end of the period.
-​ Completeness: All bank deposit balances owned by the entity have been
recorded.
-​ Rights and obligations: The entity has ownership rights over the bank deposit
balance. (less important)
-​ Valuation, and Allocation: The bank deposit balance is recorded at appropriate
amounts.

●​ Assertions about presentation and disclosure:

-​ Occurrence & Rights and obligations: disclosed events, transactions, and other
matters have occurred and pertain to the entity.
-​ Completeness: all disclosures that should have been included in the financial
statements have been included.
-​ Classification and understandability: financial information is appropriately
presented and described, and disclosures are clearly expressed.
 -​ Accuracy and valuation: financial and other information are disclosed fairly
and at appropriate amounts.

2.4. Major risks:

The major risks may include the failure to disclose all bank balances owned by the
client, discrepancies in reconciliation items between bank balances and accounting
records, and the omission or misstatement of immaterial cash amounts.

-​ Existence:
+​ Material cash floats being omitted or misstated
+​ The recorded bank deposit balances do not actually exist
+​ Example: The auditor compares the transaction balances in the bank books
with the bank statements to ensure that all transactions, including those
occurring outside of business hours, have been properly recorded. If any
transactions are omitted, the financial statements may not accurately reflect the
bank's actual operations.

-​ Completeness:
+​ Not all bank balances owned by the client being disclosed
+​ Material cash floats being omitted or misstated
+​ Example: For bank account balances, the auditor will obtain a confirmation
letter from the bank to confirm that the balance recorded on the financial
statements actually existed at the reporting date. This ensures that the assets
and capital on the books are not falsely increased.

-​ Valuation and allocation: Reconciliation differences between bank balance and

cash book balance being misstated
+​ Example: The auditor will review the valuation procedures for foreign currency
deposits to ensure that they are translated and recorded at the correct exchange
rate at the reporting date. If the exchange rate is not applied correctly, the
recorded amount of these deposits may be misleading, affecting the financial
statements.

-​ Right and obligation: The entity has legal title to all cash balances shown at the
year-end
+​ Example: Auditors examine contracts, terms and conditions relating to deposit
accounts to verify that the bank has legal title to the recorded assets (e.g.
deposits) and is obligated to pay for the recorded liabilities. This is particularly
important for loans and collateral.
3. Substantive analytical procedures of cash at bank
Due to the residual nature of cash, substantive analytical procedures have
limited applicability in cash auditing. Cash lacks predictable relationships with other
financial statement accounts, restricting auditors to basic comparisons with prior
years' balances and budgeted amounts. To compensate for this inherent limitation,
auditors must employ two key approaches: (1) extensive tests of controls and/or
substantive tests of transactions for cash receipts and disbursements and (2) extensive
tests of the entity’s bank reconciliations.

Offset 1: Extensive Tests of Controls and Substantive Tests of Transactions

Auditors begin by assessing the effectiveness of internal controls over
cash receipts and disbursements, as strong controls reduce the need for
extensive substantive testing. Key controls include segregation of duties,
proper authorization of cash transactions, and timely recording of cash receipts
and disbursements. Tests of controls might include inspecting approved cash
receipts documentation, verifying that canceled checks bear authorized
signatures, and tracing cash disbursements to voucher packets containing
purchase orders, receiving reports, and invoices (ICAEW, 2019).
Substantive tests of transactions complement these control tests by
focusing on the validity and accuracy of recorded cash movements. For cash
receipts, auditors test controls by vouching entries in the cash receipts journal
to supporting documents, such as remittance advice and deposit slips, to
confirm that recorded transactions occurred (Table 16-1).

To ensure completeness, auditors trace remittance advice back to the journal

entries and deposit slips. Authorization is validated by examining signatures on
deposit slips and endorsements, while accuracy is tested by recalculating totals
of daily deposits and cross-referencing them with bank statements. For cash
disbursements, similar procedures are applied: canceled checks are traced to
voucher packets and disbursement journals to verify proper recording, and
authorized signatories are confirmed through signature reviews. These
dual-purpose tests not only assess control reliability but also validate the
accuracy of recorded transactions, reducing reliance on analytical reviews. For
instance, unexpected variances in cash balances identified through analytical
procedures may prompt auditors to expand transactional testing to detect errors,
such as unrecorded disbursements or misclassified deposits (Messier, Glover, &
Prawitt, 2016).

Offset 2: Extensive Tests of Bank Reconciliations

Bank reconciliations are a central focus of substantive procedures for
cash, as they directly link the entity's records to external bank statements.
Auditors test the bank reconciliation process by first obtaining the entity's
reconciliation statements and verifying key reconciling items. This includes
tracing deposits in transit and outstanding checks to subsequent bank
statements to confirm their validity. These items are traced to subsequent bank
statements to confirm their validity and ensure proper cutoff (Table 16-2).

For example, in EarthWear’s reconciliation (Exhibit 16-1), auditors confirmed

that deposits in transit cleared within the expected timeframe and that
outstanding checks matched canceled checks in the cutoff statement. Balances
reported in the reconciliation are also cross-checked against the general ledger
and bank confirmations to ensure consistency (Messier, Glover, & Prawitt,
2016).

For more thorough verification, auditors may perform a proof of cash,

reconciling all cash inflows and outflows for a specific period by analyzing
bank statements, cash books, and supporting records. This procedure helps
 detect discrepancies such as unrecorded transactions, duplicate postings, or
fraudulent transfers. When control risk is high or fraud is suspected, auditors
extend testing to identify kiting—a manipulation of cash transfers between
accounts near the period-end. This involves tracing the dates of transfers
recorded in the cash book against bank clearing dates to ensure transactions are
recorded in the correct period. Such extended procedures complement standard
reconciliation tests, addressing risks of material misstatement and enhancing
audit assurance (Messier, Glover, & Prawitt, 2016).

4. Test of details

4.1. Test of details of cash transactions:

By testing both cash receipts and disbursements, the auditor obtains important
evidence about the relevant assertions for the cash account. On most audits, the
substantive tests of transactions for cash receipts and cash disbursements are
conducted together with the tests of controls for the revenue and purchasing processes,
respectively.

Assertion Misstatement Test of details

Occurrences - Cash Receipts: 1. Vouch a sample of entries in the cash receipts

+Fictitious cash journal
receipts have been
Select a sample of cash receipts to remittance advice,
recorded.
+Material cash floats daily deposit slips, and bank statements.
being omitted or 2. Cash Disbursements:
misstated (incorrect Vouch a sample of entries from the cash disbursements
amount). journal to cancelled checks, payment vouchers, and bank
- Cash statements.
Disbursements:
The recorded bank
deposit balances do
not actually exist/
Fictitious cash
disbursements or
disbursements not
 related to the entity
have been recorded.

Completeness - Cash Receipts: 1. Cash Receipts:

Cash receipts have - Trace a sample of bank credit advices or other evidence
occurred but have not of cash receipts to the cash receipts journal and, if
been recorded in the necessary, to the deposit slip.
books. - Perform a proof of cash to ensure all cash receipts
- Cash recorded in the cash receipts journal were deposited into
Disbursements: Cash the bank account.
disbursements have 2. Cash Disbursements:
occurred but have not - Trace a sample of cancelled checks to the cash
been recorded in the disbursements journal.
books. - Perform a proof of cash to ensure all cash
disbursements recorded in the cash disbursements journal
were paid through the bank account.
- Test the numerical sequence of issued checks and
investigate any missing numbers.

Accuracy - Cash Receipts: 1. Cash Receipts: Examine a sample of bank credit

Cash receipts are advice for proper account classification.
recorded with 2. Cash Disbursements:
incorrect amounts or - Examine a sample of cancelled checks for proper
to the wrong account classification.
accounts. - Check footings and calculations in the cash receipts and
- Cash cash disbursements journals.
Disbursements: Cash - Reconcile items in the cash receipts journal to the bank
disbursements are deposit listings and bank statements.
recorded with - Reconcile items in the cash disbursements journal with
incorrect amounts or supporting documentation (e.g., supplier invoices).
to the wrong
accounts.
Cut-off - Cash Receipts: 1. Cash Receipts:
Cash receipts - Note the last check number issued on the last day of the
pertaining to the year and trace it to the cash disbursements journal.
subsequent period are - Examine deposits in transit on the bank reconciliation
recorded in the with the subsequent period's cutoff bank statement.
current period or vice 2. Cash Disbursements:
versa. - Prepare an inter-bank transfer schedule to test the
- Cash proper cutoff of cash transfers.
Disbursements: Cash - Examine outstanding checks on the bank reconciliation
disbursements with the subsequent period's cutoff bank statement.
pertaining to the
subsequent period are
recorded in the
current period or vice
versa.

- Cash Receipts: 1. Cash Receipts: Examine a sample of bank credit

Classification
Cash receipts are advice to ensure proper account classification.
recorded to the 2. Cash Disbursements:
wrong accounts (e.g., - Examine a sample of cancelled checks to ensure proper
recording sales account classification.
revenue to another - Review original documentation to verify account
account). classification.
- Cash
Disbursements: Cash
disbursements are
recorded to the
wrong accounts (e.g.,
recording operating
expenses to an asset
account).
 4.2. Test of details of cash account balance:

Assertion Misstatement Test of details

Existence Bank deposit balance 1. Confirm bank balances with the financial institution by
is recorded but does sending a standard bank confirmation letter.
not actually exist.
2. Reconcile the balances on the bank confirmation with
There may be
fictitious or closed the balances on the bank reconciliation.
bank accounts that 3. Examine bank statements to verify transactions and
are still presented.
balances. Perform a cash count if there is significant cash
on hand.

Completeness Not all bank accounts 1. Gather information about all bank accounts owned by
owned by the entity the entity.
are disclosed. There 2. Review minutes of board meetings and loan
may be existing bank agreements to identify potential bank accounts. Request
deposits that have not the bank to confirm information about all accounts the
been recorded in the entity holds.
books. 3. Reconcile the detailed list of bank deposits with the
cash receipts journal and bank statements to ensure all
receipts have been deposited.
4. Perform cutoff procedures to ensure end-of-period
deposits are recorded in the correct period.
5. Perform a proof of cash to ensure no bank transactions
are omitted.

Bank deposits are 1. Review agreements related to bank accounts to

Rights and
recorded but the determine ownership and any restrictions.
obligations
entity does not have 2. Confirm information about loan agreements and
(Weak ownership rights compensating balances with the bank.
evidence)
(e.g., third-party 3. Review the items on the bank reconciliation to ensure
funds). There may be they belong to the entity.
 restrictions on the use
of bank deposits
(e.g., compensating
balances) that are not
disclosed.

Bank deposit balance 1. Test the mathematical accuracy of the bank

Valuation, and
is incorrectly reconciliation and reconcile the book balance with the
Allocation
recorded due to general ledger.
errors in bank 2. Reconcile the bank balance on the reconciliation with
reconciliation. There the balance on the bank confirmation.
may be inaccurate or 3. Trace deposits in transit on the bank reconciliation to
fraudulent bank the subsequent period's bank statement (cutoff bank
reconciliation items statement).
(e.g., fictitious 4. Compare outstanding checks on the bank
deposits in transit, reconciliation with paid checks (or electronic copies) in
outstanding checks the subsequent period's bank statement to verify the
that have been paid payee, amount, and endorsement.
but not cleared). 5. Examine bank charges and other items on the bank
statement with the bank reconciliation. Perform extended
bank reconciliation procedures if there is a risk of fraud
or weak controls.
6. Perform a proof of cash to detect potential errors or
fraud.
7. Verify the classification of cash equivalents.

5. Some key substantive procedures

5.1. Confirmation with bank:

5.1.1. Purposes:
The primary purpose of obtaining bank confirmations during an audit is to verify the
accuracy and completeness of a client's bank balances, transactions, and obligations as
recorded in their financial statements. The confirmation process provides independent
third-party evidence to enhance audit reliability and reduce the risk of misstatement or
fraud.

Bank confirmations are a critical tool in the audit process, serving as a direct means of
verifying an entity’s banking relationships and financial position. Based on the
provided information, the key purposes of bank confirmations can be analyzed from
multiple perspectives, including completeness, existence, rights and obligations, and
valuation.

1. Verifying Completeness of Financial Information

-​ Completeness refers to ensuring that all financial obligations, assets, and
transactions have been recorded and disclosed properly. Bank confirmations
help auditors determine whether an entity has:
●​ Undisclosed liabilities, such as loans, guarantees, or letters of credit
●​ Hidden deposits or accounts that are not recorded in the financial statements
●​ Closed or inactive accounts that may still have outstanding obligations
-​ Potential Risk Without Confirmation:
If an entity omits liabilities (e.g., unrecorded loans or credit lines), its financial
position may appear stronger than it actually is, misleading investors, creditors, and
regulators. Bank confirmations help auditors detect such omissions.

2. Ensuring Existence of Bank Balances and Liabilities

-​ Existence refers to verifying that recorded assets (such as cash in bank
accounts) and liabilities (such as loans) actually exist. Auditors use
confirmations to validate:
●​ The entity’s reported cash and deposit balances
●​ The existence of outstanding debts, overdrafts, or loans
●​ Securities or collateral agreements linked to the entity’s accounts
-​ Potential Risk Without Confirmation:
A company could inflate cash balances by recording fictitious deposits, as seen in the
Parmalat fraud case, where a fraudulent $4.9 billion bank balance was used to mislead
auditors. Without independent confirmation, such frauds may go undetected.

3. Confirming Rights and Obligations Over Bank Balances

 -​ Rights and obligations refer to whether the entity actually owns the reported
bank balances and is responsible for its recorded liabilities. Bank confirmations
help auditors verify:
●​ If restricted cash balances exist (e.g., funds pledged as collateral)
●​ Whether any joint accounts or third-party claims exist over the company’s
funds
●​ If the company has legal obligations related to bank-held assets or liabilities
-​ Potential Risk Without Confirmation:
An entity might overstate its liquidity by failing to disclose restricted cash, or it may
understate liabilities by hiding obligations tied to bank accounts.

4. Verifying Valuation and Cutoff for Accurate Financial Reporting

-​ Valuation ensures that reported figures accurately reflect the entity’s financial
position, while cutoff ensures transactions are recorded in the correct period.
Bank confirmations assist auditors in:
●​ Matching recorded balances with actual bank-reported balances
●​ Confirming the accuracy of interest rates, maturities, and currency values
●​ Ensuring transactions near year-end are recorded in the correct period
-​ Potential Risk Without Confirmation:
Without direct confirmation, an entity may manipulate financial reports by:
●​ Delaying loan recognition to make financial statements look better
●​ Overstating cash balances or understating liabilities to boost financial ratios

5. Identifying Additional Financial Risks and Commitments

-​ Beyond verifying balances, bank confirmations also reveal other financial risks
that might not be easily identified through traditional audit procedures. These
include:
●​ Unused credit facilities and contingent liabilities, such as guarantees or comfort
letters
●​ Security arrangements and pledges that affect an entity’s financial standing
●​ Derivative transactions or complex financial instruments
-​ Potential Risk Without Confirmation:
A company could be at significant financial risk due to off-balance sheet
commitments, which can mislead investors and creditors. Auditors use confirmations
to uncover such hidden risks.

6. Fraud Detection and Prevention

-​ Bank confirmations play a vital role in fraud detection, helping auditors
identify:
●​ Fictitious cash balances, as seen in the Parmalat fraud
 ●​ Unauthorized loans or undisclosed liabilities
●​ Fabricated bank statements by independently verifying information
-​ Potential Risk Without Confirmation:
Fraudulent companies may forge bank statements, but an independent confirmation
ensures that auditors receive authentic data directly from the bank, reducing the risk of
deception.

Based on the analysis, the primary purpose of bank confirmations is to provide

auditors with independent, third-party verification of an entity’s financial standing.
They help ensure:​
- Completeness – All accounts and liabilities are disclosed​
- Existence – Recorded balances and debts actually exist​
- Rights & Obligations – The company has legitimate ownership and responsibility​
- Valuation & Cutoff – Financial records are accurate and correctly timed​
- Risk Identification – Hidden commitments and off-balance sheet liabilities are
uncovered​
- Fraud Prevention – Prevents manipulation of financial reports and fraudulent
activities
In modern auditing, electronic confirmations have become a preferred method due to
their efficiency, security, and reliability, reducing the risks associated with paper-based
confirmations.
By using bank confirmations effectively, auditors enhance financial transparency,
strengthen investor confidence, and mitigate fraud risks—making them a cornerstone
of the audit process.

By confirming these details, auditors ensure that the financial statements present a true
and fair view of the company’s financial position and comply with accounting
standards.

5.1.2. Bank Confirmation Procedures and Scope:

5.1.2.1. Scope:
Testing of bank balances will need to cover completeness, existence, rights and
obligations and valuation. All of these elements can be tested directly through the
device of obtaining third party confirmations from the client's banks and reconciling
these with the accounting records, having regard to cut off.
The assurance providers should update details of bank accounts held.
The form and content of a confirmation request letter (bank letter) will depend on the
purpose for which it is required and on local practices.
The most commonly requested information is in respect of balances due to or from the
client entity on current, deposit, loan and other accounts. The request letter should
provide the account description number and the type of currency for the account.
It may also be advisable to request information about nil balances on accounts, and
accounts which were closed in the twelve months prior to the chosen confirmation
date. The client entity may ask for confirmation not only of the balances on accounts
but also, where it may be helpful, other information, such as the maturity and interest
terms, unused facilities, lines of credit/standby facilities, any offset or other rights or
encumbrances, and details of any collateral given or received.
The client entity and its assurance providers are likely to request confirmation of
contingent liabilities, such as those arising on guarantees, comfort letters, bills and so
on.
Banks often hold securities and other items in safe custody on behalf of customers. A
request letter may thus ask for confirmation of such items held by the confirming
bank. While alternative methods such as bank statements or online banking platforms
can verify balances, they do not provide information on undisclosed liabilities or
complex arrangements. However, bank personnel are not required to conduct a
comprehensive search beyond the requested information, so confirmations may not
reveal all possible deposits or loans. If additional details are needed, auditors may
send a separate confirmation letter signed by the client to the responsible bank official.

5.1.2.2. Procedures:
The procedure is simple but important. (ICAEW, 2019).
(a) The banks will require explicit written authority from their client to disclose the
information requested.
(b) The assurance providers' request must refer to the client's letter of authority and
the date thereof. Alternatively it may be countersigned by the client or it may be
accompanied by a specific letter of authority.
(c) In the case of joint accounts, letters of authority signed by all parties will be
necessary.
(d) Such letters of authority may either give permission to the bank to disclose
information for a specific request or grant permission for an indeterminate length of
time.
(e) The request should reach the branch manager at least two weeks in advance of the
client's year-end and should state both that year-end date and the previous year-end
date.
(f) The assurance providers should themselves check that the bank response covers all
the information in the standard and other responses.
 ●​ Bank Confirmation Form Example (Example 1) ( Cash 2, 535)

The auditor generally confirms account balance information with every bank or
financial institution that maintains an account for the entity. The American Institute of
Certified Public Accountants, American Bankers Association, and Bank
Administration Institute have agreed on a standard format for confirming such
information. This form is also used to obtain information about any loans the entity
may have with the bank.
Bank confirmations provide third-party written evidence on bank account balances
and other relevant information such as loans, lines of credit, security arrangements.

●​ Example of Fictitious Bank Confirmation ( Cash 2, 536)

Parmalat’s $4.9 Billion Fictitious Bank Confirmation
After taking over his father’s food distribution business, Calisto Tanzi founded a small
milk pasteurization company near Parma, Italy. Later named Parmalat Finanziaria
S.p.A., the company gained notoriety by acquiring a Swedish pasteurization
technology called ultra-high temperature (UHT). This process created the long-life
milk product for which the company is best known. Parmalat expanded its operations
through acquisitions and, by the end of the 1990s, was the fourth largest food
company in Europe, employing over 36,000 people in 30 countries; however,
company expansion through acquisitions meant that Parmalat assumed a heavy debt
burden. Although Parmalat had a strong credit rating entering the 2000s, the business
community began to question Parmalat’s decision not to pay down acquisition debt
with the large amount of cash it had on hand. Suspicions increased when Parmalat was
unable to make a £108 million bond payment. Parmalat officials claimed that the
delay was caused by a temporary liquidity problem. Shortly thereafter, Calisto Tanzi
resigned as chairman and CEO. Following his resignation, allegations arose that
Parmalat had forged a Bank of America confirmation for $4.9 billion and sent it to the
company’s auditors to corroborate the existence of cash. However, the cash did not
exist. The forged confirmation was fuzzy and of poor quality because it is alleged that
Parmalat officials ran the fake confirmation through the fax machine several times as
part of its efforts to hide the fact that the document was a forgery. Before the end of
2003, Parmalat had filed for bankruptcy and investigations began uncovering what
appeared to be a large and intricate accounting fraud, which in the end was hidden by
the company’s false cash deposits. Investors, creditors, and legal authorities
immediately questioned the work performed by the auditors. The Parmalat case is a
high-profile and painful example of a failure in the audit of cash and how important it
is to correctly verify cash balances. The Parmalat case demonstrates the importance of
auditing standards regarding evidence and proper auditing procedures. The SEC’s
Accounting and Auditing Enforcement Release No. 1936, charging Parmalat with
fraud, is available on the SEC’s website, www.sec.gov

5.2. Bank reconciliation:

This is a significant control that directly affects cash auditing. Monthly bank
reconciliations are performed by staff who are not involved in the processing and
recording of cash inflows and outflows, ensuring that the entity's books reflect the
same balance as the bank after reviewing the reconciliation items.

5.2.1. Purpose:
The purpose of bank reconciliation is to ensure the accuracy, completeness, and
legitimacy of an entity’s bank balances and cash transactions. It plays a crucial role in
detecting errors, fraud, and manipulative financial reporting practices such as window
dressing, which is an attempt to overstate liquidity.
1.​ Ensuring Completeness and Accuracy
-​ Reconciles differences between the bank statement and the company’s cash
book.
-​ Verifies that all transactions recorded in the accounting system actually exist.
2.​ Detecting Window Dressing and Cut-off Errors
-​ Prevents fraudulent overstatement of cash by ensuring that only actual deposits
made before the year-end are recorded.
-​ Identifies checks that were recorded as paid but not dispatched, preventing
manipulation of payables and liquidity ratios.
3.​ Verifying Rights and Obligations
-​ Ensures that reported cash balances truly belong to the entity and are not
misstated through unrecorded liabilities or overstated deposits.
4.​ Identifying Unrecorded Liabilities and Contingent Risks
-​ Helps auditors verify whether outstanding checks were properly cleared after
year-end to detect any misrepresentation of cash flow.
-​ Confirms if any contingent liabilities, such as guarantees or undrawn credit
lines, have been omitted.
5.​ Enhancing Audit Reliability
-​ Acts as an independent check to support the completeness of bank balances
through third-party confirmations.
-​ Strengthens assurance by comparing company records with official bank
statements.
By carefully examining the reconciliation process, auditors can detect fraudulent
activities, timing manipulations, and unrecorded transactions, ultimately ensuring the
fair presentation of financial statements.
●​ Example of Bank Reconciliation (Example 2) ( Cash 2, 534)
5.2.2. Procedures:
The auditor typically uses the following audit procedures to test the bank
reconciliation:
1. Verify the mathematical accuracy of the bank reconciliation working paper and
agree the balance per the books to the general ledger.
In Example 2, the working paper has been footed and the balance per the books as
shown on the reconciliation has been agreed to the general ledger.
2. Agree the bank balance on the bank reconciliation with the balance shown on the
standard bank confirmation.
The bank confirmation shown in Example 1 has been prepared so that it corresponds
to the bank reconciliation in Example 2. The $1,854,890 shown on the bank
reconciliation has been agreed to the $1,854,890 balance shown on the bank
confirmation in Example 1.
3. Trace the deposits in transit on the bank reconciliation to the cutoff bank statement.
Any deposit in transit shown on the bank reconciliation should be listed as a deposit
shortly after the end of the period. The tick mark next to the deposits in transit shown
in Example 2 indicates that the deposits were traced by the auditor to the cutoff bank
statement.
4. Compare the outstanding checks on the bank reconciliation working paper with the
canceled (or substitute) checks contained in the cutoff bank statement for proper
payee, amount, and endorsement.
The auditor should also ensure that no checks dated prior to December 31 are
included with the cutoff bank statement that are not included as outstanding checks on
the bank reconciliation. The tick mark next to the outstanding checks shown in
Example 2 indicates that the checks were traced by the auditor to the cutoff bank
statement and that the canceled (or substitute) checks were examined for propriety.
5. Agree any charges included on the bank statement to the bank reconciliation.
In some cases, these charges may result in an adjustment to the entity’s books.
For example,the bank service charges of $250 and the NSF check for $7,400 received
from a customer shown in Example 2 require adjustment of the entity’s records.
6. Agree the adjusted book balance to the cash account lead schedule.
The adjusted book balance would be part of the amount included in the financial
statements for cash.

Care must be taken to ensure that there is no window dressing, by checking the
cut-off carefully. Window dressing in this context is usually manifested as an attempt
to overstate the liquidity of the company by:
(a) keeping the cash book open to take credit for remittances actually received after
the year-end, thus enhancing the balance at bank and reducing receivables, as cash is
more liquid than debt; and
(b) recording cheques paid in the period under review which are not actually
despatched until after the year-end, thus decreasing the balance at bank and reducing
payables. This can contrive to present an artificially healthy looking current ratio.

With the possibility of (a) above in mind, where lodgements have not been cleared by
the bank until the new period, the assurance providers should examine the paying in
slip to ensure that the amounts were actually paid into the bank on or before the end of
the reporting period.
As regards (b) above, where there appears to be a particularly large number of
outstanding cheques at the year-end, the assurance providers should check whether
these were cleared within a reasonable time in the new period. If not, this may
indicate that despatch occurred after the year-end.

6. Conclusion
 References

International Federation of Accountants (IFAC). (n.d.). Handbook of International

Quality Control, Auditing, Review, Other Assurance, and Related Services

Pronouncements 2013 Edition Volume I. International Auditing and Assurance

Standards Board. Retrieved September, 2013, from

https://www.ifac.org/_flysystem/azure-private/publications/files/IAASB%20H

ANDBOOK_Vol%201_0.pdf

ICAEW. (2019). Assurance study manual 2019. Institute of Chartered Accountants in

England and Wales.

Messier, W., Glover, S., & Prawitt, D. (2016). Auditing & assurance services: A systematic

approach (9th ed.). McGraw-Hill Education.