Auditing Cash & Bank Balances

Auditing Cash & Bank balance involves several audit procedures. In broad sense following procedures can be performed,

1. Analytical Procedures
2. Calling Confirmations
3. Reviewing Bank Reconciliations
4. Physical verification
5. Verify the Cash Valuation
6. Cut off testing

1. Analytical Procedures

Cash and/or bank balance can be compared with the previous year respective balance and if there are any material deviations from the previous financial period, management explanations needs to be obtained by the auditor for such variances.

2. Calling confirmations

Calling confirmation is one of most critical audit procedure in verifying cash & bank balances. In particular the auditor must ensure that the bank confirms all the bank balances and related off balance sheet items such as Letter of credit facilities etc.

Therefore the best way to do this is to sending and letter by the auditor himself to the bank with the approval of the management,requesting necessary information.

Further it should note that in the current practice some international banks (Ex. HSBC) outsourced the confirmation activities and therefore auditors can obtain confirmation through online process.



3. Reviewing Bank Reconciliations

Same as calling confirmation this is also a critical audit procedure whereby the auditor can obtain a reasonable assurance on the completeness assertion of the Bank balance. 

In this audit procedure auditor obtains the bank reconciliation prepared by the management and check the accuracy of the reconciliation by considering the balances used for the reconciliation and the appropriateness of the reconciling items (Ex. represented cheques, Unrealized deposits)

4. Physical Verification

with regard to the cash in hand balances, specially petty cash balances surprise physical verification can be arranged so that the auditor can ascertain whether such book balance of cash in hand is physically exists.


5. Cash valuation

In a case where the cash and bank balances are maintained other than reporting currency, such balances needs to be converted to the reporting currency using appropriate exchange rates. Thus the auditor needs to check the accuracy of the conversion of such casn & bank balances in to reporting currency. 
Ex. 

The reporting currency of the company "A" is US $ while it holds bank balances in Euros. Thus such balances carried in Euro needs to be converted to the US $ in the financial statements using appropriate exchange rate.

6. Cut off testing

Cut off testing are used as both substantive procedure and Test of controls. by performing cut off test auditor can ensure that all the payments and receipts that should have recorded in the current financial period were recorded and all the payments and receipts that should have recorded in next financial period were recorded properly.

The auditor selects last 5 payments and receipts recorded in the current year bank book and check whether such transactions are recorded in the proper period. further he select first 5 payments and receipts recorded in the next financial period and ensure that those transactions are recorded in the proper period.