Audit Procedures for Cash and Bank Balances: Risks, Assertions, and Procedures

The audit of cash and bank balances is a critical component of a financial audit, as it helps to ensure the accuracy and reliability of a company’s financial statements. In this article, we will cover the accounting treatment, audit risks, audit assertions, and audit procedures for auditing cash and bank balances.

Accounting Treatment: Cash and bank balances are typically recorded as current assets on a company’s balance sheet. Under Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), these balances must be recorded at their nominal value, which is the amount that the company expects to collect in the near future.

Audit Risks:

  1. Misappropriation of funds: There is a risk that cash and bank balances could be misused or misappropriated by employees or external parties.
  2. Inadequate internal controls: If a company does not have strong internal controls in place to manage its cash and bank balances, there is a risk that transactions may be recorded inaccurately.
  3. Fraudulent transactions: There is a risk that fraudulent transactions could be recorded in the cash and bank balances, which would result in an overstatement of the balances.
  4. Bank errors: Banks can make errors when processing transactions, which could result in an incorrect recording of cash and bank balances.
  5. Unrecorded transactions: There is a risk that transactions could be missed or not recorded accurately, which would result in an incorrect recording of cash and bank balances.
  6. Unauthorized transactions: There is a risk that unauthorized transactions could be recorded in the cash and bank balances, which would result in an overstatement of the balances.
  7. Reconciliation errors: There is a risk that errors could be made when reconciling cash and bank balances, which would result in an incorrect recording of the balances.
  8. Invalid transactions: There is a risk that invalid transactions could be recorded in the cash and bank balances, which would result in an incorrect recording of the balances.
  9. Unreported transactions: There is a risk that transactions could be reported incorrectly, which would result in an incorrect recording of the balances.
  10. Lack of documentation: There is a risk that there may be a lack of documentation to support transactions recorded in the cash and bank balances, which could result in an incorrect recording of the balances.
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Audit Assertions:

The audit assertions related to cash and bank balances are:

  1. Existence: The cash and bank balances exist and are owned by the company.
  2. Completeness: All cash and bank balances have been recorded in the financial statements.
  3. Rights and obligations: The company has the right to the cash and bank balances and the obligations associated with them.
  4. Valuation and allocation: The cash and bank balances have been recorded at the correct amount and are properly classified.
  5. Presentation and disclosure: The cash and bank balances have been properly presented and disclosed in the financial statements.

Audit Procedures for Cash and Bank Balances:

  1. Obtain an understanding of the entity’s internal control and cash management procedures, including the segregation of duties and the system of authorization and approval.
  2. Review the cash receipts and disbursements journal to identify any unusual transactions, such as large amounts or unusual payment methods.
  3. Review the bank statements and reconcile items to identify any irregularities, such as bank charges or errors in the bank’s records.
  4. Reconcile the cash and bank balances per the entity’s records to the amounts per the bank statements to identify any discrepancies.
  5. Review the entity’s cash management policies and procedures to determine if they are being followed and if any changes are necessary.
  6. Test the existence of cash and bank balances through inquiries of bank personnel and confirmation requests to the banks.
  7. Test the accuracy of the recorded cash and bank balances by comparing the bank statements to the entity’s records.
  8. Obtain an understanding of the entity’s process for recording cash and bank transactions and assess its reliability.
  9. Consider the results of the audit of other relevant financial statements accounts, such as accounts receivable and accounts payable, to identify any potential effects on cash and bank balances.
  10. Consider the results of other audit procedures, such as substantive analytical procedures, in assessing the accuracy of the recorded cash and bank balances.
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