Every entity that operates some form of business will most likely have cash transactions in its day-to-day operation. This includes collections from its customers and payments to its suppliers.
Collection from its customers, otherwise known as Cash Receipts, is the process where an entity makes the collection, issues a receipt, records the transaction in its books, and ultimately presents an accurate amount of cash and bank balances in its financial statements.
There are many different ways in which Cash Receipts can occur in an entity. For example, the entity may receive payment from its customer via cash, ATM deposits, cheques, online bank transfers, and third-party payment gateway platforms.
Before the auditors decide what procedures to perform, the risks associated with auditing Cash Receipts should first be identified:
- Risk of Material Misstatement: The Risk of Material Misstatement when auditing Cash Receipts is generally low as each Cash Receipt can be verified easily by tracing to supporting documents like bank statements for clearance. One of the common risks when auditing Cash Receipts is that it is not recorded in the appropriate accounting period. However, the risk may be higher when the entity operates in a cash-intensive industry where Cash Receipts have a higher chance of either not being recorded, recorded wrongly, or subject to the risk of misappropriation.
- Control Risk: The Control Risk related to Cash Receipts is collections not being recorded in the correct accounting period or no bank reconciliation process to identify timing differences of Cash Receipts between their books and the bank statement.
- Detection Risk: Detection Risk is when an auditor cannot detect the material misstatements in the reported amounts of cash and bank balances arising from wrongly recording Cash Receipts.
The audit risk for Cash Receipts is generally low aside from risks coming from Cash Receipts recorded near the end of the accounting period and Cash Receipts of an entity in a cash-intensive industry.
For an auditor to be reasonably assured that the recorded Cash Receipts details are accurate and in the correct accounting period, tests will be performed to cover the audit assertions.
The assertions applicable to Cash Receipts are similar to that of cash and bank balance, as follows:
- Completeness: All Cash Receipts of the entity have been recorded and presented in the financial statements as part of cash and bank balances.
- Rights and Obligations (Ownership): The Cash Receipts belong to the entity and a liability is created for any unidentified Cash Receipts, taking note that such unidentified Cash Receipts should not be significant.
- Valuation: Cash Receipts are correctly recorded in the books per the supporting documents.
- Existence: The Cash Receipts which form a part of cash and bank balance exist at the reporting date in the form of cash held physically or in the bank.
- Presentation and Disclosure: The Cash Receipts, which are a part of the cash and bank balance in the financial statements and relevant disclosure notes to the financial statement are complete and follow the applicable accounting standards.
Test of Controls:
Controls relevant to Cash Receipts include recording of cash received, matching cash received to receivables, bank reconciliation process, and segregation of duties.
- Recording of Cash Received: This control ensures that all payments received have been recorded through the issuance of official receipts, cash collection, or cheques received.
- Matching Cash Received to Receivables: This control ensures that the entity has a process to match all cash received to relevant receivables to ensure the correct collections from customers. This control is also a part of good credit control.
- Bank Reconciliation Process: This control is to reconcile the entity’s recorded Cash Receipts, which ultimately form part of the cash and bank balance, to the bank statement and ensure all differences are solely due to timing differences.
- Segregation of Duties: This control is as crucial as in other processes. It effectively ensures the work of the original preparer has been scrutinized and approved, reducing the risk of any material error or fraud.
Substantive Audit Procedures for Cash Receipts:
Substantive Audit Procedures for Cash Receipts consist of the following components:
1) Substantive Analytical Procedures:
Substantive Analytical Procedures analyze the changes or lack of changes in the entity’s financial’s performance. The changes or lack of changes must be benchmarked against a set expectation such as historical performance, latest business developments, and any other information relevant to the entity.
This will allow the auditor to detect potential areas with a higher risk of material misstatements.
For example, the trend in the timing of the entity’s Cash Receipts can be benchmarked against historical data and also its debtor’s credit period policy.
This may assist the auditor in identifying high audit risk areas in months where the Cash Receipts are unusually high and are not per the auditor’s expectation. This ultimately allows the auditor to design appropriate audit procedures to address such risk.
2) Test of Details for Cash Receipts:
Audit procedures are designed around assertions similar to cash and bank balances to test details for Cash Receipts. This is because cash Receipts are audited concurrently by performing the below audit procedure. Examples and descriptions of the test of details are given in the table below:
|Audit Assertion||Example of Audit Procedure|
|Completeness||Obtaining external bank confirmations and ensuring that the entity records all the balances stated in the confirmation.|
|Rights and Obligations||Verifying the Cash Receipts against relevant receivables to ensure the cash belongs to the entity.|
|Valuation||Reviewing bank reconciliations prepared by the entity to ensure reconciliation of the recorded bank balances to the bank statements is done correctly.|
|Existence||Inspecting bank statements, performing physical cash count, and obtaining bank confirmation to ensure the cash exists.|
|Presentation and Disclosure||Reviewing the financial statements prepared by the entity and identifying if information regarding cash and bank balances has been sufficiently disclosed per the applicable accounting standard.|