Auditing of cash and cash equivalents is a critical aspect of an audit as it involves verifying the accuracy and completeness of one of the most liquid assets on the balance sheet. The following are the steps involved in auditing cash and cash equivalents:
Accounting Treatment:
Cash and cash equivalents are current assets that are reported on the balance sheet at their face value or historical cost. They are typically the most liquid of all assets and include items such as currency, demand deposits, and highly liquid investments with a maturity of three months or less.
In accounting, cash, and cash equivalents are recorded under the asset account, “Cash and Cash Equivalents.”
Audit Risks:
When auditing cash and cash equivalents, auditors must be aware of a number of inherent risks. These risks can include fraud or misappropriation of cash, errors in recording cash transactions, inaccurate classification of cash and cash equivalents, and inadequate internal controls over cash and cash equivalents.
In order to mitigate these risks, it is important for auditors to have a thorough understanding of the client’s operations and internal controls related to cash and cash equivalents.
Audit Assertions:
When auditing cash and cash equivalents, auditors must consider the following audit assertions:
- Existence: Cash and cash equivalents exist and are available to the entity.
- Completeness: All cash and cash equivalents are recorded and included in the balance sheet.
- Accuracy: The amounts recorded for cash and cash equivalents are accurate and free from material misstatements.
- Classification: Cash and cash equivalents are correctly classified and reported in the appropriate accounts on the balance sheet.
- Valuation: Cash and cash equivalents are recorded at the correct amounts and are supported by appropriate documentation.
Audit Procedures:
In order to verify the accuracy of the cash and cash equivalents reported on the balance sheet, auditors must perform various audit procedures. These procedures can include, but are not limited to:
- Review of the client’s internal control over cash and cash equivalents: This includes reviewing the client’s policies and procedures for recording and reconciling cash and cash equivalents, as well as evaluating the design and effectiveness of these controls.
- Inspection of physical cash and cash equivalents: This involves physically counting the cash and cash equivalents held by the client, including cash in hand, petty cash, and cash in banks.
- Review of cash receipts and disbursements: This involves reviewing the client’s records of all cash transactions, including cash sales, cash purchases, and cash payments.
- Reconciliation of cash and cash equivalents to bank statements: This involves reconciling the client’s cash and cash equivalents balance to the bank statements provided by the client’s bank.
- Test of transactions for accuracy, completeness, and classification: This involves performing a substantive test of selected transactions to verify that they have been recorded accurately, completely, and in the appropriate accounts.
- Verification of the valuation of cash and cash equivalents: This involves verifying that the cash and cash equivalents reported on the balance sheet are valued correctly and are supported by appropriate documentation.
By performing these procedures, auditors can provide assurance to stakeholders that the cash and cash equivalents reported on the balance sheet are accurate, complete, and free from material misstatements.