Auditing Cash Flow

Auditing Cash & Bank Balances

• Aims to understand audit assertions for cash and bank balances, and to apply appropriate audit procedures to bank reconciliation statements
• Also addresses describing the bank confirmation circularisation process and audit procedures performed upon receiving bank confirmations.

Cash in Financial Statements

• Cash and cash equivalents are classified as financial assets measured at amortised cost
• Cash and cash equivalents are presented net of bank overdrafts repayable on demand
• Bank overdrafts are shown within interest-bearing borrowings in current liabilities
• The majority of a group's cash is held in bank deposits or money market funds with maturity of three months or less to meet short-term liquidity needs
• The movement of cash and cash equivalents are shown in the statement of cash flows.
• Cash is received as cash inflow and spent as cash outflow

Statement of Cash Flows

• Cash flows from operating activities include cash receipts from sales of goods and services and cash payments for goods and services
• Cash flows from investing activities include payments to acquire PPE as well as receipts from sale of PPE
• It also includes receipts/payments from sale of or to acquire equity or debt instruments
• Cash flows from financing activities include proceeds from issuing shares or other equity instruments and issuing debentures, loans, notes, bonds, mortgages
• It also includes cash repayments of amounts borrowed
• Fixed deposits earn interest at rates ranging from 0.12% to 8.00% per annum.

Audit Assertions

• When financial statements are audited, the auditor reviews the management's assertions
• The risk of material misstatement for cash is that it may be overstated

Audit Assertions - Balances

• Existence: Verifies that the cash amount exists
• Rights & Obligations: Checks whether the company has full rights to the cash and if there are restrictions on it
• Completeness: Ensures all balances that should have been reported are included
• Accuracy & Valuation: Determines if the amount is reported at the appropriate value
• Cut off: Determines if the amount includes transactions that should be reported for other periods
• Presentation & Disclosure: Ensures that the company has made all necessary disclosures about cash balances as per SFRS

Audit Programme - Cash

• Audit program is a system of audit objectives, scope, timeline, and activities carried out by auditors
• Opening balances should be agreed to last year's financial statements
• The cash balance in the financial statements should be compared with the general ledger
• Analytical procedures should be performed
• Bank confirmations should be obtained for bank accounts opened or closed during the year
• Opened or closed bank accounts must be supported by a director's resolution
• Bank reconciliations should be reviewed

Audit Evidence

• Auditors must get evidence from the client and conduct audit work
• Auditors need to agree on the opening balances to last year's financial statements and to the general ledger
• Analytical procedures must be carried out
• Bank confirmations for all opened or closed bank accounts should be obtained
• Authorization by director's resolution is needed for said bank accounts
• Bank reconciliations have to be verified
• Audit evidence includes the general ledger for cash, bank reconciliations, bank statements, and bank details
• It also includes director's year resolutions, and bank confirmation is requested from the bank
• Ensure audit evidence is sufficient and appropriate

Internal Controls

• Cash receipts should be deposited promptly (daily) into the bank
• Segregation of duties is important so that the person handling the cash is different from the person performing the cash record keeping
• Proper authorization is needed before disbursement.
• Transactions require 2 signatories for significant amounts

Analytical Procedures

• Statement of cash flows is a good indicator of whether the analytical procedures documented for cash and cash equivalents during field work are reasonable

Bank Confirmation Process

• Obtaining bank confirmation is a standard practice of audit firms
• The auditor sends a blank bank confirmation template to the client
• The client provides the auditor with the bank address, and the relevant authorized bank signatories sign the confirmation
• All bank accounts, including active, dormant (i.e., zero balance), and closed, must be confirmed
• The auditor makes a copy of the bank confirmation to track confirmations sent out
• The bank releases the information directly to the auditors

Bank Confirmation Template

• Includes information like current account balance or amount of interest accrued
• Also, details of fixed deposits/other bank accounts or accounts with related banks and details of any guarantees issued by the company or bank loans

Letter Of Authorisation

• Most bank confirmations also include a letter of authorisation

Appropriateness of Audit Evidence

• Appropriateness is the quality of the evidence or relevance and reliability of the audit evidence
• Evidence is more reliable when obtained from an independent external source, obtained directly by the auditor and is in original and documentary form

Bank Confirmation – Audit Procedures Post Reply

• Auditors check if bank balances confirmed by the bank agree to the client's cash book, general ledger
• If so, check for information for disclosure
• If not, the auditor will check whether the confirmation balance would tie with the "balance per bank" in the bank reconciliation statement

Bank Reconciliation

• Prepared periodically to explain the difference between the cash reported in the bank statement and the cash balance in the company's books

Timing Differences

• This is the main reason to any differences

Adjusting Items

• Adjusting items include bank services charges, dishonoured cheques, bank collections, and interest income on the current account

Reconciliation Items

• Reconciliation items include deposits in transit/uncredited cheques and outstanding/unpresented cheques

Audit Procedures of Bank Reconciliation

• Once prepared by client and sent to the auditor, the auditor will check balance per bank to bank statement and bank confirmation, and balance per book to general ledger
• The auditor will also check casting (additions) and on reconciling items
• Check that unpresented cheques are not long outstanding and clear the bank soon after year end
• Also, Trace to subsequent period's bank statement and investigate further if uncleared
• The auditor will check that deposits in transit are not long outstanding and are credited to bank account soon after year end and trace a subsequent period's bank statement
• Obtain explanations and substantiate all adjustments on the reconciliation

Audit Assertions - Addressing Through Bank Confirmation

• Existence: Checks bank confirmation and bank reconciliation is properly prepared
• Rights & Obligations: Verifies that company has the legal right to the reported amount of cash
• Completeness: Checks that cash balances include all transactions that have taken place and discuss with management any changes
• Accuracy & Valuation: Verifies that the recorded balances actually reflect the true underlying economic value of cash
• Cut off: Covering days before and after the end determine proper cut-off
• Presentation & Disclosure: Bank confirmation obtains information to be disclosed

Cash Risks

• Cash is highly susceptible to fraud and misappropriation

Professional Skepticism

• Always audit with a mindset of being appropriately questioning and have a critical assessment of audit evidence

Test your knowledge of cash flow statements. This quiz covers cash equivalents, categories of activities, and audit assertions related to cash balances. Evaluate your understanding of financial statement audits.