Cash And Bank Balance Flashcards
10 jan 2025
Auditing bank and cash balances involves several key features and procedures to ensure the accuracy and reliability of these assets. Here’s an overview:
1. Definition:
- Bank Balances: Amounts held in a bank account.
- Cash Balances: Bank notes and coins (although coins are likely to be immaterial).
2. Risks:
- Loss and Fraud: Bank and cash balances are at risk of loss due to fraudulent activity or misappropriation by employees or others.
- Multiple Authorities: The risk increases when many individuals have authority over receipts and payments.
3. Verification:
- Bank Balances: Can be confirmed directly in writing by the banks (third parties).
- Cash Balances: Can be physically counted.
4. Internal Controls:
- Rigorous Controls: Bank balances and cash are usually subject to rigorous internal controls to prevent loss and theft.
- Bank Statements: Regular practice for business entities to receive regular bank statements from their bank.
- Reconciliation: A key internal control feature is reconciling the balance shown in a bank statement with the balance recorded in the entity’s accounting records (cash book).
5. Audit Procedures:
Bank Balances:
- Bank Confirmation: Obtain direct confirmation from the bank regarding the balances.
- Bank Reconciliation: Review the reconciliation of the bank statement balance with the cash book balance.
- Review Bank Statements: Examine bank statements for unusual transactions or discrepancies.
Cash Balances:
- Physical Count: Perform a physical count of cash on hand.
- Cash Count Procedures: Ensure proper procedures are followed during the cash count, such as counting in the presence of a responsible official.
- Review Cash Receipts and Payments: Examine supporting documentation for cash receipts and payments to ensure they are properly recorded.
6. Materiality and Internal Controls:
- Materiality: The audit work on cash balances will depend on the materiality of the cash held by the entity.
- Effectiveness of Controls: Assess the effectiveness of the client’s internal controls for cash handling and recording.
Scenario:
ABC Ltd. has bank balances of $200,000 and cash balances of $5,000. The auditor needs to verify these balances as part of the audit.
Steps:
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Bank Confirmation:
- Audit Step: Send a confirmation request to ABC Ltd.’s bank to confirm the $200,000 balance.
- Example: “Dear Bank, please confirm the balance of ABC Ltd.’s account as of December 31, 2024.”
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Bank Reconciliation:
- Audit Step: Review the bank reconciliation prepared by ABC Ltd.
- Example: Ensure the bank statement balance matches the cash book balance after accounting for outstanding checks and deposits in transit.
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Review Bank Statements:
- Audit Step: Examine bank statements for unusual transactions.
- Example: Look for large or unusual withdrawals that may indicate fraud.
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Physical Count of Cash:
- Audit Step: Perform a physical count of the $5,000 cash on hand.
- Example: Count the cash in the presence of ABC Ltd.’s cashier and compare it to the recorded balance.
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Review Cash Receipts and Payments:
- Audit Step: Examine supporting documentation for cash transactions.
- Example: Verify that cash receipts are properly recorded and supported by sales invoices.
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Assess Internal Controls:
- Audit Step: Evaluate the effectiveness of ABC Ltd.’s internal controls for cash handling.
- Example: Check if there are proper segregation of duties and regular reconciliations.
By following these procedures, auditors can ensure the accuracy and reliability of bank and cash balances, providing assurance to stakeholders. If you have any more questions or need further clarification, feel free to ask! 😊
Checking the accuracy of bank balances can be effectively done through direct confirmation by the banks where the entity’s accounts are held. This process is similar to confirming trade receivables balances from customers.
1. Risk-Based Approach:
- Audit Step: Decide which banks to contact for confirmation, typically all banks holding accounts for the client entity.
- Objective: Ensure completeness and accuracy of bank balances.
- Example: Contact all banks where ABC Ltd. holds accounts, unless some are immaterial.
2. Methods of Confirmation:
Method 1:
- Description: List information about the bank balances from the client’s accounting records and ask each bank to confirm the balances.
- Example: “Dear Bank, please confirm the balance of $200,000 in ABC Ltd.’s account as of December 31, 2024.”
Method 2:
- Description: Request confirmation of the relevant bank balance(s) without providing any details to the bank.
- Example: “Dear Bank, please confirm the balance of ABC Ltd.’s account as of December 31, 2024.”
3. Client Authorization:
- Audit Step: Obtain permission from the client to release information to the auditor.
- Objective: Ensure compliance with confidentiality requirements.
- Example: Include a statement in the confirmation letter authorizing the bank to release information to the auditor.
4. Sending the Letter:
- Audit Step: Send the confirmation letter to the bank.
- Objective: Ensure the letter is sent by the auditor and replies are sent directly to the auditor.
- Example: “Dear Bank, please confirm the balance of ABC Ltd.’s account as of December 31, 2024, and send your reply directly to our audit firm.”
5. Areas Covered by the Confirmation Letter:
- **Confirmation of balances on all bank accounts at the end of the reporting period.
- **Details of any unpaid bank charges.
- **Details of any liens (charges) over assets of the client entity.
- **Details of any assets of the client entity held by the bank as security for lending.
- **Details of any other client bank accounts known to the bank but not listed in the request.
Scenario:
ABC Ltd. has multiple bank accounts with different banks. The auditor needs to confirm the balances as part of the audit.
Steps:
-
Risk-Based Approach:
- Audit Step: Identify all banks where ABC Ltd. holds accounts.
- Example: Contact Bank A, Bank B, and Bank C for confirmation.
-
Choose Method:
- Audit Step: Decide on Method 1 or Method 2 for confirmation.
- Example: Use Method 1 for simplicity and efficiency.
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Client Authorization:
- Audit Step: Obtain ABC Ltd.’s authorization to release information.
- Example: Include a statement in the confirmation letter: “ABC Ltd. authorizes Bank A to release the requested information to the auditor.”
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Send Confirmation Letter:
- Audit Step: Send the letter to Bank A.
- Example: “Dear Bank A, please confirm the balance of $200,000 in ABC Ltd.’s account as of December 31, 2024.”
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Areas Covered:
- Audit Step: Ensure the letter covers all necessary areas.
- Example: Request confirmation of balances, unpaid charges, liens, assets held as security, and any other accounts.
By following these steps, auditors can effectively confirm bank balances and ensure the accuracy and reliability of the financial statements. If you have any more questions or need further clarification, feel free to ask! 😊
Upon receiving replies from the banks, the auditor should perform the following procedures to verify the accuracy of bank balances:
1. Obtain or Prepare Bank Reconciliation Statements:
- Audit Step: Obtain or prepare a bank reconciliation statement for each bank account.
- Objective: Ensure the reconciliation is accurate and complete.
- Example: Prepare a reconciliation statement for ABC Ltd.’s account with Bank A.
2. Check Arithmetical Accuracy:
- Audit Step: Verify the arithmetical accuracy of the reconciliation prepared by the company.
- Objective: Ensure there are no calculation errors.
- Example: Check the addition and subtraction of outstanding checks and deposits in transit.
3. Compare Bank Balances:
- Audit Step: Compare the bank balance confirmed in the bank’s confirmation letter with the balance used in the bank reconciliation statement.
- Objective: Ensure the balances match.
- Example: Confirm that the $200,000 balance in the bank’s letter matches the reconciliation statement.
4. Relate Other Information:
- Audit Step: Relate other information in the confirmation letter to other audit areas.
- Objective: Ensure all relevant information is considered.
- Example: Accrued bank charges must be provided for in the financial statements.
5. Check Supporting Evidence:
- Audit Step: Verify items in the bank reconciliation statement against supporting evidence.
- Objective: Confirm the validity of outstanding items.
- Example: Ensure unpresented checks are shown as presented in subsequent bank statements.
6. Review for Unusual Items:
- Audit Step: Review the cash book and bank statements for unusual items or delays.
- Objective: Investigate any unusual transactions.
- Example: Look for large or unusual withdrawals and investigate the reasons.
7. Review Additional Information:
- Audit Step: Review the confirmation letter for any other information to be disclosed in the financial statements.
- Objective: Ensure all relevant disclosures are made.
- Example: Check for charges on assets or security for loans.
The audit work on cash balances involves a physical count, largely dictated by materiality considerations. Here are the key procedures:
1. Simultaneous Counting:
- Audit Step: Count cash at all locations simultaneously and in the presence of a company official.
- Objective: Prevent the movement of cash between locations.
- Example: Count cash at all ABC Ltd. locations at the same time.
2. Obtain Signed Receipt:
- Audit Step: Obtain a signed receipt for the amount of cash returned to the official after the count.
- Objective: Ensure accountability for the counted cash.
- Example: Get a signed receipt from the cashier for the $5,000 counted.
3. Check Against Records:
- Audit Step: Compare the cash balance from the count with the client’s cash records and draft financial statements.
- Objective: Ensure the recorded balance matches the counted amount.
- Example: Verify that the $5,000 counted matches the cash book balance.
4. Investigate Money Advances:
- Audit Step: Investigate the treatment of any money advances to employees.
- Objective: Ensure advances are properly recorded and accounted for.
- Example: Check advances against wages or salary for proper recording.
By following these procedures, auditors can ensure the accuracy and reliability of bank and cash balances, providing assurance to stakeholders. If you have any more questions or need further clarification, feel free to ask! 😊
