Hello, welcome to your new role. In this role as an external auditor of company ABC (i.e., as a member of the external audit team), you have to ‘audit’ bank balances of the company as well as cash in hand. The term ‘audit’ would mean that you need to apply auditing procedures on cash and bank accounts of the company.
Identifying audit risks in cash and bank balances
Now, before we devise and apply audit procedures for testing cash and bank balances of the company, let’s firstly understand what the possible business and audit risks in the bank accounts of the company are.
Below are some of the examples of audit risks in cash and bank balances:
- There might not be proper authorization procedures defined for opening a bank account.
- Bank accounts may be opened or closed without due internal authorization process of the company.
- There might not be any adequate segregation of duties, i.e., the person who is preparing the cheque may be signing it as well as an authorized signatory.
- Bank accounts of the company may be overstated in the financial statements or understated or not disclosed in the financial statements at all
- The balances in the bank accounts may be misappropriated, stolen, misused for personal purposes
- Money laundering activities might be carried out through bank accounts.
- There is a risk that the balances available in the bank accounts are not available for the company for withdrawal either due to some restrictions or some other reason
- Some bank accounts which are owners or employees personal accounts may be reported as the company’s accounts.
- Bank may wrongly debit or credit company’s account for the transactions which are not carried.
- Bank may charge excessive bank charges not agreed with the company beforehand.
- Some fake cheques may be presented by any party in the bank to withdraw money from the company’s bank account.
- Authorization limits may be breached by staff by preparing multiple cheques of smaller amounts in the name of the same supplier.
- Payments may be processed in the names of third parties without due purchase orders and receiving goods or services.
- Fictitious transactions may be designed only to show economic activity on the bank statements. Such movement may be within the company’s bank accounts or in collision with some supplier or customer.
- Fictitious transactions may be passed temporarily to increase or decrease a particular bank account balance, and such transactions may be reversed after the closing date.
- There is a risk that the bank accounts which are being reported do not exist at all, or even in a worst-case scenario, the bank itself doesn’t exist in which accounts are being reported.
- The company reported balances which are outdated and do not exist on the reporting date.
- Bank reconciliation statements may not be prepared and reviewed at regular intervals.
- There might be a significant number of pending items in bank reconciliation statements.
- Cash-in-hand may be used for personal purposes and later reimbursed (or not reimbursed).
- Cash-in-hand maybe misappropriated by making unauthorized transactions.
- Cash in hand amount may be short of what it should be.
- Accountant may not correctly record petty cash expenses in the correct expense code.
- Expenses which should be paid through the bank only might be paid through petty cash.
- There might be no defined petty cash limit and the designated person for handling petty cash.
- The policy and procedure for obtaining petty cash may not be well defined (or not defined at all).
It is vital to consider WCGW (What Could Go Wrong) when identifying audit risks and devising audit procedures for cash and bank accounts, as well as any other account type. The higher the number of audit risks you can generate, the better. Because we’ll be devising our audit procedures to tackle these audit risks, if we couldn’t identify an audit risk, we might not want to formulate an audit procedure to assess that particular risk.
Identifying audit procedures to be performed on cash and bank balances
Once we have identified audit risks related to cash and bank, we need to perform audit procedures. Please note that we may not need to perform all audit procedures. The results of some of the audit procedures would guide us on our further action. So, some audit procedures are dependent upon the results of some other audit procedures.
Let’s review, what could be all (or maximum) possible audit procedures which may be performed on cash and bank balances of an audit client.
- Inquire with the management about their cash handling policy as well as bank accounts policy.
- Obtain the policy manual related to cash and banks (if available).
- Obtain a list of bank accounts along with the closing balances and locations of the banks.
- Understand if there has been any change in the payment process and what is the reason for the same.
- Match the balances as per the lists provided with the trial balance and inquire if there is any difference.
- Review the policies related to cash and bank and identify if there is any weakness in the designing of internal controls.
- Inquire if historically there has been any instance of fraud or misappropriation in the cash and bank balances.
- Send out bank balance confirmation letters to the bank accounts to verify the balances as well as any loans.
- Obtain signed bank reconciliation statements for all bank accounts as at the reporting date as well as at any previous periods on a sample basis.
- Review bank reconciliation statements carefully matching the balances as per general ledger and balances as per bank statement.
- Inquire about unreconciled items on the bank reconciliation statements and understand the impact of these items.
- Perform subsequent positioning test of the unreconciled items on the bank reconciliation statement.
- Review bank ledgers subsequent to the closing date and check if there is any reversal of material transactions in the following accounting period.
- Propose adjustment entries to rectify any errors found and to account for any pending items in the bank reconciliation statements.
- Match the confirmations letters replied by banks with the bank balances in the bank reconciliation statements.
- Obtain proforma samples of signatures of authorized signatories and assess the risk of copying these signatures by any party.
- Ensure that the company’s cheque books are kept in a secure place with proper accountability of a specific person(s).
- Perform a walk-through of the process explained by the management by reviewing one transaction each for cash and bank balances.
- Select a sample of transactions to for detailed testing. Perform thorough testing for all sampled transactions and identify the non-compliance with the standard procedure.
- Inquire about new bank accounts opened during the year and understand the need for opening these banks. Assess if this is in line with the requirement of the business. Discuss any suspicion with the management as well with your team.
- Obtain a list of petty cash handlers, the amount authorized, and the current balance in hand.
- Perform physical cash count as on the reporting date. Alternatively, Obtain a certificate of cash in hand as on the closing date.
- Review cash replenishment requests on a sample basis and verify source documents.
- Requester and approver should appropriately sign all cash disbursement requests.
- Obtain a list of bank accounts closed during the year and understand the reason for closing these accounts.
- Check that the balance in the accounts closed was successfully moved and accounted in the active bank accounts of the company.
- Obtain a list of dormant bank accounts of the company and understand the reason of not closing these accounts or ask for the management’s plan regarding these accounts, whether these accounts will be used in future or will be closed.
- Inquire with the management if there has been any instance or attempt of money laundering.
- Obtain a list of authorized signatories, assess whether they are at a suitable level of responsibility.
- Inquire if there has been additions or deletions in the list of authorized signatories. Check if all the deletions and additions have been timely informed to the bank.
- Perform analytical testing on the bank account balances; let’s see how much bank balances have been increased or decreased. Observe the movements in the closing balances of bank accounts. Inquire with the management of any significant variance or unusual trends.
- Wherever there is no satisfactory response from the management on the significant variations, perform further detailed procedures and obtain new audit evidence to validate the points raised during analytical testing.
- All performed audit procedures have to be appropriately documented. This includes writing down the audit procedure performed, the result obtained and the conclusion drawn. All audit documents have to be dated with proper authorization by the preparer and reviewer of the material.