Cash Cycle

Bank and cash audit


Things to check:

  • Cash account
  • Bank confirmation
  • Bank statement
  • Bank reconciliation

Cash audit objectives

Cash balances include cash on hand and at bank. Cash on hand includes undeposited receipts and petty cash. Cash at bank includes cash held in current and savings accounts which is available on demand. Unlike any other account balance, cash may be either an asset or a liability. The latter arises where the bank with which the entity holds an account allows the entity to write cheques in excess of the balance in the account up to an agreed limit known as an overdraft.

Existence Recorded cash balances exist at the balance sheet date.
Completeness Recorded cash balances include the effects of all cash transactions that have occurred.
Rights and obligations The entity has legal title to all cash balances shown at the balance sheet date.
Valuation Recorded cash balances are realisable at the amounts stated on the balance sheet.
Presentation and disclosure Cash balances are properly identified and classified in the balance sheet.
  Lines of credit, loan guarantees and other restrictions on cash balances are appropriately disclosed.



Bank confirmation letter:


  • Balances in the accounts
  • Maturity and interest terms on loans and overdraft
  • Guarantees
  • Loans



Way1: listing balances & information:


Account 1: balance is $50             yes     no

Account2: balance is $100             yes     no


Way2: requesting details of balances:

Q1: what is the balance in the bank account1?____________________


Q2: what is the overdraft facility? _______________________________



Request procedures: (arts) (Auditors to bank and bank to auditors)

  • Auditors should get written authority from client and provide it to the bank;
  • Auditor’s request must refer to client’s authority letter;
  • The request should reach the branch manager at least one month before client’s year end.(Time)
  • Auditors should specifically check that the bank response content and returned directly to auditors.

Bank reconciliation

Idea: difference between cash account and bank statement.





  1. unrecorded differences: appear in bank statement but not in cash book.
  2. timing difference: appear in the cash book but not in bank statement.
  3. outstanding lodgment: we receive the cheque but we haven’t clear it in the bank(cash in transit)
    unpresented cheques: we’ve written off the cheque but supplier not clear it in the bank

  4. Errors.



Q: Recon

Date Narrative $


    Date Narrative $
1 Otc Balance b/f 3,285     10 May Cheque #2025 1,000
3 Otc

4 Otc

Cheque #2124

Cheque #2127





    11 Otc Cheque #2126 500


          17 Otc Cheque 1441 250
          20 Otc Cheque 1442 350




    30 Otc Balance c/f 2,911


1 NOV                      2,911



Hangseng Bank
To: Jim                  account number: 264-561652118         26 Otc 2014
Date Details Paid out Paid in Balance
2014   $ $ $
1 Otc

4 Otc

Opening balance








17 Otc 1441 250   5,011C
20 Otc 1442 350   4,661C
24 Otc


Bank charges 35   4,626C


  D=Debit C=Credit    



Company incorrectly recorded check #2127 for $1,476 instead of $1,976

There is unrecorded bank service charge of $35.



(a) Prepare bank reconciliation statement for the company.
(b) Describe substantive procedures an auditor would perform in verifying a company’s bank balance.(10marks)


Cash balance:                     $2,911

+ Error($1,976-$1,476)                $500

-bank service charge                 ($35)


Bank statement balance             $4,626

+outstanding logment

#2124                       250

-unpresented checks

#2025                         ($1,000)

#2126                          ($500)



Bank reconciliation is not perfect because:

  • Misstatements can’t be discovered when there is a failure to bill a customer;
  • Misstatements can’t be discovered when there is an embezzlement of cash receipts from customers by staff.

Procedures on bank reconciliation:

General procedures:

  • Agree all balances listed on the bank confirmation letter to Co’s bank reconciliations to ensure completeness of bank balances.
  • Agree all balances listed on the bank confirmation letter to Co’s trial balance to ensure completeness of bank balances.
  • Agree bank balances in Co’s trial balance to balances listed on the bank confirmation letter to ensure existence of bank balances.
  • Inspect company’s bank reconciliation and check the additions to ensure its accuracy.
  • Reperform the bank reconciliation to ensure its accuracy.


Cash book:

  • Trace bank charges/standing order to supporting documentation to ensure its existence (there are no fictitious reconciling items).

Bank statement:

  • Agree all of the outstanding lodgements to the pre year-end cash book, post year-end bank statement to verify the cut off is correct.
  • Agree all unpresented cheques to a pre year-end cash book and post year-end statement to verify the cut off is correct (for any unusual amounts or significant delays obtain explanations from management).
  • Inspect any old unpresented cheques to verify if they need to be written back into the purchase ledger(DR I/S CR payable rather than Cr cash) as they are no longer valid to be presented.
  • Perform analytical procedure by reviewing the cash book and bank statements for any unusual items or large transfers around the year end to verify any window dressing issues.

Cash audit:

Petty cash book using imprest system

Receipt Date Narrative Cash Postage
100 12.11.2014 Cash receipt    
  13.11.2014 Stamps 10  
    Total 10  


Float amount=100
Spend 10
So restore 10: DR petty cash 10  CR bank 10

  • Count cash balances at the year end and agree to the petty cash book.
  • Inspect the unbanked cheques(undeposited receipts) and make sure they have been paid in to the company’s bank account and agree this to bank reconciliation.