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Audit Procedure on Cash and Cash Equivalents


To avoid the unnecessary panic that revolves around audit time, companies and industries ought to understand and comply with the audit procedures. Monitoring and internal controls should be done in a careful and consistent manner considering that cash and cash equivalents naturally are of a high risk category. This paper will explore on the procedure of auditing cash and cash equivalents.

To understand the procedure involved while auditing cash and cash equivalents, it is important to define what is cash and cash equivalents. Commonly, cash and cash equivalents refers to cash on hand, cash deposited in banks and other financial institutions and short-term assets that can be converted to liquid cash easily. Confirmation is the main audit procedure which is used to test the cash balances. Usually the auditor will seek to know the balance of the company’s bank accounts. This is done confidentially as the information given regarding the balance in the accounts is solely given to the auditor. Through direct confirmation, the auditor also obtains other important information related to loans, bank guarantees and contracts, if any.

The auditor also examines bank reconciliations. This is done to confirm the actual bank balance as the bank balance may differ from the cash book balance. This normally occurs due to outstanding checks, service charges, wire transfers and deposits in transit. The auditors are able to connect the discrepancy between the bank and book balance.In addition, the audit procedures include testing cut off of cash receipts and cash disbursements for transfers between different bank accounts at the balance sheet date. This ensures the cash balances are recorded in the correct accounting period.

Further, audit procedures involve testing the translation of the foreign currency process. This applies to companies that have their cash denominated in foreign currencies. The auditor calculates the cash balance independently using the closing exchange rate as at balance sheet date to determine if the rate used by the company is reasonable or otherwise. Finally, the auditors tests if the cash has been correctly classified. Some cash balances and cash equivalents are restricted as collateral as a result of contractual agreements that impose rules related to their classification and disclosure. This cash should be listed as restricted cash or as investments on the balance sheet rather than cash.

In conclusion, the auditor should ensure the cash and cash equivalents audit procedures applied are responsive to the risks identified.

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