KA T H E A R N
A C C A F 8
C H A P T E R 1 5
Auditing
cash
and
Tests
of
detail
We
are
in
the
middle
of
looking
tests
of
detail
for
various
different
Financial
Statement
items:
Non current assets and intangibles Inventory
Receivables Cash and Bank
Liabilities, capital and directors emoluments
Learning
objectives
By
the
end
of
this
lecture
you
should
be
able
to:
Explain
the
audit
procedures
to
test
cash
and
bank.
Explain
how
to
draft
a
bank
letter.
Company
cash
A company may have various different bank
accounts, and perhaps some physical cash.
To audit these, the auditor will need to get a
breakdown of all of the different bank accounts that a company owns, including those which are overdrawn.
Bank and cash is a good example of where the
reliability of the evidence available means that only a small quantity of evidence is needed. The auditor relies mainly on just two key pieces of
evidence: the bank confirmation letter and the
Cash:
FS
assertions
The
FS
assertions
associated
with
bank
and
cash
are:
Existence
Completeness
Valuation
Auditing
bank
and
cash
Valuation
Re-perform bank reconciliations.
Agree balances to cash book and bank letter. Trace reconciling items to post year end bank
statements.
Rights
and
obligations
Obtain confirmation from bank (bank letter) for all bank accounts and year end balances
Existence
(and
completeness)
Illustration
Audit with bank
confirmatio n letter and bank reconciliati on Potentially immaterial – alternative procedures
Statement of financial position for X plc for the year ended 31 Dec 2012
Cash £5,253,846
Breakdown of bank accounts
Sort code Account Balance Bank account
1 10-20-30 12345678 £1,876,364 Bank account
2 42-98-28 98765432 £509,852 Bank account
3 47-41-43 45667655 (£42,850) Bank account
4
47-09-87 12343241 £1,035,32 1
Bank account 5
30-90-98 65468767 £1,874,30 5
Petty cash tin - - £854
Bank
confirmation
letters
(ISA
505)
The bank confirmation letter provides direct
confirmation of bank balances from the bank: it is third party, independent, written evidence and
therefore very reliable.
The format of the letter is usually standard and
agreed between the bank and auditor. Positive confirmation must be sought.
The letter should be sent a minimum of two weeks
before the client's year end.
The letter should include enough information to
Bank
confirmation
letters
(continued)
The
bank
should
then
forward
on
all
details
on
all
balances
for
the
client;
this
will
ensure
completeness.
Permission
must
have
been
given
by
the
client
for
the
bank
to
release
this
information
to
the
auditors,
as
they
too
have
a
duty
of
confidentiality
to
their
clients.
In
some
jurisdictions
such
disclosures
are
illegal,
and
so
bank
confirmation
letters
cannot
Bank
confirmation
contents
Bank
confirmations
include
enquiries
about:
Confirmation that all bank accounts with the
bank are disclosed, including accounts with nil balances and accounts opened and closed in the period.
Credit limits and overdraft facilities. Existence and terms of loans or other
borrowings.
Knowledge of other bank accounts in other
banks.
Outstanding charges and interest accrued but not
applied at the balance sheet date.
Any outstanding bills of exchange,
guarantees, acceptances, etc.
Foreign currency contracts. Asset repurchase or hire
purchase/leasing agreements.
Items held in safe custody or as security
Illustration:
Bank
confirmation
letter
Auditor’s address Date Dear sirs,
In accordance with the agreed practice for provision of information to auditors, please forward information on our mutual client as detailed below on behalf of the bank, its
branches and subsidiaries. This request and your response will not create any contractual or other duty with us.
Company name: Lemon Ltd Main account number:
01763311 Sort code: 48-13-09
Audit confirmation date: 31 December 2013
The authority to disclose information signed by your customer is enclosed.
Please respond to Auditor Name using the pre-paid envelope. Yours faithfully,
Bank
confirmation
letters
(continued)
Banks
should
all
reply…
…
but
some
will
need
chasing
–
which
the
client
may
have
to
help
with!
Once
they
do
reply,
we
will
perform
the
Who
is
responsible
for
sending
the
bank
confirmation
requests?
The
auditor
must
retain
responsibility
for
sending
out
and
receiving
response
bank
confirmations.
The auditor writes the bank confirmation
letter and attaches it to the client’s permission.
The auditor posts the letters direct to the bank being careful not to use the client’s
posting system.
All responses from banks are sent directly
to the auditors address not to the client.
Why?
To
ensure
that
the
client
does
not
interfere
Auditing
bank
and
cash
-process
Obtain a bank confirmation letter from the
company’s bankers.
Verify the balance per the bank statement to an
original year end bank statement and also to the bank confirmation letter.
Agree all balances listed on the bank confirmation
letter to the company’s bank reconciliations or the trial balance to ensure completeness of bank
balances.
Examine the bank confirmation letter for details
of any security provided by the company or any legal right of setoff as this may require
Bank
confirmation
Imagine that bank 1 responded to say that the
balance was £1,963,212. This is a difference of £86,848 that must be reconciled via a bank
reconciliation.
Breakdown of bank accounts
Sort code Account Balance per year end accounts
Bank account 1 10-20-30 12345678 £1,876,36 4
Bank account 2 42-98-28 98765432 £509,85 2
Bank account 3 47-41-43 45667655 (£42,850) Bank account 4 47-09-87 12343241 £1,035,32
1
Bank account 5 30-90-98 65468767 £1,874,30 5
Petty cash tin - - £854
Auditing
the
bank
reconciliation
Obtain the company’s bank reconciliation and
cast to ensure arithmetical accuracy.
Verify the reconciliation’s balance per the cash
book to the year end cash book.
Trace all of the outstanding lodgements to the
pre year end cash book, post year end bank statement and also to paying in book pre year end.
Trace all un-presented cheques through to a pre
year end cash book and post year end statement. For any unusual amounts or significant delays
obtain explanations from management.
Examine any old un-presented cheques to assess
Auditing
bank
reconciliations
It
is
the
client’s
responsibility
to
produce
a
bank
reconciliation,
however
the
auditor
will
want
to
check
it
to
gather
audit
evidence.
£ Audit procedureBalance per bank statement at y/e
1,963,212 Agree to bank confirmation Cheques written not cleared
Reconciling items
(£102,401) Agree sample to post y/e bank statement Cheques received not banked £15,553 Agree sample to post
Auditing
bank
reconciliations
This
process
needs
to
be
completed
for
all
bank
accounts
held
at
year
end.
Other
procedures
Review
the
cash
book
and
bank
statements
for
any
unusual
items
or
large
transfers
around
the
year
end,
as
this
could
be
evidence
of
window
dressing.
Count
the
petty
cash
in
the
cash
tin
at
the
year
end
and
agree
the
total
to
the
balance
included
in
the
financial
statements.
Review
the
petty
cash
book
transactions
to
Other
procedures
(continued)
The
bank
confirmation
letter
will
also
provide
details
of
loans
held,
the
amounts
outstanding,
accrued
interest
and
any
security
provided
in
relation
to
those
loans.
Additional
procedures
that
the
auditor
will
need
to
perform
in
relation
to
loan
payables
include:
Review disclosures of interest rates, and the split of the loan between current and noncurrent.
Review restrictive covenants (terms) in the loan agreement and determine the effect of any loan covenant breaches.
Recalculate interest accrual in accordance with terms within the loan agreement, to ensure
Summary
of
learning
objectives
You
should
now
be
able
to:
Explain
the
audit
procedures
to
test
cash
and
bank.
