CASH AUDIT 101: Cash says, “DON’T MISS A CHECK ON ME!”

By: Joelex L. Cortes, CPA

Have you ever wondered why auditors review supporting documentation relating to cash accounts at every audit engagement? And, on occasion, bank confirmation and inquiries are made in order to execute their cash audit? As you read on, you will discover how cash accounts are a critical component of the balance sheet of your company’s financial statements.

As cash is one of the most liquid assets, it is reported first on any company’s balance sheet since the latter are presented in the order of highest liquidity. When it comes to paying for any business debts or payables, cash serves as the primary asset. Since cash accounts are highly liquid, the auditor must take this into account when performing the audit because it carries inherent risks and the determination of such risk does not matter with the size of your business. 

COMMON CASH FRAUD OR ERRORS

Cash theft is often undiscovered because transactions are often untraceable and include the following, among others:

• Transferring cash to another bank account to conceal cash shortage (cash lapping)
• Unreported or undeclared collection of sales 
• Unauthorized purchases using the company’s cash account
• Payroll disbursement to ghost employees

• Non-existing expenses paid out of petty cash fund 
• Unsupported or unliquidated cash advances

However, mistakes or errors in cash reporting can easily be detected and corrected right away. Certain are the following, among others:

• Transposition errors in amounts posted in the books cross-referenced with supporting documents.
• During the reporting period, customer checks that have not yet been deposited are recorded as cash without any guarantee that they won’t bounce.
• Written checks for debt repayment, whether sent to creditors or not, are categorically reported as payments even when they haven’t been cashed as of the reporting period.
• Bills and coins deposited in the bank are recorded in the cash in the bank account, even if they are not yet reflected in the bank statements as of the reporting period’s cut-off.
• Bank errors, e.g. erroneous deposit in the bank’s cash account or an incorrect bank payment debited in the company’s account rather than another bank customer’s account.

Internal control surrounding cash accounts must be considered as a preventative measure to protect the business interests from any cash fraud or mistaken assumptions.

COMMON AUDIT PROCEDURES

To ensure the existence and completeness of cash in bank accounts as at reporting period, a common audit procedure conducted by auditors is to obtain bank confirmation from bank accounts maintained by the business. In this way, the auditor can be satisfied with the cash in the bank ending balance and any cash equivalents present in the books as of the reporting period if they agree with the bank confirmation. In addition, such bank confirmation replies disclose if there are necessary requirements to be reported in the notes of the financial statements. The auditor may also perform procedures to test if there are any deposits in transit and outstanding checks and further procedures are performed. For cash on hand, a surprise cash count may be conducted by the auditor during audit fieldwork. 

As the preceding only applies to the test of balances as of the reporting period, auditors conduct audit sampling to see if internal controls over cash are in place, such as testing a particular cash transaction. Auditors communicate to management any deficiencies noted in their audit.

It is a key takeaway that an external audit does not involve a complete test of financial transactions happening during the reporting period unless other assurance engagements are being performed. 

In summary, having sound internal control over cash expedites the audit procedures done by the auditors. As an accountant or a business owner, it is vital to look over cash reporting since this is the lifeblood of the business. Due to a lack of or dysfunctional internal control over cash, the business may suffer extraordinary losses, and either employees or part of management may be encouraged to commit fraud. 

Have you thought about improving or placing internal control over cash? If not now, when will it be? Leaving you with this quote, “If you lose the count, you’ll face the losses”— so keep in check with your cash.

Joelex L. Cortes is a Certified Public Accountant and currently, the Audit Associate of the Audit Department of G. Pagaspas Partners & Co., CPAs, an affiliate full-arm accounting firm of TaxAcctg Center and a member firm of Allinial Global, ranked as the second largest accounting association in the world by International Accounting Bulletin. He is currently an Audit Senior in charge of handling various clients from BPOs, pharmaceuticals, and other industries.