SUBSTANTIVE TEST OF CASH

CHAPTER OBJECTIVES

To know the auditors objectives for the

substantive audit of cash in bank and on
hand.
To learn the nature of the appropriate
audit procedures to accomplish the
objectives for the audit of cash.
Understand the preparation of audit
working papers to document the audit
procedures for cash.

AUDIT OF
CASH ON HAND AND IN BANK

The following misstatements which result in the improper payment of or

failure to receive cash may be uncovered through the tests of controls and
substantive tests of transactions.

1.
2.
3.
4.
5.
6.
7.
8.

Failure to bill customer

Billing a customer at a price lower than called for by company policy
Abstraction of cash receipts from customers before they are recorded
Duplicate payment of a vendors invoice
Improper payments of officers personal expenses
Payment for merchandise or goods that were not received
Payment to an employee for more hours than he or she has worked
Payment of interest to a related party for an amount far exceeding
the going rate

AUDIT
OBJECTIVES
AND PROCEDURES

SUBSTANTIVE TESTING OF CASH

ASSERTIONS

I. Existence or
occurrence

AUDIT OBJECTIVES

AUDIT PROCEDURES

A. To determine
1. Obtain analysis of cash
whether cash exists
balance and reconcile
at year-end and
to the general ledger.
cash-related
2. Confirm bank balances
transactions occur
as of statement of
within the year.
financial position date.
3. Perform cash count
B. To determine that
procedures for cash on
all cash balances of
hand.
the client are
4. Obtain (prepare) bank
reflected on the
reconciliations as of
statement of
the statement of
financial position
financial position date.
at year-end.
5. Trace all transfers
occurring between
banks near year-end.

ASSERTIONS

AUDIT OBJECTIVES

II.
Completeness

C. To determine
whether all cash
transactions are
recorded in the
proper accounting
period.

AUDIT PROCEDURES
6. Obtain a cutoff bank
statement containing
transactions several days
subsequent to the
statement of financial
position date. Examine
items returned with the
cutoff bank statements.
7. Prepare proof of cash and
reconcile cash transactions
occurring during a specified
period as they are recorded
by the bank and the client.
8. Verify the clients cutoff of
cash receipts and cash
disbursements.

ASSERTIONS

AUDIT OBJECTIVES

AUDIT
PROCEDURES

III. Rights and

Obligations

D. To determine that
cash balances are
available for use
without restrictions or
if with restrictions ,
properly indicated in
the statement of
financial position

9. Review bank
statements and the
bank replies to
confirmation letters.

IV. Valuation or
allocation

E. To determine if
cash is recorded and
presented at the
proper amount.

10. Verify existence of

cash in banks under
receivership, cash
subject to courts
restraining orders, in
foreign banks and in
foreign currency.
This is in addition to
the foregoing
procedures which will
enable the auditor to
verify proper

ASSERTIONS
V. Presentation and
disclosure

AUDIT OBJECTIVES
F. To determine
whether cash is
presented in
accordance with
generally accepted
accounting principle

AUDIT
PROCEDURES
11. Investigate any
checks representing
large or unusual
payments to related
parties.
12. Evaluate proper
financial statement
presentation and
disclosure of cash.

DISCUSSION OF
SUBSTANTIVE
AUDIT PROCEDURES

1. Obtain analysis of cash balance and

reconcile to the general ledger.
2. Confirm bank balances as of statement of
financial position date.

3. Perform cash count procedures for cash on hand.

In conducting the cash count the auditor should follow these
procedures:
1. Control all cash and negotiable instruments held by the client
until funds have been counted.
2. Insist that the custodian of the cash be present throughout the
count.
3. Obtain a signed receipt from the custodian on return of the funds
to the client.
4. Ascertain that all undeposited checks are payable to the order of
the client either directly or through endorsement.

4. Obtain (prepare) bank reconciliations as

of the statement of financial position date.
The examination of the client-prepared bank reconciliations
should also include:
1. Tracing bank balances to bank confirmation responses
2. Verifying the validity of the reconciling items
3. Scanning the bank statements for erasures and
alteration.

5. Trace all transfers occurring between

banks near year-end.
Kiting is an irregularity involving transfer of
cash between banks, check drawn on one
bank is deposited in another, several days
(called the float period ) usually pass before
the check clears the bank on which it is
drawn.

6. Obtain a cutoff bank statement

containing transactions several days
subsequent to the statement of financial
position date.
This statement should be sent directly by the bank to
the auditor. Upon receipt of the statement, the auditor
should
1. Trace all prior year dated checks to the outstanding
checks listed on the bank reconciliation.
2. Trace deposits in transit on the bank reconciliation to
deposits on the cutoff statement.
3. Scan the cutoff statement and enclosed data for
unusual items.

7. Prepare proof of cash and reconcile cash

transactions occurring during a specified period
as they are recorded by the bank and the client.
8. Verify the clients cutoff of cash receipts and
cash disbursements.
9. Review bank statements and the bank replies
to confirmation letters.

10. Verify existence of cash in banks under

receivership, cash subject to courts
restraining orders, in foreign banks and in
foreign currency.
11. Investigate any checks representing
large or unusual payments to related
parties.

12. Evaluate proper financial statement presentation

and disclosure of cash.
Review financial statements to make sure
A. Material savings accounts and certificates of
deposit are disclosed separately from cash in bank,
B. Cash restricted to certain uses and compensating
balances are adequately disclosed, and
C. Bank overdrafts are included as current liabilities