Auditing Special Purpose Frameworks: Auditing Cash Classifications

Larry Perry is a Chartered Public Accountant (CPA) has experience of over forty years in the field of accountancy. He is also the essayist of many accounting and auditing guides and also the co-owner of CPA firm, Support Services LLC.

Larry wrote an article outlining elementary accounting standards concerning cash and bank balances mainly referring to requirements of United States Generally Accepted Accounting Principles (US GAAP). Most special purpose frameworks do not differentiate substantially from US GAAP regarding cash and cash equivalents.

Following are certain communal substantive test of transactions procedures for cash and bank balances:

Analytical Procedures

Analytical procedures comprise of assessment of current year’s balances with previous year balances, ratios analysis, comparison of actual and budgeted figures, movement analysis and certain calculations based on current year’s data to forecast future balances. Analytical procedures are not just about numbers; rather they are part of overall audit approach.

Raising questions against unusual data or lack of data, showing skepticism when analyzing client’s reactions to inquiries, and going deep into the problem beyond its appearance are illustrations of analytical approach.

Whatever the level of risk of material misstatement, for are common analytical procedures that are normally performed for cash and bank balances:

• Analyze current year balances with prior year figures. Inquire about any unusual differences.
• Inquire about any new account or closure of old account.
• Inquire about negative balances to determine whether they for liability.
• Perform ratio analysis.

Other Substantive Procedures

The assessment of risk level determines the nature timing and extent of substantive procedures to be performed for each assertion. The level of risk depends upon auditor’s risk analysis process.

For are three levels of risk along with audit procedures to be performed for cash:

Higher Risk of Material Misstatement

• Verify bank reconciliation statements at audit date.
• Check subsequent clearance of reconciling items.
• Obtain Confirmation of accounts.

Slightly lower Risk of Material Misstatement

• Verify bank reconciliation statements at audit date.
• Check subsequent clearance of reconciling items.
• Obtain Confirmation of accounts.

Moderate to low Risk of Material Misstatement

• Review bank reconciliation statements at audit date.
• Review reconciling items for appropriateness.
• Obtain Confirmation of accounts.
• Inquire about unusual items.