Question

In this chapter, focus on processes and procedures for performing audit tests of the following:

cash financial instruments

Answer 1

Financial instruments accounts include investments in marketable securities such as debt and equity securities, derivative instruments, and hedging activities. ... We discuss internal control and auditingconsiderations related to financial instrumentsfollowing our discussion of the cashaccounts.

Analytical Procedures

Analytical procedures help the auditor note any obvious discrepancies or errors before performing tests of details. However, these procedures do not provide any significant assurance for the auditing team or management. These types of procedures include comparing cash balances with forecasts and budgets. When cash balances greatly exceed or fall below expectations for the year, it should place the auditor on alert for items to look for during the tests of details. Other analytical procedures include reviewing company policies regarding minimum cash balances and the investment of surplus cash.

Tests to Details

There are two types of tests of details that the auditor performs when auditing cash balances -- tests of details of transactions and tests of details of balances. During the tests of details of transactions, the auditor traces bank transfers and performs cash cutoff tests. When approaching the balance sheet date, the auditor uses the cash cutoff tests to ensure that all of the appropriate transactions are included in the financial statements. Tests of details of balances include confirming bank deposits and loan amounts, obtaining bank cutoff statements to ensure all relevant cash is included in the balance, reconciling the bank account to the books, and confirming arrangements with all banks the organization uses, including those with zero balances.

Other Services

An auditor may provide other types of services, other than reasonable assurance of the accuracy of a company's financial statements, to an organization. For cash receipts or cash balances, an auditor may help management forecast the cash flow and accurate projections for the subsequent year. He may also identify areas for improvement and make recommendations for short-term investment of excess cash.