Question

Discuss the objective of each of these audit procedures used to test a cash balance. Include in your discussion which PCAOB assertions for the cash account each procedure would support. Be sure to explain how each procedure would cover each of the assertions you believe it would cover for the cash balance and any limitations there might be for the assertion. That is, some procedures can provide more complete evidence to support an assertion than others can. Your answer should discuss any limits of the audit procedures as well.

Part A) Proof of Cash

Part B) Vouch the deposits in transit shown on the client's bank reconciliation to the cutoff bank statement.

Part C) Use of a bank confirmation letter.

Part D) Compare the date shown on the back of the check when the bank cancelled a check with the date of the check for checks dated near the balance sheet date.

Answer 1

There are 5 fundamental audit assertions :-

- Accuracy

- Classification

- Completeness

- Cutoff

- Occurence

Each of the tests listed above relate to atleast one of these assertions.

A. Proof of Cash - Proof of cash is essentially reconciling every entry in the general ledger with the bank statment. By checking every assertion with a bank statement the auditor can confirm the accuracy and occurence of every transaction recorded in the GL. The bank statement being an external document provides an assurance that every transaction that is recorded is accurate and has actually occured. However, this test does not provide any assurance with respect to classification, Cut-off or Completenes. The Bank statement does not provide any detail with respect to the accounting classification of any transaction. Furthermore, the Bank Statement is reported from the perspective of the bank (i.e) each transaction is reported from the date of clearing by the Bank. Hence Cut-off of transactions are not revealed by thi procedure. Furthermore, Completeness of all transactions are not assured through proof of cash. For example, a payment that is not recored in the GL and not cleared by the bank would not be revealed by Proof of Cash. However, this procedure combined with the Bank Reconciliation Statement provides an assurance of Completeness.

B. Vouch the deposits in transit - Vouching deposits in transit to the cutoff bank statement is an important procedure to ensure cut-off. Any transaction reproted in the current period but not reflected in the current period bank statement would require to be Vouched with a Cut-off Bank Statement in order to ensure the following assertions are satisfied:

- Occurence - Vouching actually ensures that the transaction actually occured

- Cut-off - Vouching also provides partial assurance about the period in which the transaction occured and hence provides an assurance on existence

However, this procedure does not assure completeness. For example, if a check written is not reported in the bank reconciliation, it would not be revealed by this procedure. This is at primarily an ancillary procedure to be used with other procedures.

C. Use of Bank Confirmations

Bank Confirmations is a primary procedure to ensure Accuracy. A Bank Confirmation is a direct external document and ensures that the Bank Balance Reported is accurate. It is the primary starting point for the other 2 procedures - Proof of Cash and Bank Reconciliation. Without Confirming the closing balancece through a bank confirmation the other 2 procedures may not be accurate. This procedures also confirms the classification as the Bank is likely to confirm the type of balance involved. However, Bank Confirmations do not provide assurance on Completeness, Occurence and Cut-off. Bank Confirmations are as at a specific date. It does not tell us whether all transactions are recorded or if a recorded transaction has actually occured.

D. Comparing dates on check with bank cancellation date - This procedure specifically helps with assurance of cut-off with respect to bank disbursement. By checking the bank cancellation date, we can understand when the bank has received the check much later than the balance sheet date, it may may be that the check was not actually paid on the bank date.