Auditing Cash and bank Balances is a critical part of any audit engagement, and for CPA exam candidates, a strong understanding of this area is essential for scoring well on the Auditing and Attestation (AUD) section. Cash is an asset that is particularly susceptible to fraud and error, making its verification one of the most important tasks for an auditor. Three key audit procedures commonly associated with auditing cash and bank balances are Cash Confirmations, Bank Reconciliation, and Bank Transfer Schedules.

Cash Confirmations

Cash Confirmations involve directly confirming the cash balances of a company with its bank. This is considered a highly reliable source of audit evidence because it involves an independent third party. CPA exam candidates should be familiar with Standard Confirmation Requests, which usually contain information on account balances, loans, and other financial data. Blank Confirmation Requests are sometimes used, in which the bank fills in the necessary financial information.

Example: Imagine you’re auditing a retail company, and their balance sheet shows a bank balance of $200,000. You would send a confirmation request to the bank to confirm this balance. If the bank’s confirmation shows a matching amount, you have strong evidence that the balance is accurate. If there are discrepancies, further investigation is necessary.

Bank Reconciliation

Bank Reconciliation is another key audit procedure and is frequently tested on the AUD section of the CPA exam. This process involves reconciling the company’s cash records with its bank statements. It helps identify any differences between the two, which may be due to timing differences, errors, or fraud. For auditors, scrutinizing the reconciliation helps in evaluating whether all items like outstanding checks, deposits in transit, or bank charges have been correctly accounted for.

Example: In the same retail company, you find that the bank statement shows a balance of $190,000. Upon reviewing the bank reconciliation, you see an outstanding check for $10,000, which explains the difference between the book balance and the bank statement. Further tests may include ensuring that the outstanding check clears shortly after the balance sheet date.

Bank Transfer Schedules

Bank Transfer Schedules are often used in audits to examine the movement of cash between bank accounts. This is crucial for detecting whether any fraudulent activities like “lapping” or “kiting” are taking place. In the CPA exams, you might encounter questions where you’ll need to assess the adequacy of bank transfer schedules as an audit procedure.

Example: During your audit, you come across multiple transfers between the retail company’s main bank account and a secondary account. You would create a bank transfer schedule to track these movements, listing dates, amounts, and account details. If you find that the funds were moved to the secondary account just before year-end and then transferred back immediately after, this could be a red flag for fraudulent activity designed to inflate the year-end balance.