I posted the cash procedures performed by a big four firm in the U.S. a couple weeks back in detail. Here is the post again UpstateChris...
I’m reiterating some procedures accurately stated by rjeezy007 yesterday…cash is by far the easiest account to verify when performing auditing procedures, which is why as auditors, we usually allow our first year auditor to perform the testing. Once testing is performed, it is then preceded by three levels of review by the senior auditor, manager, and finally partner. When using D&T’s methodology, we not only confirm account balances as of yearend, but also perform limited interim testing procedures for additional assurance if it is considered necessary. Procedures would include but are not limited to the following:
TEST BANK RECONCILIATIONS
1)Select all bank accounts representing cash on deposit in accounts with financial institutions including overdraft accounts. Obtain reconciliations of such accounts to the general ledger.
2)Prepare, or have the entity prepare, standard bank confirmation requests for the accounts and perform the following:
a)Mail the confirmation requests under our control, determine that the requests are properly addressed (i.e., obtain audit evidence about the accuracy and completeness of addresses provided by the entity), and request that all replies be sent directly to our office. Inquire with banks whether there are related guarantees, endorsements, and/or letters of credit, including guarantee arrangements for related parties.
b)Compare replies to the balance per bank in the bank reconciliations.
c)Agree direct and contingent liabilities, together with collateral, security interests, and liens reported in the replies to bank confirmation requests with other analyses, the general ledger, or other appropriate records.
3)Test clerical accuracy of reconciliation and, in addition, scan the bank reconciliation for significant or unusual reconciling items. Obtain explanations and review supporting documentation for any unusual reconciling items noted.
4)Make a selection of additive reconciling items. Examine related accounting records, subsequent or current bank statements, bank credit advices, or other evidence, and determine that the selected items are properly included as additive reconciling items.
5)Make a selection of items from subsequent bank statements representing paid checks, bank debit advices, and other items that potentially should be subtractive items in the bank reconciliations. Examine supporting documents for the items selected. Determine that the items are properly included with, or excluded from, subtractive items in the reconciliations.
6)Test the summarization of the individual items shown in
the reconciliations to the totals for each type of item.
7)Scan cash receipts and disbursements for significant or unusual transactions (including any bank transfers) near year end. This is usually done for either the last month of the fiscal year and the first month in subsequent fiscal year or 10 business days before and after year end.
TEST PRESENTATION OF CASH
8)Determine that amounts presented as cash and cash equivalents are properly classified as such, and that other amounts included in cash accounts, if any, are properly recorded, classified and/or disclosed, as appropriate: overdrafts; time deposits and other interest bearing accounts; compensating balances; other restricted cash; cash in transit.
9)Determine that amounts classified as cash equivalents are short-term, highly liquid investments that are both (1) readily convertible to cash and (2) so near maturity that they present an insignificant risk of changes in value because of changes in interest rates. (Generally, only investments with original maturities of three months or less meet these criteria.)
10)If the entity has cash that is restricted by agreements with third parties for special purposes (i.e., "restricted cash"), determine that the restricted cash balance is excluded from cash and cash equivalents.
Per PCAOB, public companies are also required to have reviews completed for interim statements which include analytical testing for any unusual differences when compared to prior quarters, bank statements are provided for these procedures. We obtain explanations and review supporting documentation for any significant differences and unusual transactions found.
These are a majority of the standard procedures used to test cash at any accounting firm, specifically a big four firm. In conclusion, cash accounts not only go through multiple levels of review by the auditing staff but are also independently verified with a bank (year end balance) and analytically tested in each interim period. In some instances, we access the clients bank statements online directly from the bank for the entire fiscal year. I am sure Deloitte will include additional procedures during their interim testing to ensure cash balances are confirmed directly with the bank and that check kiting has not occured.
It is also important to be aware of differences in the competency of different forms of evidence. The following table presents the hierarchy of reliable evidence.
Hierarchy of Reliability of Evidence
Level one
Physical examination
Confirmation
External Documentation
Recalculation and Reperformance
Level two
Internal documentation -
good internal control
Observation
Analytical procedures
with adequate data
Level three
Internal documentation -
poor internal control
Inquiries of client
Broad analytical procedures
Some key points:
• Physical examination and confirmation are considered most reliable forms of evidence.
• Auditor's direct knowledge (physical examination, reperformance, observation) is generally preferable to information gained indirectly.
• The most common evidence is documentation:
a. External evidence is more reliable than internal evidence.
b. Internal evidence is more reliable when internal control is effective.
I hope this is able to shed some light on what procedures are performed by auditors.