Reference: Year-End Audit Program

Year-end Audit Program
Contents:

Cash in Bank

Accounts Receivable

Audit Procedures for Cash

Accounting and auditing procedures differ across companies and industries but audit procedures for cash are similar. The auditor must obtain reasonable assurance that the cash balances of the company are stated accurately and does so using mostly standard procedures. Knowing audit procedures for cash can eliminate any surprises for you and your company around audit time.

Confirmation

The primary audit procedure used in testing cash balances is confirmation. In order to test confirmation, auditors ask the company's bankers to verify the balance of the bank accounts directly; responses are sent solely to the auditors. Bankers require electronic confirmation requests. The confirmation process also has an unintended benefit. When submitting the confirmation request, auditors commonly ask if the company has any loans with the bank as well. This helps to uncover any unrecorded liabilities present.

Foreign Currency Translation

For companies that hold cash denominated in foreign currencies, part of the cash audit process includes a test of the translation process. In order to test translation, the auditor independently calculates the cash balance using the exchange rate in effect at 12/31. If the translation is materially close to the company's figure, the auditor documents this finding and moves on with the audit. If there is a difference in the rate used that results in a material difference, the auditor must determine if the company's rate is reasonable.

Reconciliation Testing

As a part of cash testing, auditors also test the bank reconciliation process. By examining cash confirmations, auditors gain assurance over the bank balance. However, differences may exist between the correct bank balance and the correct book cash balance. Usually these differences relate to deposits-in-transit and outstanding checks. By recalculating and testing the underlying information in the company's bank reconciliations, auditors can bridge the gap between the book and bank balance.

Classification

Auditors might also need to test for the correct classification of cash. Some cash balances, such as cash balances that are restricted from use due to contractual agreements or cash equivalents that have been pledged as collateral, have complicated rules related to disclosure and classification. In some cases, these balances should not be listed as cash on the balance sheet and might need to be listed as investments or restricted cash. If your business is subject to an audit and you have any contractual obligations related to cash collateral, be sure to examine these agreements to ensure proper classification.

Accounts Receivable Audit
Substantive Audit Procedures for Accounts Receivable

Substantive audit procedures are the activities that auditors perform to assess the risk of material misstatements or instances of fraud at the assertion level. As opposed to the testing of controls, substantive procedures focus on amounts and include detailed testing of classes of transactions, account balances and disclosures. Substantive analytical procedures are also included.

Substantive Analytical Procedures

Auditors perform substantive analytical procedures at the planning and review stages of an audit. These procedures include comparison of a company's financial information with comparable financial information from past records; the company's anticipated results, such as forecast or budgets; or financial information of another company from similar industry. Auditors conduct these comparisons at the transaction's class level and the assertion level, and they generally ask management about the availability and reliability of the comparable information. If there are differences, then an investigation must follow.

Verification by Confirmation

To verify completeness, valuation and cut-off assertions, auditors send confirmation requests to debtors and third parties. They first test the reconciliation of accounts receivable balances to the general ledger. They then select relevant account balance items either on a judgmental basis or using audit software, and prepare confirmation requests for these items. They ask the recipients to respond with negative or positive confirmation and use the responses to verify the company's information.

Performance of Alternative Procedures

External parties don't always respond to confirmation requests, and when they don't, auditors must perform alternative audit procedures. This involves tracing subsequent cash receipt records or invoices and supporting documentation. If the company didn't receive significant repayments from debtors in a subsequent period, the auditors will address this concern with the organization's managers. To verify the valuation assertions, validity, and recording and presentation, auditors also perform tests of the journal entries in accounts receivable and the subsidiary ledgers. They also perform aging analyses to check long outstanding debts.

GAAP Considerations

Companies must prepare and present their financial statements according to a financial reporting framework, and in United States, when companies share their financial information with the public, they must use generally accepted accounting principles, or GAAP, to prepare their financial statements. Auditors, therefore, determine that the accounting policies and procedures related to accounts receivables are appropriate and are applied consistently according to GAAP. They also validate that the company presents and discloses its accounts receivable balances in the balance sheet and its accompanying notes properly.