Bank and Cash

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Bank Balances Audit Case Example: ABC Manufacturing Company

Context

ABC Manufacturing Company has multiple bank accounts across various financial institutions to manage its operations, payroll, and other business activities. Given the significance of cash flows in operational management and financial planning, ensuring the accuracy and reliability of reported bank balances is essential.

Audit Objective

To obtain reasonable assurance that bank balances reported in ABC Manufacturing Company’s financial statements exist, are controlled by the company, are complete, accurately recorded, and properly presented and disclosed in accordance with the applicable financial reporting framework.

Types of Audit Evidence and Documentation for Bank Balances Assertions

1. Existence

• Case: Verify the existence of reported bank balances by obtaining direct confirmations from banks.

• Documentation: Document the confirmation process, including the selection of accounts for confirmation, correspondence with banks, and reconciliation of confirmed balances with the company’s records.

2. Rights and Obligations

• Case: Confirm that the company has legal rights to the cash balances reported in bank accounts and any related obligations, such as overdrafts or set-off arrangements.

• Documentation: Summarize the review of bank agreements and account terms to verify the company’s rights to the funds and obligations.

3. Completeness

• Case: Ensure all bank accounts owned by the company are included in the financial statements.

• Documentation: Outline procedures for testing completeness, such as reconciling bank accounts listed in the general ledger to independent sources (e.g., bank confirmations) and reviewing for any unrecorded bank accounts.

4. Accuracy

• Case: Assess the accuracy of recorded bank balances by reconciling them to bank statements and confirming transactions.

• Documentation: Document the reconciliation process, including the identification and investigation of reconciling items, adjustments made, and the resolution of discrepancies.

5. Presentation and Disclosure

• Case: Review the financial statements to ensure that bank balances are correctly classified (e.g., between current and non-current assets) and adequately disclosed in accordance with the applicable financial reporting framework.

• Documentation: Note the evaluation of bank balance classifications and disclosures, verifying the accuracy of the amounts reported and the adequacy of disclosures related to cash and cash equivalents.

6. Assessment of Internal Controls over Bank Balances

• Case: Evaluate the design and operating effectiveness of internal controls over the management and reporting of bank balances, including authorization of transactions, reconciliation processes, and access controls.

• Documentation: Document the review of internal controls related to bank balances, highlighting any identified control deficiencies and their implications for the audit strategy.

7. Inquiries and Analytical Procedures

• Case: Perform inquiries with finance personnel regarding the management of bank balances and apply analytical procedures to identify unusual or unexpected balances or transactions.

• Documentation: Summarize inquiries and the results of analytical procedures, highlighting any significant variances, trends, or issues that required further investigation.

8. Communication with Management and Those Charged with Governance

• Case: Discuss significant findings related to the audit of bank balances with management and those charged with governance, especially any issues impacting the reliability of bank balance information.

• Documentation: Prepare a summary of communications regarding bank balances, including management’s responses to audit findings and any adjustments or disclosures resulting from the audit.

Conclusion

The audit of bank balances is a fundamental aspect of ensuring the accuracy and reliability of a company’s financial statements. By documenting the audit procedures and findings related to each assertion for bank balances, auditors provide a basis for their opinion on the financial statements, enhancing the confidence of stakeholders in the reported cash positions. This comprehensive approach supports informed decision-making and financial analysis.