Cash Flow Statement

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Cash Flow Statement Audit Case Example: ABC Manufacturing Company

Context

The cash flow statement is crucial for stakeholders to understand how ABC Manufacturing Company generates and uses its cash and cash equivalents. It reflects the company’s liquidity and financial flexibility, making the accuracy of its presentation vital.

Audit Objective

To obtain reasonable assurance that the cash flow statement of ABC Manufacturing Company is prepared accurately and completely, in accordance with the applicable financial reporting framework, such as IAS 7, Statement of Cash Flows, under IFRS, or ASC 230, Statement of Cash Flows, under US GAAP.

Types of Audit Evidence and Documentation for Cash Flow Statement Assertions

1. Completeness

• Case: Verify that all cash inflows and outflows are included in the cash flow statement.

• Documentation: Document reconciliation procedures between the cash flow statement and the underlying accounting records, bank statements, and other relevant documents to ensure all cash transactions are captured.

2. Accuracy

• Case: Assess the accuracy of the amounts reported in the cash flow statement.

• Documentation: Document testing of mathematical accuracy, including recalculating amounts and tracing selected transactions to supporting documentation to verify their accuracy.

3. Classification

• Case: Evaluate whether cash flows are appropriately classified into operating, investing, and financing activities.

• Documentation: Summarize the review of transaction classifications, including the examination of significant or unusual transactions to determine if they have been placed in the correct category according to the financial reporting framework.

4. Presentation and Disclosure

• Case: Review the presentation of the cash flow statement to ensure it complies with the applicable financial reporting standards and that all required disclosures are made.

• Documentation: Note the assessment of the cash flow statement’s format, the compliance with financial reporting standards, and the adequacy and clarity of disclosures related to cash and cash equivalents, including restrictions and amounts held in foreign currencies, if applicable.

Additional Considerations

• Direct vs. Indirect Method: If applicable, document the company’s choice between the direct and indirect methods for reporting operating cash flows, including a justification for the method chosen and its consistency with the financial reporting framework.

• Non-Cash Transactions: Evaluate and document the company’s disclosure of significant non-cash transactions that do not appear in the cash flow statement but are relevant for understanding the company’s financial activities.

• Interest and Dividends: Assess and document how interest paid, interest received, and dividends received are classified in the cash flow statement, ensuring consistency with the company’s accounting policies and financial reporting standards.

• Foreign Currency Cash Flows: If ABC Manufacturing Company has foreign currency cash flows, document the examination of how these are translated into the reporting currency and whether the effects of exchange rate changes are appropriately disclosed.

• Internal Controls Evaluation: Evaluate the design and effectiveness of internal controls over the preparation of the cash flow statement, documenting any identified control deficiencies and their implications for the audit.

• Communication with Those Charged with Governance: Discuss significant findings or issues identified during the audit of the cash flow statement with management and those charged with governance, especially regarding the accuracy of reported cash flows and compliance with disclosure requirements.

Conclusion

Auditing the cash flow statement is essential for ensuring that it accurately reflects the company’s cash inflows and outflows and complies with the applicable financial reporting standards. Documenting the audit procedures and findings related to each relevant assertion provides a basis for the auditor’s opinion on the financial statements, enhancing stakeholder confidence in the reported financial information.