Auditing Cash and Cash Equivalents

Auditing Cash and Cash
Equivalents – Risk, Assertions,

And Procedures
Overview:
Cash and Cash Equivalent is scoped under IAS 7, Statements of Cash Flows. In Cash
and Cash Equivalents, there are two separate components. The first is cash which
comprises cash on hand and at the bank.
The second is Cash Equivalents which are investments that are short-term, highly
liquid, and are readily convertible to known amounts of cash which are subject to
insignificant changes in value.
An example of Cash Equivalents is short-term bank deposits that are less than three
months. Equity investments are generally excluded from Cash Equivalents unless they
are Cash Equivalents in substance. An example would be an investment in preferred
shares with a short maturity period and a specified redemption date.
Risks
:Before the auditors can decide what procedures to perform, the risks associated with auditing
Cash and Cash Equivalents should first be identified:
Risk of Material Misstatement: The Risk of Material Misstatement when auditing Cash and
Cash Equivalents is generally low as most cash or bank balances can be easily verified through
a cash count procedure or by obtaining external bank balance confirmation from the bank.
However, the risk is always higher when auditing Cash Equivalents as interpreting the terms of
such investments often requires a lot of judgment.
Control Risk: The Control Risk related to Cash and Cash Equivalents is the absence of
appropriate approval in the payment process, absence of appropriate process over the
preparation of bank reconciliation, and investment being wrongly or not classified as Cash and
Cash Equivalents.
Detection Risk: Detection Risk is the risk that an auditor is not able to detect the material
misstatements in the reported amounts of Cash and Cash Equivalents and classification error in
investment.
Assertions:
For an auditor to be reasonably assured of the Cash and Cash Equivalent balances, tests will be performed to
cover the audit assertions. The assertions applicable to Cash and Cash Equivalents are:
Completeness: All Cash and Cash Equivalents belong to the entity have been recorded and presented in the
financial statements including those held by a third party.
Rights and Obligations (Ownership): The Cash and Cash Equivalents belong to the entity and there is no cash
held on behalf of a third party in the entity’s Cash and Cash Equivalents without appropriate disclosures in the
financial statements.
Valuation: Cash and Cash Equivalents will be remeasured only when the balance is originally in foreign
currency and when there is a difference between the spot and foreign exchange rate at the end of the accounting
period.
Existence: The reported Cash and Cash Equivalent balance exists at the reporting date either in the form of
cash held physically or in the bank.
Presentation and Disclosure: The Cash and Cash Equivalent amount in the financial statements and relevant
disclosure notes to the financial statement are complete and following the applicable accounting standards.
Procedures:
Audit Procedures for testing Cash and Cash Equivalents include Test of Controls and Substantive Tests.
Test of Controls:
Controls that are relevant to Cash and Cash Equivalents include payment approval and recording process,
classification of investment, bank reconciliation process, and segregation of duties.
Payment Approval and Recording Process: This control is to ensure all payments made by the entity are
approved by the appropriate level of personnel depending on the payment amount involved and subsequently
recorded correctly.
Classification of Investment: This control is to ensure that the entity has in place a process to interpret the
terms of the investment and make a judgment on the classification of investment as to whether it belongs to
Cash and Cash Equivalents.
Bank Reconciliation Process: This control is to reconcile the entity’s recorded cash balance to the bank
statement and ensure all differences are solely due to timing differences.
Segregation of Duties: This control is crucial here as in any other processes. It effectively ensures the work
of the original preparer has been scrutinized and approved which reduces the risk of any material error or
fraud.
Substantive Audit Procedures for Cash and Cash Equivalents consist of the following components:
1) Substantive Analytical Procedures:
Substantive Analytical Procedures analyze the changes or lack of changes in the entity’s financial’s
performance. The changes or lack of changes must be benchmarked against a set expectation such as
historical performance, latest business developments, and any other information relevant to the entity. This
will allow the auditor to detect potential areas with a higher risk of material misstatements.
For example, a significant increase is noted in Cash and Cash Equivalents near the end of the accounting
period. This substantial increase can be checked against the entity’s sales collection timing and sales
performance near the end of the accounting period.
It could also indicate that the entity may have recorded some of its cash receipts from the next accounting
period in the current one if the information obtained does not correlate with each other.
2) Test of Details for Cash and Cash Equivalents:
To test details for Cash and Cash Equivalents, audit procedures are designed around assertions. Example and
description of test of details are given in the table below:
Problem : Cash and Cash Equivalents
Problem 1
Presented below are unrelated situations:
1. The following information has been extracted from the accounting records of the PILI NUT COMPANY at
December 31, 2021:
1. Cash on hand (undeposited sales receipts) 40,800.00

2. Certificate of time deposit with maturity of 3 months 1,000,000.00
3. Customer’s note receivable 40,000.00
4. Reconciled balance in metrobank checking acct (14,000.00)
5. Reconciled balance in Psbank checking acct 374,000.00
6. Balance in BPI savings account 342,400.00
7. Customer’s postdated check 54,000.00
8. Employee travel advances 64,000.00
9. Cash in bond sinking fund 48,000.00
10. Bond sinking fund investments 323,600.00
What total amount should PILI NUT Company report as “cash” at December 31, 2021?
Problem 1
2. The controller of MUSIC CO. is trying to determine the amount of cash and cash equivalents to be reported on its
December 31, 2021 statement of financial position. The following information is provided:
1. Balance in the company’s account at the LBP

- checking acct – P540,000
- savings acct – P884,000
2. Undeposited customer’s check P208,000
3. Currency and coins on hand 0f P23,200
4. Savings account at PNB with a balance of P350,000. This account is being used to accumulate cash for future
plant expansion (in 2023)
5. P800,000 balance in checking account in PNB. In exchange for a line of credit. MUSIC CO has agreed to
maintain a minimum balance of P100,000 in this account.
6. Treasury bills; 30-day maturity bills totaling P600,000, and 180-day bills totaling P800,000.
What total amount of “cash and cash equivalents’ should be reported in the current assets section of the 2021 statement
of financial position ?
Problem 1
3. The controller of OTTO CO. is in the process of preparing the company’s December 31, 2021 financial statements.
He is trying to determine the correct balance of cash and cash equivalents to be reported as a current assets in the
statement of financial position. The following items are being considered :
1. Savings account of P900,000 and a checking account of P1,200,000 are held at MBTC.
2. Money market placement with maturity of 3 months , P7,500,000
3. Currency and coins on hand amounted to P11,550
4. Travel advances of P270,000 for the first quarter of next year (employee reimbursement will be through salary
deduction)
5. OTTO Co. has purchased P3,150,000 of commercial paper of Mando Corp., which is due in 60 days.
6. A separate cash fund amounting to P2,250,000 is restricted for the retirement of long-term debt.
7. Petty cash fund of P1,500.
8. An IOU from an employee of OTTO Co. in the amount of P2,000
9. Two certificates of deposit, each totaling P500,000. These CD’s have maturity of 120 days.
9. Two certificates of deposit, each totaling P500,000. These CD’s have maturity of 120 days.
10. OTTO Co. has received a check from a customer in the amount of P187,500 dated January 15, 2022.
11. OTTO Co. has agreed to maintain a cash balance of P50,000 at all times at MBTC to ensure future credit
availability
12. On January 1, 2021, OTTO Co. purchased marketable equity securities to be held as “trading” for P3,000,000. On
December 31, 2021, its market value is P4,300,000.
What amount should be recorded as “cash and cash equivalents’ on December 31, 2021?

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Auditing Cash and Cash

Equivalents – Risk, Assertions,

Presented below are unrelated situations:

1. Cash on hand (undeposited sales receipts) 40,800.00

1. Balance in the company’s account at the LBP

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