Every organization must have checks and balances to ensure transparency and accountability in financial matters. The cash audit is one such procedure that every business puts in place. Read through this article to learn more about it.
Financial audits are carried out in an organization to check the accuracy of the records and to ascertain any discrepancies. It is also used to display transparency to investors, and to reaffirm that the organization is adhering to the generally accepted accounting principles and is devoid of any fraudulent activities. As the title suggests, cash audits are specifically related to transactions in which cash has changed hands. These audits cover a specified period of time, such as a month or a quarter, and is included in the annual report of the organization.
Types of Audit Procedures
There are three known types of audit procedures. Let us take a look at each one of them.
Data Selection: In this method, an auditor checks the numerical data to review the accuracy of the various financial transactions. It enables the auditor to look out for any variations in the proceedings over a fixed period of time. One of the disadvantages of this is that it is too rigid and on the basis of numbers, one cannot fully explain the inconsistency, if any, over a period of time.
Tests of Control: A control test is carried out by an auditor to verify if the organization is being managed efficiently and how the operational risks are being avoided. It also provides them an insight into the decision-making mechanism of the organization.
Account Details Tests: In this method, an organization’s bookkeeping practices are reviewed. During this review, the auditor checks for various journal entries and ensures that the bookkeeping is in accordance with GAAP or the IFRS.
Process of a Cash Audit
- Check the summary of the period-end cash balances to ensure that there are no loopholes. The total should match with the ledger total and the previous audit’s working papers.
- Check the list of bank accounts in the summary and compare this list with that of the previous year, to check for new additions and omissions.
- Verify the organization’s disbursements by checking the bank statements.
- Check how many people are involved in dealing with cash. Ideally, only employees with administrative powers and managers should be involved in this process. An auditor also needs to examine the outstanding checks, deposits, reconciling items, etc.
- Review the receipt books, and ascertain the reason for any receipts not reflecting in the bank statement. If there are multiple banks in question, check all the interbank transfers, and verify their authenticity.
- The expenditure book of an organization tells us where and how much of the cash was spent, so check that the sum total of all the expenses in the expenditure book is equal to the total of the expenses in the books of accounts.
- Carefully compare all the canceled checks, and also check the follow-up on these to ensure that these are not endorsed by their payees.
- Examine all the receipts of goods and services, and whether these were approved by the authorized personnel.
Audits ensure that any loopholes are exposed and corrected, and the existing procedures are updated. These audits also make sure that the guidelines are implemented by the book, and the changes that take place in the business environment are quickly adapted by the organization by means of a cash flow analysis. As cash can be readily converted to any other asset, it is susceptible to many fraudulent activities. Thorough audit procedures ensure that one can safeguard this asset generated by the organization.