a. Principal risks

The principal risks of misstatement of the bank and cash balances in the financial statements are that:

i. Not all bank balances are disclosed (the rights and obligations, and existence assertions);

ii. Reconciliation differences between bank statements and the client’s cash book balances are incorrectly dealt with (the valuation assertion); and

iii. Material cash balances are omitted (the completeness assertion).

b. Typical areas covered by a confirmation letter include the following:

i. Confirmation of balances on all bank accounts at the end of the reporting period;

ii. Details of any unpaid bank charges;

iii. Loans granted to the organisation;

iv. Details of any liens (charges) over assets of the client entity;

v. Details of any assets of the client entity held by the bank as security for loans and advances;

vi. Details of accrued interests;

vii. Details of any other client bank accounts that are known to the bank but not listed on the request to the bank for confirmation of balances; and viii. Names of signatories and their mandates.

c. Audit work on the banks’ confirmation replies

i. Bank reconciliation statement: Obtain or prepare a bank reconciliation statement for each bank account.

ii. Arithmetic accuracy of reconciliation: If the reconciliation is prepared by the company, check it for arithmetical accuracy.

iii. Comparison with bank reconciliation: Check the bank balance confirmed in the bank’s confirmation letter against the balance used in the bank reconciliation statement.

iv. Other information on the confirmation letter: Relate other information contained in the confirmation letter to other areas of the audit (for example, accrued bank charges must be provided for in the financial statements).

v. Check the bank reconciliation against available evidence: Check items appearing in the bank reconciliation statement against any available supporting evidence (for example, unpresented cheques in the bank reconciliation statement should be shown as having been presented in a subsequent bank statement).

vi. Unusual items: Review the cash book and bank statements for unusual items, including unusual delays between cash book and bank statement entries. Investigate the reasons for any unusual item.

vii. Review of the confirmation letter in relation with disclosure on the financial statements: Review the confirmation letter from the bank for any other information to be disclosed in the financial statements (for example, charges on assets and security for loans).

d. The main audit steps involved in verifying cash balances in a physical count include the following:

i. The auditor should count cash at all locations simultaneously and in the presence of a company official. (Simultaneous counting is necessary, to prevent the client from moving cash that has been counted at one location to another location ready for the next count);

ii. After the count, the auditor should obtain a signed receipt for the amount of cash returned to the official, after the count;

iii. The auditor should check the cash balance obtained from the count against the client’s cash records and cash balance in the draft financial statements; and

iv. The auditor should also investigate the treatment of any money advanced to employees (for example, against wages or salary).