Tuesday, July 14, 2009

Cash balance (overdraft) & audit planning?

I have a problem where im asked to discuss the impact of a cash balance (overdraft) on an audit plan where the cash balance in one year was $100K but in the following year it was $(640K). I%26#039;m not sure how to go about answering it. My main ideas were that first of all and most obviously, there is a potential risk area as there is a significant deviation from last year%26#039;s cash balance, so the auditor would plan to perform substantiative tests in relation to cash related transactions so as to find any possible mistatement or unusual transaction. Such tests can include auditing the client%26#039;s bank reconcilliation or contacting the bank directlty to confirm the cash balance amount. The auditor could also consider the potential of fraud in the cash balance. Furthermore, there could be an issue with foreign exchange rate if the company has branches overseas which have converted cash balance wrongly because of misuse of exchange rates. So am i on the right track? If not, pls provide further help.



Cash balance (overdraft) %26amp; audit planning?cheap loans





Honestly you are on the perfect track. The only thing I would add is a discussion with management or accounting personel to determine why there was such a significant variance from prior year. I think your audit plan sounds great. It would depend on your materiality level whether or not I would perform substantive tests on the cash transactions since you will probably be performing a test for unrecorded liabilities also which gives you some comfort over cash transactions being recorded properly. I would definitley confirm cash balances with the bank. Good thought on the conversion rate could be a factor if there were major conversion rate changes from prior year. Good luck, sounds like you are on the road to being a great auditor!!!

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