Auditing Special Purpose Frameworks: Auditing Cash Classifications—Part 1
Learning "how" to audit cash is mainly learning "when" to audit cash and to "what extent" cash auditing procedures should be applied. To prevent over-auditing, the amount of audit work necessary must depend on the assessed levels of risk of material misstatement (RMM) at both the financial statement and classification (assertion) levels. For example, when RMM is low at the financial statement and assertions level for cash and significant substantive evidence has been gathered from risk assessment procedures, tests of balances procedures may be limited
The Relevant Accounting Standards
Demand and time deposits in banks, credit unions, and other depositories; cash on hand; and cash equivalents are included in this classification. Pre-codification, currently effective standard SFAS No. 95, Statement of Cash Flows (ASC Topic 305), which is available for download in its currently updated format, is the principal accounting standard affecting cash.
ASC Topic 305 defines cash equivalents as highly liquid investments that usually have a maturity of less than three months from date of acquisition by an investor. Cash and any cash equivalents should be classified together with the description of "Cash and Cash Equivalents" in both the balance sheet and statement of cash flows.
Cash balances that are restricted because of withdrawal restrictions, or donor restrictions in nonprofit organizations, should be classified separately. Depending on the nature of the restrictions, these balances may be classified as current or noncurrent.
Negative cash balances, such as bank overdrafts, should be classified as current liabilities unless the legal right of offset relates to these and other accounts at the same financial institution. Also, any material amounts of written and held checks should be reclassified as current liabilities.
Know the Auditing Standards
In previous articles in this series we discussed understanding and formulating audit strategies. Audit strategies are based on the standards issued by the Auditing Standards Board of the AICPA, specifically the clarified risk assessment standards. These standards indicate that all risk assessment procedures, tests of controls, analytical procedures, and tests of balances produce substantive evidence that enables an auditor to design the most cost-beneficial audit strategy on every audit engagement.
Risk assessment—based on an auditor's professional judgment and professional skepticism—is required on all audits to indentify potential risks of material misstatement due to error or fraud and to design audit responses that will prevent such risks from causing the audited financial statements to become misleading. These standards apply to audits of all financial reporting frameworks, including special purpose frameworks.
Assertions and Procedures—Tailoring the Audit Plan
Financial statement assertions—management's representations in financial statement classifications—are presented in AU-C 315. Relevant assertions are those that are directly applicable to a financial statement classification. Audit procedures should be designed to gather evidence to evaluate the applicable relevant assertions based on the facts and circumstances of a particular audit engagement.
Here are the relevant financial statement assertions for cash extracted from the assertions detailed in AU-C 315. For cash, all assertions are normally relevant except for Rights and Obligations.
To determine that all cash transactions and account balances that should be presented have been included in the financial statements.
Occurrence and cutoff
To determine that all cash transactions occurring during the period have been recorded in the financial statements in the proper period.
Valuation, accuracy, and classifications
To determine that all cash and related accounts have been included in the financial statements at accurate amounts, classified properly.
To determine that all recorded cash accounts exist at a given date.
Disclosure and Presentation
To determine that all components of the financial statements and other transactions and events are accurately classified, clearly described, and disclosed.
In my next article I'll begin to focus on the common, basic procedures for auditing cash. For webcasts on Performing Tests of Balances for a major financial statement classifications, click on the box on the left side of my home page, www.cpafirmsupport.com.