Cash Audit: Bank Confirmation, Reconciliation, Cutoff Statement | Auditing and Attestation |CPA Exam

In this session, I will discuss cash audit including bank confirmation, reconciliation and bank cutoff statement.
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Although bank confirmations are not required under auditing standards, auditors usually obtain a direct receipt of a confirmation from every bank or other financial institution with which the client does business, except when there is an unusually large number of inactive accounts. If the bank does not respond to a confirmation request, the auditor should send a second request or ask the client to communicate with the bank to ask it to complete and return the confirmation to the auditor.
In testing the year-end balance in the general cash account, the auditor must accumulate sufficient appropriate evidence to evaluate whether cash, as stated on the balance sheet, is fairly stated and properly disclosed in accordance with five of the eight balance-related audit objectives used for all tests of details of balances (existence, completeness, accuracy, cutoff, and detail tie-in). Rights to general cash and its classification on the balance sheet are generally not of concern, and the realizable value of cash is not applicable.
The importance of bank confirmations in the audit extends beyond the verification of the actual cash balance.
A cutoff bank statement is a partial-period bank statement and the related copies of or digital access to cancelled checks, duplicate deposit slips, and other documents included in bank statements, provided by the bank directly to the CPA firm’s office or through online access to the bank’s electronic records of the client’s bank account information. The purpose of the cutoff bank statement or electronic access to account information on the bank’s system is to verify the reconciling items on the client’s year-end bank reconciliation with evidence that is maintained by the bank, not the client. To fulfill this purpose, the auditor requests the client to have the bank provide directly to the auditor a partial-period statement, or digital access to the information, for 7 to 10 days subsequent to the balance sheet date.
Foot the lists of all cancelled checks, debit memos, deposits, and credit memos

Verify that the bank statement balances when the footed totals are used

Review the items included in the footings to make sure that they were cancelled by the bank in the proper period and do not include any erasures or alterations


A monthly bank reconciliation of the general bank account on a timely basis by someone independent of the handling or recording of cash receipts and disbursements is an essential control over the ending cash balance. Companies with significant cash balances and large volumes of cash transactions may reconcile cash on a daily basis to online banking records. If a business defers preparing bank reconciliations for long periods, the value of the control is reduced and may affect the auditor’s assessment of control risk for cash. The reconciliation ensures that the accounting records reflect the same cash balance as the actual amount of cash in the bank after considering reconciling items. More important, the independent reconciliation provides an opportunity for an internal verification of cash receipts and disbursements transactions. The person performing the bank reconciliation may have read-only access to online bank account information to complete the reconciliation. Alternatively, the individual performing the bank reconciliation may only have access to bank statements mailed by the bank. If bank statements are received unopened by the reconciler, and physical control is maintained over the statements until the reconciliations are complete, copies of cancelled checks, duplicate deposit slips, and other documents included in the statement can be examined without concern for the possibility of alterations, deletions, or additions. A careful bank reconciliation by competent client personnel includes the following actions:

Compare cancelled checks or electronic bank records of payment with the cash disbursements records for date, payee, and amount

Examine cancelled checks or electronic bank records of payment for signature, endorsement, and cancellation

Compare deposits in the bank with recorded cash receipts for date, customer, and amount

Account for the numerical sequence of checks, and investigate missing ones

Reconcile all items causing a difference between the book and bank balance and verify their appropriateness for the client’s business

Reconcile total debits on the bank statement with the totals in the cash disbursements records