Two or more employees work together to hide the fraud.
Example:
One person steals cash, while another person prepares a false bank reconciliation.
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| Term | Meaning |
|---|---|
| Cash audit | Audit procedures performed to verify cash balance |
| Bank reconciliation | Comparison between bank statement and cash book |
| Deposits in transit | Cash received and recorded but not yet shown in bank statement |
| Outstanding cheque | Cheque issued but not yet cleared by the bank |
| Skimming | Stealing cash before recording it |
| Lapping | Hiding stolen cash by delaying customer payment records |
| Kiting | Overstating cash by manipulating transfers between bank accounts |
| Proof of cash | Audit schedule used to check cash receipts and payments |
| Cutoff | Ensuring transactions are recorded in the correct accounting period |
| Petty cash | Small cash fund for minor expenses |
Petty cash is usually small, but auditors may still check it because it can be misused.
Important controls over petty cash include:
Example:
Petty cash fund = RM500
Actual cash in box = RM120
Petty cash vouchers = RM380
Total = RM500
This means the petty cash fund balances correctly.
This test is used to detect kiting.
The auditor checks whether the recording dates for cash disbursement and cash receipt are in the same financial year.
Important rule:
The disbursement and receipt of the same transfer must be recorded in the same fiscal year.
If the receipt is recorded before year-end but the disbursement is recorded after year-end, it may indicate kiting.
Assume the company transfers RM10,000 from Account A to Account B.
Before year-end:
At 31 December, the accounts show:
| Account | Balance Effect |
|---|---|
| Account A | RM10,000 still shown |
| Account B | RM10,000 added |
| Total shown | RM20,000 |
| Actual cash | RM10,000 |
This means the company appears to have more cash than it actually has.
Proof of cash is used when there are material internal control weaknesses in cash.
It helps the auditor determine whether:
This is performed when the auditor believes the year-end bank reconciliation may be intentionally misstated.
The auditor checks whether the bank reconciliation is properly prepared.
The auditor examines:
A cutoff bank statement is a short-period bank statement after year-end, usually covering 7 to 10 days after the reporting date.
The auditor uses it to check whether year-end reconciling items are genuine.
Example:
If the year-end date is 31 December 2023, the auditor may request a bank statement from 1 January to 10 January 2024.
The auditor sends a confirmation request directly to the bank. The bank confirms the client’s cash balance, loan balance, or other financial information.
If the bank does not reply, the auditor should send a second request or ask the client to contact the bank.
The general cash account has high audit risk because cash is easy to steal or manipulate.
Important controls over the general cash account include:
The purpose of bank reconciliation is to ensure that the accounting records agree with the actual cash balance in the bank after considering reconciling items.
| Substantive Test | Main Audit Objective |
|---|---|
| Obtain analysis of cash balances and reconcile to general ledger | Accuracy |
| Send bank confirmation to banks | Existence and rights |
| Obtain bank reconciliation | Existence and accuracy |
| Obtain bank cutoff statement | Cut-off and completeness |
| Count cash on hand | Existence |
| Verify cash transaction cut-off | Existence, rights, and completeness |
| Analyse bank transfers around year-end | Detect kiting |
| Investigate payments to related parties | Fraud risk and disclosure |
| Evaluate presentation and disclosure | Proper reporting |
Substantive tests are audit procedures used to obtain evidence about the correctness of cash balances.
Management has two main concerns about cash:
Although bank reconciliation can detect many errors, cash is still risky because of its liquid nature.
Cash and cheques should be kept securely.
Examples of physical controls:
The company should compare the bank statement with the cash book regularly.
Bank reconciliation helps detect:
Different people should handle different cash-related tasks.
For example:
| Duty | Person Responsible |
|---|---|
| Receiving cash | Cashier |
| Recording cash | Accounts clerk |
| Bank reconciliation | Independent staff |
| Approving payment | Manager |
This reduces the chance of fraud because one person does not control the whole process.
All cash payments and receipts should be approved by authorised personnel.
Example:
Only the finance manager can approve cheque payments above RM5,000.
Kiting happens when money is transferred between bank accounts to overstate the cash balance.
Simple explanation:
The same cash appears to exist in two bank accounts at the same time.
Example:
Before year-end, RM10,000 is recorded as received in Bank B, but it has not yet been deducted from Bank A. The company appears to have RM20,000, but the real cash is only RM10,000.
This happens when fake expenses are recorded to hide cash theft.
Example:
An employee creates a fake supplier invoice and issues payment to their own bank account.
Lapping is hiding cash theft by delaying the recording of customer payments.
Example:
Cash received from Customer A is stolen. Later, cash received from Customer B is used to cover Customer A’s account.
Skimming is stealing cash before it is recorded in the accounting records.
Example:
A cashier receives RM500 from a customer but does not issue a receipt and keeps the money.
A material misstatement means an error or fraud that is serious enough to affect the financial statements.
Possible misstatements in cash include:
Window dressing happens when management tries to make the company look financially stronger than it actually is.
Example:
A director repays a loan to the company just before year-end, so the cash balance looks higher. Then, after year-end, the director borrows the money again.
A material misstatement means an error or fraud that is serious enough to affect the financial statements.
Possible misstatements in cash include:
A cash receipt or payment is recorded in the wrong accounting period.
Example:
Cash received on 2 January 2024 is wrongly recorded as received on 31 December 2023.
Inherent risk means the risk that an error or fraud may happen because of the nature of the business or transaction.
Cash has high inherent risk because it is easy to steal and easy to manipulate.
Inherent risk is higher when there is:
| Situation | Explanation |
|---|---|
| High judgment | Staff may make wrong decisions when recording transactions |
| Estimates | Some cash-related amounts may require estimates |
| Complexity | Large businesses with many branches or subsidiaries may record cash incorrectly |
The auditor checks whether cash is properly presented in the financial statements.
Example:
Restricted cash, compensating balances, or sinking funds should be properly disclosed.
The auditor checks whether the cash balance is recorded at the correct amount.
Example:
The bank statement shows RM50,000, but the general ledger shows RM55,000. The auditor must investigate the difference.
The auditor checks whether the company has legal rights to the cash.
Example:
Cash in the company’s bank account belongs to the company, but restricted cash may not be freely used.
Example:
If the company received RM8,000 from a customer, the auditor checks whether it was recorded in the cash book and general ledger.
Example:
If the company records RM100,000 cash in bank, the auditor checks whether the bank confirms that the money exists.
Examples:
They usually have low risk and short maturity periods.
Examples of petty cash payments:
The petty cash fund should have a fixed amount, and all spending must be supported by receipts or petty cash vouchers.
Example:
A company with branches in Kuantan, Temerloh, and Shah Alam may allow each branch to maintain its own bank account.
One example is an imprest payroll account, which is used to control salary payments.
Example:
Customer pays RM5,000 into the company bank account. The payment is recorded in the general cash account.
Cash is one of the most important accounts in an audit because almost every business transaction affects cash. Money comes into the business through sales, loans, disposal of assets, or capital introduced by owners. Money goes out through purchases, payroll, payment of liabilities, and buying assets.
Cash is considered high risk because it is easy to steal, misuse, or manipulate. Unlike inventory or equipment, cash does not need to be converted into another form before it can be used. Therefore, auditors must pay close attention to cash balances and cash transactions.
In auditing cash, the auditor must check two important things:
