CASH AND CASH EQUIVALENTS NO.21 HOW THE AUDITOR SHOULD VERIFY CASH AND CASH EQUIVALENTS? ANSWER: 1. Cash should be physically verified by the audit

NO.21 HOW THE AUDITOR SHOULD VERIFY CASH AND CASH EQUIVALENTS? ANSWER: 1. Cash should be physically verified by the auditor as on the balance sheet date. 2. The cash should be checked not only on the last day of the year, but also checked again sometime after the close of the year without giving notice of the auditor’s visit either to the entity or to his staff. (Surprise check) Audit of Items of Financial Statements 13.25 3. If there are more than one cash balances, e.g., when there is a cashier, a petty cashier, a branch cashier and, in addition, there are imprest balances with employees, all of them should be checked simultaneously, as far as practicable. 4. It is desirable for the cashier to be present while cash is being counted and he should be made to sign the statement. 5. If it is not possible for the auditor to physically verify the cash balance as on balance sheet date, the auditor shall ask the management to deposit the cash with the bank as on balance sheet date, if possible. 6. The auditor needs to obtain bank reconciliation statements (BRS) for all bank accounts maintained by the entity as at the reporting period and additionally need to understand the client’s process and periodicity of making the BRS. 7. The auditor should ensure that BRS is signed by the authorized personnel so that he is able to assign responsibility in case of any errors. The following points shall be kept in mind: a. Tallying the balance as per bank book to the bank confirmation/ statement. b. Checking of all material reconciling items included under cheques issued but presented for payment. In addition, the auditor should request for bank statements of subsequent period and should verify if the cheques issued have subsequently been cleared by the bank. c. Checking of all material reconciling items included under cheques deposited but not credited by bank and verifying if the balances were credited by bank subsequently by tallying to the bank statement of subsequent period. d. Checking of all material reconciling items included under amounts or charges debited/ credited by bank but not accounted for by requesting for bank statements. 8. Direct Confirmation Procedure: a. A significant and important audit activity is to contact banks/ financial institutions directly and ask them to confirm the amounts. b. The Company should be asked to investigate and reconcile the discrepancies, if any, including seeking written explanations/ clarifications from the banks/ financial institutions on any unresolved queries. c. The auditor should emphasize for confirmation of 100% of bank account balances. 9. Disclosure requirements: Ensure whether the following disclosures as required under Schedule III (Part I) to Companies Act, 2013 have been made: Cash and cash equivalents (i) Cash and cash equivalents shall be classified as: (a) Balances with banks; (b) Cheques, drafts on hand; (c) Cash on hand; (d) Others (specify nature) (ii) Earmarked balances with banks (for example, for unpaid dividend) shall be separately stated. (iii) Balances with banks to the extent held as margin money or security against the borrowings, guarantees, other commitments shall be disclosed separately. Audit of Items of Financial Statements 13.26 (iv) Repatriation restrictions, if any, in respect of cash and bank balances shall be separately stated. (v) Bank deposits with more than 12 months’ maturity shall be disclosed separately.