Reasons for Auditing Cash
Cash auditing is a complete or partial assessment of cash transactions that your business carries out within a set time frame. You may audit cash to ensure proper documentation of cash received or disbursed and to establish that the cash balance and deposits are accurate. A cash audit is a review of cash transactions between an identified start date and end date in accordance with the generally accepted procedures of accounting, in addition to the policies of your company.
Cash audits ensure that you clearly and appropriately name and categorize cash when making a financial statement, including lines of credit and loan guarantees, in order to enable easy verification of cash balances. For example, you should report cash on deposit as a current asset while displaying a bank overdraft as a current liability. Thus, an audit will help you understand how the business is performing financially and avoid misappropriation of funds.
Businesses conduct cash audits to ensure that cash balances exist in line with the dates they are reported on the balance sheet, and in the long run, this can help you make better business decisions. Records must show existing items to reassure you of their dependability and a cash audit exposes non-existent items and unreliable records. Many times, you will make decisions based on the data you analyze from financial documents, so entries need to be authentic.
Cash audits help to obtain and verify the mathematical accuracy of cash transactions by tracing opening balances to the previous year’s documents and by reviewing activity in general ledger accounts for cash. An audit helps to expose errors such as kiting, where you may record deposits and omit withdrawals, causing an overstatement of cash. You must ensure that you record realizable cash balances in the amounts you state on your balance sheet.
To ascertain that all records reflect the expenditure in the financial statements, an auditor may examine cash receipts and disbursement records for a period before the balance sheet date. This prevents deliberate misstatement of fact and establishes errors committed by the person handling the records. Misstatement of fact may occur for many reasons, such as to conceal poor decisions or fraudulence. The auditor’s intention may not be to identify fraud, but in the course of the audit, he may uncover it and save your business from theft.
You may also audit cash to establish the cut-off dates of accounts by reconciling balances and tracing the reconciled items with the aid of supporting documentation. For instance, if the transaction is at a date other than the end of the period, reconcile the activity to the date of the balance sheet. A cash audit provides evidence that transactions for each year are included in the financial statements of the appropriate year.