Definition:

Cash refers to money (currency) that is readily available for use. Cash includes:
● Cash on Hand: Physical currency held by the business.
● Demand Deposits: Funds held in bank accounts that can be withdrawn at any
time without prior notice.

Cash Equivalents are short-term, highly liquid investments that are readily
convertible to known amounts of cash and are subject to an insignificant risk of
changes in value. Examples include:
● Deposits with a maturity of less than 3 months
● Commercial Paper
● Marketable Securities
● Money Market Funds
● Treasury Bills
● Short-term Government Bonds

Overview of the Audit Process

There are four main steps in an audit:

1. Plan and Design an Audit Approach

○ Establish the scope and objectives of the audit.
○ Develop an audit plan based on the understanding of the client’s
business and industry.
2. Test of Controls and Transactions
○ Evaluate the effectiveness of the client’s internal controls.
○ Test the accuracy and completeness of transactions recorded in the
financial statements.
3. Perform Analytical Procedures and Test of Details of Balances
○ Analyze financial data to identify trends, ratios, and unusual
fluctuations.
○ Verify the accuracy of account balances through detailed testing.
4. Complete the Audit
○ Review audit findings and finalize audit reports.
○ Ensure all audit objectives have been met.
Transaction Cycles Relevant to CCE
During the audit, several transaction cycles are closely examined because they
interact with Cash and Cash Equivalents:
● General Cash Cycle
● Capital Acquisition and Repayment Cycle
● Sales and Collection Cycle
● Acquisition and Payment Cycle
● Payroll and Personnel Cycle

Importance of Auditing Cash and Cash Equivalents (CCE)

Cash is a critical component in almost every transaction within a business.
Therefore, auditing CCE is essential to ensure the accuracy and integrity of financial
statements. Below are examples of common misstatements related to CCE:

Sales and Collection Cycle:

● Failure to bill a customer, leading to understated revenue.
● Embezzlement of cash by intercepting receipts before they are recorded,
possibly disguised as bad debt.
● Duplicate payment of a vendor’s invoice, resulting in overstatement of
expenses.
● Improper payment of personal expenses for officers, misclassified as
business expenses.
Acquisition and Payment Cycle:
 ● Payment for raw materials that were not received, leading to overstatement
of inventory.
● Payment to an employee for more hours than worked, inflating payroll
expenses.
Capital Acquisition and Repayment Cycle:
● Payment of interest to a related party at an above-market rate, increasing
financial expenses.

Audit Objectives for Cash and Cash Equivalents (CCE)

Audit of Cash:
● Detail Tie-in: Cash in the bank as stated on the reconciliation is correctly
totaled and agrees with the general ledger.
● Existence: Cash in the bank as stated on the reconciliation actually exists.
● Completeness: All existing cash in the bank is recorded.
● Accuracy: The cash balance as stated on the reconciliation is accurate.
● Cutoff: Cash receipts and disbursements are recorded in the correct
accounting period.

Audit of Cash Equivalents:

● Detail Tie-in: Financial instruments as listed on the schedule of investment
activity are correctly totaled and agree with the general ledger.
● Existence: The financial instruments listed exist.
● Completeness: All existing financial instruments are recorded.
● Accuracy: The value of financial instruments as listed is accurate.
● Classification: Financial instruments are properly classified in the financial
statements.
● Cutoff: Financial instrument transactions are recorded in the correct period.
● Realizable Value: Financial instruments are stated at appropriate amounts
according to accounting standards.

Audit Procedures for Cash and Cash Equivalents (CCE)

Why Do Misstatements Occur?
Misstatements often occur due to weak internal controls within the audited
company. Therefore, it is crucial to understand and evaluate the company’s internal
controls to prevent and detect errors or fraud.

Internal Control Over Cash and Cash Equivalents

 ● Control Over Cash Receipts:
○ Count the cash on hand on the last day of the year and trace it to
deposits in transit and the cash receipts journal.
○ Trace deposits in transit to subsequent period bank statements to
ensure proper cutoff.
○ Ensure separation of duties between the person receiving cash and
the person recording it to prevent fraud.

● Control Over Cash Disbursements:

○ Record the last check number used on the last day of the year and
trace it to the outstanding checks and the cash disbursements journal.
○ Trace outstanding checks to subsequent period bank statements.
○ Ensure all cash disbursements are made by check, except for small
expenses, which can be handled through petty cash.
○ Require that checks be signed by at least two authorized officers.
○ Properly file voided or incorrectly written checks.
○ Stamp “Paid” on all receipts and checks issued to avoid duplicate
payments.

Audit of Cash and Cash Equivalents (CCE)

Phase I:
● Identify Client Business Risks affecting Cash and Cash Equivalents.
● Set performance materiality and assess inherent risk.
● Assess control risk.

Phase II:
● Design and perform tests of controls and substantive tests of transactions.

Phase III:
● Design and perform substantive analytical procedures.
● Design tests of details of the cash balance.

Test of Controls (TOC) for Cash and Cash Equivalents

When performing TOCs for CCE, auditors should focus on:

● Conduct interviews with key personnel.
● Use an Internal Control Questionnaire to systematically evaluate controls.
● Create Flow Charts to visualize processes and identify control weaknesses.
● Review bank reconciliations for accuracy and completeness.
 ● Examine signatures and dates on cash disbursement documents for proper
authorization.
● Verify document numbers for proper sequencing and printing.
● Ensure all documents are properly signed and authorized.

Substantive Testing for Cash and Cash Equivalents

● Prepare the main schedule to organize audit work.

● Conduct a surprise and simultaneous cash count (cash opname) and prepare
a report on the findings.
● Send confirmations or obtain a statement of balance from the cashier if cash
opname is not performed.
● Request a bank reconciliation as of the balance sheet date.
● Review bank confirmations, minutes of meetings, and credit agreements to
check for any restrictions on the company’s bank accounts.
● Examine interbank transfers around the balance sheet date to detect kiting
or window dressing.
● Inspect subsequent payments and collections up to the completion of
fieldwork.
● Convert foreign currency using the BI Middle Rate if applicable.
● Prepare a Correction List if necessary.
● Ensure the presentation of cash and cash equivalents in the balance sheet
and notes to the financial statements complies with financial accounting
standards in Indonesia (SAK/ETAP/IFRS).