[Checklist] Audit of Cash and Bank Balances

Sr. No.

W.P. Ref.

• Existence: that recorded bank balances exist at the year-end
• Rights: that recorded bank balances represent the assets of the entity
• Cut-off: Banking transactions are recorded in the period in which they take place and not earlier/later [See Barings Plc v Coopers & Lybrand (a firm) & Ors [2003] EWHC 1319 (Ch)]
• Completeness: there are no unrecorded bank balances.
• Valuation: in certain special cases – e.g. Foreign currency held by the entity/bank accounts designated in foreign currencies.

(b) Have you exercised greater care in satisfying yourself about the genuineness of the transactions and balance?

a) Segregation of duties relating to;

• authorisation of transactions.
• issuance of cheques.
• writing books of accounts

b) Proper authorisation of  banking transactions

c) Restrictive crossing of cheques

d) Whether the entity had availed Positive Pay facility to protect against fraudulent encashment of cheques

e) Per day limits set on Internet banking transactions

f) Per day limits set on UPI transactions

g) Periodic reconciliation of bank balances.

h) Safe custody of cheque books, internet banking passwords etc

(b) Is it ensured that there is no direct debit to the bank account on receipt of a cheque?

Note: In the case of companies, accounting for receipts and payments on a day-to-day basis is a requirement of Section 338(2) of the Companies Act, 2013. In the case of other entities, it is a sound and prudent practice to ensure internal control over bank balances.

• Non-Configurable: The audit trail feature must be non-configurable. That is to say, the audit trail should not be capable of being disabled and should not be capable of being tampered with.
• Enabled throughout the year: Verify whether the audit trail feature was enabled/operated throughout the year.
• Auditor’s responsibility is limited to transactions that have been recorded in the accounting software and subsequent changes made to those transactions: whether all transactions recorded in the software are covered in the audit trail feature? Proviso to Rule 3(1) of Companies (Accounts) Rules 2014 prescribes the requirement of an audit trail only in the context of books of account by stating that accounting software should be capable of creating an edit log of “each change made in books of account.” The auditor’s responsibilities have been prescribed for “all transactions recorded in the software.” Accordingly, the auditor’s responsibility under Rule 11(g) is restricted to transactions which have been recorded in the accounting software and subsequent changes made to those transactions (which is demonstrated through rectification/additional entities).
• Compliance with statutory record retention requirements: Has the audit trail been preserved as per statutory requirements for record retention under Section 128(5) of the Companies Act, 2013?

(b) Are all those bank accounts disclosed in the balance sheet of the year under audit?

b. If the bank balance in the books is a credit balance, is there an overdraft arrangement with the bank?

c. If there is no overdraft arrangement with the bank and the bank account shows a credit balance, have you treated it as a red flag and enquired into the reasons? [See CA Lavitha Shetty, In re [2023] 151 taxmann.com 526]

• Verify that PDCs received have not been accounted for as deposits in bank account
• Verify that PDCs received are not accounted as cheques on hand

• Have you verified the composition of balance of cheques on hand account?
• Have you verified that it does not include PDCs received?
• Have you verified that cheques received, which are dated 31st March or earlier but received after 31st March, are not included in cheques on hand in the balance sheet as at 31^st March?

Note: The above requirement seems to be a case of Regulators learning from the Satyam case.

(b) Do the requests for confirmation also cover dormant accounts and accounts closed during the year under audit?

(b) Have you examined the bank statement for the relevant period to confirm this?

(b) Have you ascertained the reasons for such items from the management?

(c) Have you examined whether such items require any adjustment or write-off?

(b) If so, whether a sizeable proportion of these subsequently remain unpaid or uncleared as per the Bank Reconciliation Statement?

(c) If so, as this may indicate an intention to overstate/understate debtors or creditors and/or bank balances to window-dress the current ratio and/or escape disallowance u/s 43B(h) in respect of delayed payments to MSEs and/or suppress payables to related parties:

(i) have you obtained confirmations from the parties concerned as to the actual date of receipt by them of the cheques, especially for cheques of large amounts; and

(ii) have you examined whether the reversal of entries of appropriate in the circumstances

(iii) if such cheques pertain to MSEs, have you verified that reversal of entries is considered in disclosing MSE dues in the notes to accounts

(iv) if entries are not reversed and the auditee is a company, have you considered reporting these as transactions represented merely by book entries [See Section 143(1)(b) of the Companies Act, 2013 and also modified the opinion on true and fair suitably?

(v) if you are tax auditor under Section 44AB of the Income-Tax Act, 1961, have you factored in the non-reversal of such entries in reporting in Clause 22 of  Form 3CD the disallowance under Section 43B(h) and under Section 23 of MSMED?

Note: Even though balances have remained stagnant, transactions may have occurred. The auditor should be alert to this possibility.

b) If not credited in the next period, have you ascertained the reasons for the same.?

c) Have the entries been reversed in appropriate cases?

i. the facts have been suitably disclosed in the financial statement; and

ii. suitable adjustments have been made in appropriate cases.

• Stale or dishonoured cheques