As the GYF Assurance & Advisory (A&A) Group begins 2026, final fieldwork is underway for our year‑end audit engagements. During this phase, auditors gather the evidence needed to support the balances and disclosures presented in the financial statements – ultimately, forming the basis for the audit opinion to be issued in the coming months.
This article is part of a new series designed to explain key areas of the audit process in a clear and approachable way. This installment focuses on cash and cash equivalents.
What Are Cash and Cash Equivalents?
While “cash” may seem straightforward, consisting of physical currency and funds held in traditional bank accounts, “cash equivalents” represent short‑term, highly liquid investments with original maturities of three months or less. Common examples of cash equivalents include: Treasury bills, commercial paper, money market funds, and certificates of deposit (short‑term).
Because these assets can quickly be converted into cash, their classification on the financial statements carries important implications for liquidity and financial health.
Why Do Auditors Focus on Cash?
Warren Buffett famously said that “cash is like oxygen.” Cash plays such a fundamental role in business operations that it is reported in detail on its own financial statement: the statement of cash flows (see related post). Given this importance, external stakeholders rely on auditors to provide reasonable assurance that the cash balance is complete and accurate.
Although procedures vary by engagement, auditors typically focus on the existence and occurrence assertion. In simple terms, they want to ensure the reported cash balance actually exists and is not overstated. Inflating cash would artificially strengthen the balance sheet and misrepresent the organization’s liquidity.
Another common area of focus is cutoff — ensuring transactions are recorded in the proper accounting period as of the balance sheet date.
How Do Auditors Test Cash?
To evaluate whether the cash balance is accurate and fairly stated, auditors commonly perform the following procedures:
- Review bank statements and bank reconciliations to ensure that reconciling items are valid and appropriately supported
- Perform analytical procedures to investigate unusual fluctuations or unexpected results
- Confirm balances directly with financial institutions – independent confirmations provide strong audit evidence
- Evaluate proper classification to determine whether balances meet the criteria for cash, cash equivalents, restricted cash, or short‑term investments
These steps help auditors gather sufficient and appropriate evidence to support their conclusion. To perform these procedures, auditors rely on supporting information prepared by the organization or banks, which becomes part of the audit workpapers.
What Information Will the Auditor Request?
To complete the audit of cash and cash equivalents, auditors typically ask management for:
- Bank statements at interim and year‑end dates, as well as statements for the month following those periods
- Bank reconciliations that reconcile book and bank balances
- Contact information for banks and authorization to send confirmations
- Documentation for investment activity, such as brokerage statements or investment prospectuses, when applicable
- Information about internal controls, including segregation of duties related to cash handling, recording, and reconciliation
Together, this information helps auditors address relevant assertions, perform required procedures, and ultimately conclude on the reasonableness of the year‑end cash balance.
Key Takeaways
Cash is a foundational component of any audit. While the procedures performed on cash may seem detailed, they play a crucial role in supporting the accuracy of the financial statements and the integrity of the audit opinion.
Understanding why auditors request certain documents, and how those items fit into the larger audit process, can help organizations prepare effectively and ensure a smoother audit experience.
If you would like to learn more about the audit process or discuss your organization’s needs, please contact the GYF team.
Related Posts:
Understanding the Audit Process: Accounts Receivable (A/R)
