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Auditing of bank and cash

Phil Lenton offers practical tips on taking a more risk-based approach to the audit of bank and cash.

The withdrawal of Practice Note (PN) 16 Bank Reports for Audit Purposes in the UK (PN 16) has created an opportunity for auditors to exercise more professional judgement in determining whether it is necessary to obtain a bank confirmation in all circumstances. PN 16 stated that without obtaining a bank confirmation “it will not normally be practical to obtain sufficient appropriate audit evidence from other sources”. This led many audit firms to conclude that they had to obtain bank confirmations as a matter of course, regardless of the level of risk or other audit evidence that had been obtained.

When PN 16 was withdrawn in 2017, the accompanying feedback statement noted that the Financial Reporting Council (FRC) proposals were “intended to encourage the auditor to apply their professional judgement as to when a confirmation report is required”. The feedback statement further stated that “deciding whether a confirmation report is required continues to be a matter of professional judgement for the auditor”. This appears to permit auditors to adopt a more risk-based approach, taking into account the auditor’s risk assessment of bank and cash.

Understanding the entity 

As part of performing that risk assessment, a key factor to consider is the understanding of the entity. This could include the number of bank accounts the entity has, with which banks, in what country and the reasons for those accounts. If the entity has numerous bank accounts with a number of different banks in multiple countries, this may indicate higher audit risk. This would especially be the case if this number or spread of bank accounts was particularly unusual for the type of entity.

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