Why is Cash Verification in the Audit Process Important?

“Our CPA insists that we get a year-end printout OR bank statement for all of our cash accounts – including certificates of deposit. Why is that? We don’t get statements and we haven’t used the money since we invested it, so why isn’t the investment notice good enough for the year end audit?”

The above question, in different words, is asked of us often during the audit season. Hopefully, by the end of this answer you will understand a bit more why we ask for the documentation that we do and that we are trying to protect your association.

WHY ARE STATEMENTS NECESSARY?

As auditors, we must verify that cash actually EXISTS, that it is OWNED BY THE ASSOCIATION and that it is PROPERLY VALUED on the financial statements. In addition, we must be assured that there are adequate INTERNAL CONTROLS in place with regards to cash.

EXISTENCE

In order to give an opinion on cash, we need to know that is in in the bank as of the date of the audit report. While the original investment notice tells us that it was in the bank at the time it was deposited, it does not ensure that it is still there. Certificates of deposit are easily withdrawn. Often the only penalty for closing out a CD is a loss of interest. Banks will generally cash out a certificate of deposit to anyone on the signature card.

In our firm we have seen ~

• A manager steal certificates of deposit by adding their name to the signature card after the Board has signed
• Investments still showing on the financial statements when they were legitimately closed out early but the financial statements were never updated for the early cashing in of the investment

OWNERSHIP

The CPA must verify that the cash account is in the name of the Association and that the Association has exclusive “rights” to the money.

In our firm we have seen ~

• Certificates of deposit turned over to the state because there was no activity for a period of time
• Cash accounts for the association that are actually invested in a Board member’s name

VALUATION

As part of the audit process, we need to ensure that the cash is on the financial statements at the right amount (value). Most certificates of deposit accrue interest and have a very minimal early withdrawal penalty. Since the audit must be prepared on the accrual basis of accounting, interest income is reported as it is earned – whether or not it has been received. Thus, by receiving a year-end statement we can accurately value the certificate of deposit with accrued interest.

INTERNAL CONTROL

In addition, as auditors we must evaluate the system of internal controls. However, it is our opinion that there needs to be certain controls on all cash accounts, regardless of whether there is an audit or not. One of the most important controls for cash is to receive statements or other verification of activity in all cash accounts at least quarterly. The Board needs to review this activity to ensure that there are no unauthorized withdrawals. The Board should also be comparing the cash balances with the Association’s financial statements.

NEWMAN & ASSOCIATES POLICY - AUDITING CASH ACCOUNTS

Thus, it is the policy of our firm that we must have year-end bank statements or account history statements from the bank or financial institution for all cash accounts. This provides independent, outside verification of the existence, ownership rights and valuation of the cash on the financial statements. It also ensures that the Board is adequately monitoring their assets as part of their internal control procedures.

Other CPAs may choose to use bank confirmations in which the bank confirms the existence of the cash at year end. We no longer use bank confirmations (except in very limited circumstances) because the banks quite often complete the information incorrectly and/or charge a fee to the Association to complete the confirmation.