When auditing the cash balance, auditors focus on relevant financial statement assertions and assess risks of material misstatement to ensure the accuracy of financial reporting.

1. Relevant Assertions for Cash

According to professional auditing standards, financial statement assertions are relevant if there is a reasonable possibility that a misstatement could cause the financial statements to be materially misstated. The most relevant assertions for cash include:

• Existence: Ensuring that the cash balance reported in financial statements actually exists in bank accounts.

• Valuation: Confirming that cash balances, particularly foreign currency holdings, are accurately translated and recorded.

• Presentation and Disclosure: Verifying that any restrictions on cash (e.g., restricted funds, pledged cash) are properly disclosed​.

2. Risks of Material Misstatement ("What Could Go Wrong?" - WCGW)

Auditors assess the potential for material misstatements using the WCGW approach, which identifies key risks associated with the cash balance:

Existence Risk:

• The reported cash balance may not actually exist in the company's bank accounts.

• Fraudulent financial reporting could involve inflating cash balances.

Valuation Risk:

• If a company holds cash in multiple currencies, improper foreign currency translation could lead to misstatements.

• The company may fail to adjust the cash balance using the appropriate exchange rates.

Presentation and Disclosure Risk:

• The company may have restrictions on cash balances (e.g., funds held as collateral) that are not properly disclosed.

• Certain cash balances could be misclassified, impacting liquidity ratios and financial decision-making​.

3. How Auditors Address These Risks

• Bank Confirmations: Auditors send confirmation requests to banks to verify cash existence.

• Review of Foreign Currency Transactions: Auditors check exchange rate calculations and verify them against external sources.

• Examining Bank Reconciliations: Auditors test bank reconciliations to ensure no fraudulent adjustments are made.

• Disclosure Review: Auditors examine footnotes and disclosures to ensure compliance with GAAP or IFRS.

• By identifying these risks and applying appropriate audit procedures, auditors reduce the risk of issuing an incorrect audit opinion on cash balances.