The main concern in this area is to establish the existence of the balances and more recently due to failures in several financial institutions in Kenya valuation of these balances. The client will produce a reconciliation of the cash book and the bank statement. These are checked by the auditor paying particular attention to the reconciling items. These should be genuine reconciling items. Unpresented cheques and uncleared lodgements should appear on the bank statements early in the new year, say within two weeks of the year end. If they do not appear, then these should be investigated as manipulation or fraud could be indicated. Material unpresented cheques could indicate that the bank balance is being distorted for balance sheet purposes as a high balance is indicated of poor utilisation of cash and may reflect adversely upon the directors. Uncleared lodgements present a more serious threat of fraud or distortion. Banks normally clear lodgements within a week, therefore if after a week we have uncleared lodgements that are not up country, cheques, then the position displayed may be probably fictitious. They could have been inserted by management to conceal a shaky liquidity position or by an employee to conceal a misappropriation elsewhere.
A bank reconciliation is a routine matter, what remains is for the auditor to obtain direct confirmation from the bank confirming the balances at the year end. The main purpose of this bank certificate is to confirm that the bank statements are not fraudulent. The bank request a copy of which is given as an appendix at the end of this chapter must be made by the client for the auditor has no right to obtain this information from the client's bankers. The reply must however go directly to the auditors. The normal procedures is in fact for the client to write to the bank authorising the bank to provide the auditor with any information that the auditor may require. With this authority, the auditor then writes to the bank.
Valuation: Till recently, valuation of banks and cash balances was taken for granted until several financial institutions started to fail and this brought into question the value of balances maintained with marginal banking institutions. Therefore as a further test, the auditor must establish that the balances are maintained in a reputable bank that is still a going concern.
Petty-cash: Petty-cash balances are usually not material. They are usually counted by the auditor but this is just because most organizations hold the view that a cash count is an integral part of auditing. As far as possible all cash balances should be counted at the same time to prevent the possibility of substitution. The count must be performed in the presence of the petty-cashier who should be asked to sign the count-sheet, and the count-sheet should also be signed, dated by the auditor. The petty-cashier's presence is important as the auditor could later be held responsible for any shortages. This area is simplified when the client maintains an imprest system. The auditor should obtain a certificate from the cashier.
Sundry Debtors and Loans:
Sundry debtors and loans are not usually material assets of companies other than those companies whose business is to make loans. We shall consider two types of sundry debtors and loans:
a) Dealings with others other than directors: The verification work will involve:
i. Determining, evaluating and testing the systems of internal control. Particular attention being paid to authorization.
ii. Obtaining a schedule of the debtors and testing it for accuracy and completeness.
iii. Obtaining certificates direct from the debtors concerned.
iv. Review of agreements and ensuring that the terms are being followed.
v. The debt may be secured in which case, the security is examined and consideration given to its value and realizability.
vi. The loan may be guaranteed, in which case the status of the guarantor must be examined.
vii. Provisions for bad debts must be reviewed for adequacy. Where loans have been made to employees, they usually become bad if the employee leaves before repayment is completed.
Dealings with directors and other related parties: The auditor's duties are as follows:
i. The review of all loans made to directors and connected persons outstanding at any time during the year. Materiality does not apply. All loans must be reviewed.
ii. Certificates of confirmation should be obtained from the directors concerned.
iii. Read the board minutes to ensure that all such advances are subject to proper board minutes.
iv. Ensure compliance with the law.
v. Full disclosure as required should be made.
vi. If the directors fail to give all the relevant information in the accounts the auditor is required to give that information in his report.