Corporate Accounting and Auditing · Audit of Various Items of Financial Statements

Audit of Investments, Cash and Bank Balances

Updated 10 October 2026 · Fact-checked

Auditing these items means gathering evidence that they exist, belong to the company, are fully recorded, are correctly valued and are properly disclosed. For cash, count it and vouch the cash book. For bank, check the reconciliation and get a bank confirmation. For investments, inspect certificates or statements and check valuation.

Understand Audit of Investments, Cash and Bank Balances

Cash, bank balances and investments are liquid assets. They are easy to move and easy to misuse, so auditors treat them with care. Cash is most exposed to theft and teeming and lading. Bank balances are exposed to unrecorded items and window dressing. Investments are exposed to wrong ownership claims, overvaluation and missing income.

The auditor works from the assertions: existence, rights and ownership, completeness, valuation, and presentation and disclosure. Each procedure you write in an answer should link to one of these. For example, a surprise cash count tests existence. A bank confirmation tests existence and completeness. Inspecting a demat statement tests existence and ownership.

Cash in hand is verified by physical count and vouching. The count should be done on the balance sheet date, or on another date with roll-forward or roll-back by checking transactions in between. It should be done in the presence of the cashier or a responsible person, and the cashier should sign the count certificate. All cash, imprest balances, stamps, and any cash held at branches should be counted together, so that cash cannot be moved to hide a shortage.

Bank balances are verified through the bank pass book or statement, the bank reconciliation statement (BRS) and a direct confirmation from the bank. The BRS explains the difference between the cash book and the bank statement. The auditor checks that each reconciling item is genuine and clears soon after the year end. Old uncleared cheques and unusual items need extra inquiry.

Investments are verified by inspecting share certificates, debenture certificates, demat or custodian statements, and by checking purchase and sale documents. The auditor confirms that the investments are held in the company's name, checks the classification between current and non-current, checks valuation as per the applicable accounting framework, and checks that income such as dividend and interest is recorded. Compliance with the Companies Act, 2013 on loans and investments should also be checked, and the auditor should confirm that any investment held in the name of others is disclosed.

Key rules to remember

Adjusted cash book balance from bank statement balance: Adjusted balance = Bank statement balance + Cheques deposited but not yet credited − Cheques issued but not presented; Use this when you start from the bank statement with a favourable balance. Reverse the signs for an overdraft. Items not in the cash book (interest, charges) are already in the bank statement, so do not use them to adjust the bank statement balance. Recompute from the stated figures in the question.
Adjusted cash book balance from cash book balance: Adjusted balance = Cash book balance + Bank credits not yet in cash book (e.g. interest) − Bank debits not yet in cash book (e.g. charges); Use this when you start from the cash book. Cheques deposited but not credited and cheques issued but not presented are already in the cash book, so make no adjustment for them. Both routes should give the same adjusted balance.
Cash count reconciliation: Book balance on count date = Closing book balance ± Transactions between count date and balance sheet date; Used when cash is counted on a date other than the year end.
Assertions checklist: Existence, Rights and ownership, Completeness, Valuation, Presentation and disclosure; Link every procedure to an assertion in written answers.
Investment carrying amount rule: Carrying amount follows the applicable framework: current investments at lower of cost and fair value (AS 13); long-term at cost less permanent diminution; Under Ind AS the measurement depends on the classification of the financial asset. State the framework you are using.

How to solve Audit of Investments, Cash and Bank Balances questions

Use this order for any question asking how to audit cash, bank or investments.

1Identify the item: cash in hand, bank balance, bank reconciliation or investments.
2List the assertions at risk: existence, ownership, completeness, valuation, disclosure.
3Write the main procedure for each: count, vouch, confirm, inspect, recompute.
4Add the specific checks: cut-off, timing of the count, old reconciling items, custody, and classification.
5If figures are given, prepare the BRS or count roll-forward in a neat statement.
6Note what to do with exceptions: inquire, obtain evidence, adjust or report.
7Finish with disclosure and any reporting point, such as restrictions on use of balances or investments held in others' names.

Quickest way: Four-word recall: Count, Vouch, Confirm, Inspect

When to use it: Use it when time is short in a theory question or an MCQ asking for the best evidence.

Cash in hand: count it on the same date and vouch the cash book.
Bank: get the bank confirmation and check the BRS items to later statements.
Investments: inspect certificates or demat statements, and check ownership.
Close with valuation, income recorded and disclosure.

Common mistakes in Audit of Investments, Cash and Bank Balances

Treating the bank pass book alone as sufficient evidence of the bank balance.
Students forget that the pass book is a client document and can be altered.
Fix: State that a direct confirmation from the bank is stronger evidence, as it comes from an external source.
Counting cash on a different date without adjusting for transactions in between.
Students focus on the count and not on the balance sheet date.
Fix: Roll forward or roll back using receipts and payments to the year end and tie it to the book balance.
Adding cheques issued but not presented in the wrong direction in a BRS.
Students memorise signs instead of reasoning on whether the bank has already acted.
Fix: Ask which record is ahead. Unpresented cheques mean the cash book has already reduced its balance but the bank has not, so the cash book is lower than the bank statement. Deduct unpresented cheques from the bank statement balance to arrive at the adjusted cash book balance. When you start from the cash book balance, they need no adjustment because they are already recorded. Only items that are in the bank statement but not in the cash book, such as interest and charges, adjust the cash book.
Ignoring reconciling items that clear after the year end.
Students stop once the BRS agrees.
Fix: Trace each item to the next period's statement. Examine stale cheques and items that do not clear.
Verifying investments only by looking at the ledger.
Students confuse vouching a purchase with verifying ownership and existence.
Fix: Inspect the certificate or demat statement, confirm the holding is in the company's name, and check the valuation and income.
Counting only the main cashier's cash and leaving out other cash balances.
Students overlook imprest, branch cash and unused stamps.
Fix: Count all cash and similar items together and seal or control them, so nothing can be moved between counts.

Worked examples

Example 1

The cash book of Sharma Traders shows a bank balance of ₹1,20,000 (debit) on 31 March. The bank statement shows ₹1,31,000 (credit). Cheques issued of ₹14,000 are not yet presented. A cheque deposit of ₹5,000 has not been credited by the bank. The bank has credited ₹3,000 interest not in the cash book. Bank charges of ₹1,000 are not in the cash book. Reconcile the balances and state what the auditor should do.

Show the solution

Start from the cash book balance, which is ₹1,20,000 debit.
Update for items not in the cash book. Add interest ₹3,000. Deduct charges ₹1,000. Adjusted cash book = 1,20,000 + 3,000 − 1,000 = ₹1,22,000.
Start from the bank statement of ₹1,31,000.
Add the cheque deposited but not yet credited, ₹5,000. This gives ₹1,36,000.
Deduct cheques issued but not presented, ₹14,000. This gives ₹1,22,000.
The two results agree at ₹1,22,000.
The auditor should still obtain the bank confirmation, trace the ₹5,000 deposit and the ₹14,000 cheques to the next period's bank statement, and vouch the interest and charges to bank advices before accepting the reconciliation.

Answer: The reconciliation agrees. The adjusted cash book and the adjusted bank statement balance are both ₹1,22,000. The auditor should confirm the balance with the bank and check that the reconciling items clear after the year end.

Example 2

Explain how an auditor verifies investments of a company at the balance sheet date.

Show the solution

Obtain a schedule of investments with cost, quantity, carrying amount and classification. Agree its total to the ledger and balance sheet.
Check existence by inspecting certificates or demat and custodian statements. Where held by a custodian, obtain a confirmation.
Check ownership by confirming the holdings are in the company's name and are free from pledge or restriction, or that these are disclosed.
Vouch purchases and sales to contract notes, broker statements and bank entries.
Check valuation under the applicable framework, such as AS 13 or the relevant Ind AS, including any diminution in value and use of quoted prices.
Check that dividend and interest income is recorded, and recompute it for reasonableness.
Check compliance with the Companies Act, 2013 provisions on investments, and check classification and disclosure under Schedule III.

Answer: The auditor should check existence, ownership, valuation, income and disclosure, using inspection or confirmation of certificates and demat statements, vouching of transactions, valuation checks and compliance and disclosure review.

Exam tips

For theory questions, write procedures as a list and tie each to existence, ownership, completeness or valuation.
In BRS questions, show both starting points and the adjusting items in a neat statement, then state the agreed balance.
MCQs often ask for the most reliable evidence. For bank balances, choose bank confirmation. For cash, choose physical count.
Mention a surprise count and the cashier's signature on the count certificate when asked about cash verification.
If a difference remains, say what the auditor does next instead of leaving the answer open.

Practice questions from Audit of Various Items of Financial Statements

Audit of Investments, Cash and Bank Balances in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Audit of Investments, Cash and Bank Balances: frequently asked questions

What is the main audit evidence for a bank balance?

A direct confirmation from the bank is the strongest evidence because it comes from outside the company. The auditor also checks the bank statement and the bank reconciliation. Together these test existence and completeness.

Why does the auditor count cash on the balance sheet date?

Cash can be moved between counts to hide a shortage. A count on the balance sheet date, or a controlled count with adjustments for the transactions in between, gives reliable evidence of existence. The cashier should sign the count certificate.

How is a bank reconciliation statement audited?

The auditor recomputes it, checks each reconciling item to documents, and traces cheques and deposits to the next period's bank statement. Old or unusual items need further inquiry.

How are investments verified in an audit?

The auditor inspects certificates or demat statements, checks ownership, vouches purchases and sales, reviews valuation and checks income and disclosure. Confirmation from the custodian is used when investments are held by others.