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CA Intermediate · Auditing and Ethics · Audit of Banks

CA Firm Kapoor & Co. is auditing a branch of a scheduled commercial bank where it is the branch auditor. During the audit it finds that the branch's cash balance certified by the branch manager differs from the actual physical count on the audit date by a small unexplained shortage. What is the most appropriate response?

The auditor should independently count and reconcile cash, obtain management's explanation, and evaluate whether the shortage may indicate fraud, reporting it as appropriate. Simply adjusting the books or assuming immateriality ignores the auditor's responsibility under the fraud standard.

  1. AIgnore it because cash differences in banks are always immaterial
  2. BVerify the cash and vault count independently, obtain the explanation from management, evaluate whether the shortage is a possible fraud indicator and report as appropriateCorrect
  3. CAsk the manager to adjust the cash book to match the count and proceed without further work
  4. DInclude it only in the statutory central auditor's report without informing branch management

Explanation

Cash counts must be verified by the auditor, and unexplained differences require inquiry and evaluation of possible fraud under SA 240 and reporting as appropriate. Simply adjusting the books hides the issue, and materiality is judged, not assumed.

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