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CA Intermediate · Auditing and Ethics · Audit of Banks

During audit of Narmada Bank, the auditor wants to verify the existence of cash and security items held at branch vaults. Which audit procedure is most appropriate to obtain reliable evidence on the cash balance reported at the year-end?

The auditor should physically count cash, simultaneously with other cash and securities, on the balance sheet date or close to it and reconcile the count to the books. Ledger balances or management representations alone are weaker evidence and cannot replace physical verification.

  1. ARely solely on the cash balance shown in the branch's general ledger
  2. BVerify the cash by physical count, ideally simultaneously with other cash and negotiable securities, as at the balance sheet date or a date close to it, with reconciliation to booksCorrect
  3. CObtain a management representation that cash is correctly stated
  4. DExamine only the cash credit transactions for the last week of March

Explanation

Physical verification of cash is the most reliable evidence of existence. Counting should be simultaneous for cash and securities held at the branch so that items cannot be substituted between counts, and reconciled to the books on the date counted. The ledger balance is internal evidence of lower reliability, and representations alone are not sufficient audit evidence.

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