Audit analytics: Cash and cash equivalents

“Why did cash and cash equivalents increase or decrease?” Most of us are familiar with this question. Usually asked by an audit manager or partner.

First thought that comes to mind, “if the client (had a whole year to figure this out) can’t even tell me the cause how am I (have a few weeks) supposed to figure this out?” That was back then…..Am always wondering that cash and cash equivalent is a statement of financial position item so how best is an associate expected to know this? The client can’t even give me answers. So typically we use movement in payables and receivables to support our risk (preliminary) assessment analytics. It is not totally wrong, it just provides a partial explanation.

The best way which I recently discovered was when I moved to industry after five years of working in a practice firm is to use the statement of cash flows. This shows how daft I was back then as an associate, “I am familiar with the statement of cash flows so why didn’t it cross my mind back then?” I arrived at these conclusions:

1. Most of my clients did not have their balanced statement of cash flow as at the planning phase of the audit;

2. I knew the purpose of the statement of cash flows but probably treated it in isolation or the audit pressure didn’t let me think far.

So I conducted a short poll to get views and see if I had ‘mates’ out there but I guess from the results my poll was misunderstood. Refer to Report Saved Report_cash analytics for complete report.

Respondents

I had 6 people taking the survey and 1 unofficial person (personally interviewed the person who happens to be an auditor).

responders

Is it possible to explain the movement in cash and cash equivalents?

Majority of the respondents believed it was possible. The 2 who didn’t believe so must be my “mates” back in the day :).

cash and cash 2

How best can one explain this movement?

cash and cash 3

The one person I interviewed, indicated the statement of cash flow as the best tool to explain this movement which I agree with.

Conclusion

In performing analytics of cash and cash equivalents the statement of cash flows should be the best tool to provide an explanation on the factors that caused changes in the balance from one period to the other. (It is important to note that analytics can be performed using other ways such as comparing figures to the budget etc, this case study explores comparing from one period to another). Changes are explained from 3 categories: investing, operating and financing activities.

cash_flow_statement1_450
Simple statement of cash flows Credits: http://www.accounting-basics-for-students.com/cash-flow-statement-example.html

What are some of the “why didn’t I think of it back then “ or “ahaaa” moments you have had as an auditor or accountant? Share with us or email omtsdigest@gmail.com .

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s