Cash balance is maintained to meet the day to day operational needs of the organization. So, the auditor has to perform audit procedures particularly having regard to the fact that maintaining such huge balance is highly prone to misappropriation and other forms of fraud. Accordingly, since the entity is maintaining consistently huge cash balance which is not required for its operational needs, the auditor should carry out the surprise verification of cash more frequently to ascertain whether the actual cash in hand agrees with the balance as per cash book. If the actual cash balance is not in agreement with the book balance, he should seek explanations from senior official of the entity. In case any material difference is not satisfactorily explained, the auditor should state this fact appropriately in his audit report. In any case, he should satisfy himself regarding the necessity for such huge cash balance having regard to the normal working requirements of the entity. The entity may also be advised to deposit the whole or major part of the cash balance in the bank at reasonable interval.
Material cash on hand if found during the audit in relation to the financial statements taken as a whole, or if there are significant negotiable securities in the custody of the client, consider performing the following additional procedures:
Count the cash fund or observe and list the securities in the presence of a client representative.
Tie amount counted to general ledger balances.
In most of small businesses, cash on hand is immaterial and should not be counted, unless it is at the clients’ request.