Audit objective
Verify that cash and bank balances recorded in the books exist and are owned by the entity, that reconciling items between book and bank balances are genuine and clearing in the ordinary course, and that disclosures including liens, fixed deposit pledges, and CARO loan-default reporting are complete. This area is mechanically simple but carries outsized reporting risk through CARO 3(ix), which exists nowhere else on the balance sheet.
Relevant framework
- IND AS 7 · Statement of Cash Flows · definition of cash and cash equivalents, restricted cash treatment
- IND AS 109 · Financial Instruments · bank balances as financial assets, amortised cost
- IND AS 21 / AS 11 · Foreign currency bank accounts restated at closing rate
- AS 3 · Cash Flow Statements for non-IND AS entities
- Section 73 & 74 · Prohibition on acceptance of deposits from the public, relevant if unusual credit balances in bank-linked current accounts suggest deposit-taking
- Section 92 · Annual return disclosure of indebtedness, cross-check against loan/overdraft balances
- Schedule III Div I & II · Cash and cash equivalents classified: balances with banks, cheques/drafts on hand, cash on hand, others (specify), with earmarked balances and bank deposits with more than 12 months maturity shown separately
- 3(ix)(a) · Whether the Company has defaulted in repayment of loans or borrowings or in payment of interest to any lender; if yes, period and amount of default, lender-wise
- 3(ix)(b) · Whether the Company is a declared wilful defaulter by any bank, financial institution, or other lender
- 3(ix)(c) · Whether term loans were applied for the purpose for which they were obtained; if not, amount and nature of diversion
- 3(ix)(d) · Whether funds raised on short-term basis have been utilised for long-term purposes; if yes, nature and amount
- 3(ix)(e) · Whether the Company has taken funds from any entity to meet obligations of its subsidiaries, associates, or joint ventures; details
- 3(ix)(f) · Whether the Company has raised loans on the pledge of securities held in its subsidiaries, JVs, or associates; details and default status
- SA 230 · Audit Documentation
- SA 315 · Identifying and Assessing Risks of Material Misstatement
- SA 500 · Audit Evidence
- SA 501 · Audit Evidence, Specific Considerations · physical cash count principles
- SA 505 · External Confirmations · bank confirmation (standard bank letter) is the cornerstone procedure for this area
- SA 510 · Initial Audit Engagements, Opening Balances · relevant for first-year bank balance verification
- Section 269ST · Prohibition on cash receipt of Rs. 2 lakh or more in aggregate from a person in a day, in respect of a single transaction, or relating to one event/occasion
- Section 40A(3) · Disallowance of expenditure where payment exceeding Rs. 10,000 (Rs. 35,000 for transporters) is made otherwise than by account payee cheque/draft or electronic mode
- Section 269SS / 269T · Restrictions on cash acceptance and repayment of loans/deposits above Rs. 20,000
- Guidance Note on Bank Audit (for bank confirmation formats and standard bank letter content) · ICAI
- Technical guidance referenced in CARO reporting formats issued by ICAI AASB
BRS review · the workflow
Bank Reconciliation Statement review is mechanical but commonly rushed. Every reconciling item needs to actually clear within a reasonable window, not just sit on the BRS quarter after quarter.
Obtain the BRS
For every bank account, as at the reporting date, prepared by the client with book balance, bank balance, and itemised reconciling items.
Trace to bank statement
Verify the bank balance per BRS agrees to the year-end bank statement, not a balance pulled from an earlier date.
Trace to general ledger
Verify the book balance per BRS agrees to the GL balance for that bank account code.
Test reconciling items
Cheques issued not presented, deposits not credited, bank charges not booked: vouch a sample and verify cleared in the subsequent period.
Flag stale items
Items unreconciled beyond 3-6 months are a red flag: stale cheques (possible reversal/write-back needed), or unbooked bank charges/interest.
CARO 3(ix) · loan default
This is the clause that turns a quiet cash-and-bank section into a reporting matter. None of these six sub-clauses are optional, and most engagement teams under-document the diversion-of-funds checks at 3(ix)(c) and (d).
Six checks, one per sub-clause
Obtain lender-wise repayment schedule; compare to actual payment dates per bank statement; quantify period and amount of any default
Obtain management representation and search RBI's wilful defaulter list / CIBIL where feasible
Trace term loan disbursement to actual end-use (capex invoice, project ledger); flag if used for working capital or unrelated purposes
Review working capital / cash credit utilisation for funding of long-term assets (PPE, investments) instead of operating cycle needs
Check if borrowings were used to meet obligations of subsidiaries, associates, or JVs rather than the Company's own use
Verify if loans are secured against shares/securities held in subsidiaries, JVs, or associates, and check default status on those loans
Sub-clauses (c) through (f) require tracing fund flow, not just confirming the loan balance. Build a one-page fund-flow working per material borrowing.
Risk areas by assertion
Risks below are mapped to financial statement assertions per SA 315. Existence dominates for cash and bank, since the balance is directly confirmable, but presentation risk (CARO 3(ix) specifically) is where most findings actually occur.
Existence Dominant
- Bank balance recorded does not agree to year-end bank statement
- Fictitious or dormant bank accounts not reconciled or confirmed
- Cash-in-hand overstated, not physically verified
- Imprest / petty cash floats not reconciled at multiple locations
Completeness
- Bank accounts opened during the year not included in the FAR / bank listing
- Fixed deposits with banks not separately tracked from current accounts
- Unpresented cheques received not recorded
Valuation / Accuracy
- Foreign currency bank balances not restated at year-end closing rate
- Bank charges, interest credited/debited not booked in the correct period
- Interest accrued on fixed deposits not recognised
Rights & Obligations
- Fixed deposits under lien (against guarantees, LCs) not disclosed as restricted
- Bank accounts frozen / under court order not separately disclosed
- Joint bank accounts with related parties, ownership share not assessed
Cut-off
- Year-end deposits in transit not verified for subsequent clearance
- Cheques issued before year-end but dated/recorded in subsequent period
Presentation & Disclosure High stakes
- CARO 3(ix) loan default not assessed or under-documented
- Term loan end-use diversion (3(ix)(c)) not traced
- Bank deposits with maturity over 12 months not separately classified per Schedule III
- Earmarked balances (unpaid dividend account, escrow) not separately disclosed
Documents to request
Hand this to the client at the start of the engagement, and send bank confirmation requests (item 2) as early as possible since responses take time.
- List of all bank accounts held during the year, with account numbers, branch, and status (active/closed/dormant)
- Bank confirmation request authorisation letters, signed by authorised signatories, for each bank account
- Bank statements for the full year, and for the first month of the subsequent period
- Bank Reconciliation Statements for each account, as at year-end
- Fixed deposit certificates/advices, with lien details if any
- Cash book and petty cash / imprest registers for all locations
- Physical cash count sheet (if performed by client) as at year-end or near year-end
- Loan sanction letters and repayment schedules, lender-wise
- Loan account statements from lenders for the year
- Term loan utilisation certificate / end-use certificate from the lender, if obtained
- Board minutes approving borrowings and disclosing utilisation
- Working capital / cash credit account statements with drawing power computation
- Details of any loans extended to or funds routed through subsidiaries/associates/JVs
- Details of securities (shares in group entities) pledged against any borrowing
- Management representation on wilful defaulter status and loan default history
- Foreign currency bank account statements with year-end closing rate applied
- List of dormant or zero-balance accounts with explanation
Fieldwork procedures
Procedures are grouped by assertion. Bank confirmations under SA 505 should be sent directly by the auditor, not routed through the client, to preserve independence of the confirmation process.
- Send bank confirmation requests directly to all banks where the Company held an account at any point during the year, including closed/dormant accounts
- Trace confirmed balances to the BRS and year-end bank statement; investigate any discrepancy
- For cash-in-hand, attend or review the physical cash count, particularly at year-end if material; reconcile to the cash book
- For multiple location imprest/petty cash, obtain confirmation or perform surprise verification on a sample basis
- Obtain a complete listing of bank accounts from the Company secretary / finance team and cross-check against board minutes for any account opened/closed during the year
- Verify fixed deposits are separately confirmed and not embedded within current account balances
- Search for bank accounts via GST registration documents, loan agreements, or statutory filings that may not appear in the Company's internal listing
- Recompute foreign currency bank balance restatement at year-end closing rate
- Verify bank charges and interest are booked in the correct period by tracing to bank statement entries
- Recompute accrued interest on fixed deposits based on rate, principal, and period
- Verify fixed deposits under lien against bank guarantees or letters of credit are identified and disclosed as restricted/encumbered
- For joint accounts, verify the Company's share of balance is correctly assessed and disclosed
- Verify any frozen accounts or accounts under court/regulatory order are separately identified
- For deposits in transit at year-end, verify clearance in the subsequent bank statement
- For cheques issued before year-end but not yet presented, verify they relate to genuine transactions dated within the year
- Obtain lender-wise repayment schedule and compare to actual payment dates; quantify period and amount of any default for CARO 3(ix)(a)
- Obtain management representation on wilful defaulter status; perform an independent check where feasible for CARO 3(ix)(b)
- Trace term loan disbursement to actual utilisation (capex ledger, project account) for CARO 3(ix)(c); document any diversion
- Review working capital utilisation against long-term asset additions during the year for CARO 3(ix)(d)
- Inquire and review fund flow for any amounts routed to subsidiaries/associates/JVs to meet their obligations, for CARO 3(ix)(e)
- Verify whether any borrowing is secured against pledge of group entity securities, and the default status of that borrowing, for CARO 3(ix)(f)
- Verify bank deposits with maturity exceeding 12 months are classified separately from cash and cash equivalents per Schedule III
- Verify earmarked balances (unpaid dividend, escrow) are separately disclosed
Common findings and red flags
The most common observations encountered in Cash and Bank fieldwork. Each line is a working-paper trigger.
Sample conclusion language
Use these as starting drafts. Adapt to engagement-specific facts and your firm's house style. All language is illustrative.
"Based on our procedures, which included direct confirmation of balances from all banks with whom the Company maintained accounts during the year, review of bank reconciliation statements with testing of reconciling items, verification of cash on hand, and review of loan repayment schedules against actual payment history for CARO 2020 Clause 3(ix) reporting, the cash and bank balances as at 31 Mar XXXX exist, are owned by the Company, and are presented in accordance with Schedule III to the Companies Act, 2013. No material misstatement was noted."
"As reported under CARO 2020 Clause 3(ix)(a), the Company has defaulted in repayment of [principal / interest] amounting to Rs. XX lakhs to [Lender Name] for a period of [N] days from the due date, as at 31 Mar XXXX. This is a CARO reporting matter."
"We noted that term loan funds amounting to Rs. XX lakhs, sanctioned for the purpose of [stated purpose], were utilised by the Company for [working capital / other purpose] rather than the purpose for which the loan was obtained. This has been reported under CARO 2020 Clause 3(ix)(c). [Assess implications for going concern and lender covenant compliance.]"
"During our review of bank reconciliation statements, we noted reconciling items aggregating to Rs. XX lakhs that have remained unresolved for a period exceeding six months, including stale cheques issued and bank charges not yet booked. We have recommended that the Company implement a monthly BRS review process with escalation for items remaining open beyond 90 days."
Linked AuditAIKit tools
Audit Sampling Engine
Select samples of BRS reconciling items and cash count locations for testing.
PlannedBank Reconciliation Hunter
Books vs statement fuzzy narration matching, automated BRS build, stale item ageing.
PlannedLoan Covenant & Default Tracker
Lender-wise repayment schedule vs actual payment date, automated CARO 3(ix) default quantification.
Sources & references
Every reference in this playbook traces to an official source. Open the link to verify the exact wording in force as at the last review date.
| Reference | Source | Link |
|---|---|---|
| Companies Act, 2013 · Sec 73, 74, 92, Sch III | MCA | mca.gov.in |
| IND AS 7 / 21 / 109 | ICAI / MCA notification | icai.org |
| CARO 2020 Order · 25 Feb 2020 | MCA | mca.gov.in |
| SA 230, 315, 500, 501, 505, 510 | ICAI AASB | icai.org |
| Guidance Note on Bank Audit | ICAI | icai.org |
| Income Tax Act · Sec 269ST, 269SS, 269T, 40A(3) | Income Tax Dept | incometax.gov.in |