Cash: bank confirmations, reconciliations and the proof of cash

• Test a bank reconciliation by agreeing each reconciling item to independent evidence
• Prepare a four-column proof of cash and explain what it detects
• Explain the SAS 150 requirement to confirm cash held by third parties and its effective date
• Identify transfer and kiting red flags at period-end

Why cash still needs real work

Cash is often low inherent risk, but it is the account most exposed to misappropriation and the one every other cycle runs through. Under current standards, AU-C 330.19 requires the auditor to consider whether external confirmation procedures are to be performed as substantive procedures. Many firms confirm every bank account as a matter of policy. SAS 150 turns that policy into a requirement, with two exceptions.

SAS 150, External Confirmations, issued in July 2026, adds a requirement in AU-C 505 to perform external confirmation procedures for cash and cash equivalents held by third parties unless (a) confirmation is impracticable or (b) the assessed risk at the relevant assertion level is low and other planned substantive procedures address it. The auditor may meet the requirement by directly accessing information held by a knowledgeable external source, such as a bank portal accessed with credentials the bank provides to the auditor. Access codes supplied by management do not count. The basis for using either exception must be documented. SAS 150 is effective for audits of periods ending on or after December 15, 2028, and early adoption is permitted.

Confirming balances

Whatever the year, the confirmation process follows AU-C 505.07: the auditor controls what is confirmed, who receives the request, the design and addressing of the request, and the sending. Responses come directly to the auditor. For bank confirmations, ask about loans, lines of credit and other relationships as well as deposit balances, so the confirmation also supports completeness of debt. A bank confirmation letter and the step-by-step bank confirmation process cover mechanics.

Testing the bank reconciliation

The confirmation proves the bank balance. The reconciliation is what bridges it to the books, and the reconciling items are where errors and theft hide.

1. Agree the bank balance to the confirmation or to the bank statement obtained directly.
2. Agree the book balance to the general ledger.
3. Foot the reconciliation and the outstanding check list.
4. Trace deposits in transit to the subsequent bank statement. A deposit in transit that clears a week into the new year needs an explanation.
5. Trace large outstanding checks to the subsequent statement, checking payee, amount and clearing date. Checks dated before year-end that clear months later may have been written but held to dress up payables.
6. Investigate old outstanding items and any unexplained "other" reconciling line.

Obtain the subsequent period bank statement directly from the bank or by direct access when the risk warrants it. A statement from the client's files is weaker evidence.

The proof of cash

A proof of cash reconciles four columns between bank and books: opening balance, receipts, disbursements and closing balance. A standard year-end reconciliation only proves the closing balance. The proof of cash shows whether the receipts and disbursements recorded in the books for the period agree with the bank activity. It catches unrecorded receipts offset by unrecorded disbursements, which net to zero in a closing-balance reconciliation. Use it for a month with high fraud risk, a client with weak segregation of duties, or where you need evidence about cash activity rather than just the balance. The proof of cash template and proof of cash calculator lay out the columns.

Transfers and kiting

Prepare or test an interbank transfer schedule for the days around period-end: date withdrawn per bank, date deposited per bank, and dates recorded in the books for each leg. A transfer recorded as a deposit before year-end but as a withdrawal after year-end inflates cash in two accounts at once. See interbank transfers and kiting.

Common file findings

• Reconciling items "agreed to client support" with no subsequent statement in the file.
• Bank accounts that appear on the confirmation but not on the trial balance, with no follow-up.
• Restricted cash or compensating balances not identified for disclosure.
• Confirmations sent by client staff, which breaks the AU-C 505.07 control requirement.

Proof of cash for December at Cedar Point Logistics, LLC