How Does Big 4 Audit Firms Verify S-chips' Cash Balances

[minimax]

Given the fact that cash-rich S-chips' share price trading at below per share net cash value is a perennial problem, would audit professionals from the Big 4 audit firm care to enlighten us on how S-chips' cash balances are being verified?

The 2 main areas of concern are:

1) how are bank confirmation currently being done?
2) how does the Big 4 audit firm avoid management corrupting the bank reconciliation process via generation of fake bank statements?

[maximillian]

Given the fact that cash-rich S-chips' share price trading at below per share net cash value is a perennial problem, would audit professionals from the Big 4 audit firm care to enlighten us on how S-chips' cash balances are being verified?

The 2 main areas of concern are:

1) how are bank confirmation currently being done?
2) how does the Big 4 audit firm avoid management corrupting the bank reconciliation process via generation of fake bank statements?

Hi minimax,
I am not an auditor, but am in charge of the accounts of a company. Bank confirmation process are done in two process.
A: verify that the bank balances in the company books with the bank statement and check all outstanding cheques. In a nutshell, auditors will have to check for all reconsilation items in the bank reconsilation. This will help to detect window dressing.
B. Auditors will request bank to send them a copy of bank statement to make sure that it agrees with the bank statement the client has. The assumtion is audit evidence is more reliable from third party.

Regards your question to point 2, you are refering to a fraud case. Generally auditors have an analytical procedure on the FS to detect this. But they only gives a reasonable assurance and not a perfect assurance. The answer lies with the internal control of the banks. I have no explosure to this area so maybe someone who have audited or works in the bank will be able to answer. I would like to hear about this as well.

[Temperament]

Anything can be phoney in AR. Cash holdings can be faked at least for a year or 2. By the time auditors come into the picture, we are all dead. IMHO

[cfa]

Some sizable companies have their own internal auditor to control.

[Temperament]

Some sizable companies have their own internal auditor to control.

Yes! but think of Enron, Worldcom, - The bigger the company the worse is the case; for many more people are going to be vitimised.

[Clement]

Given the fact that cash-rich S-chips' share price trading at below per share net cash value is a perennial problem, would audit professionals from the Big 4 audit firm care to enlighten us on how S-chips' cash balances are being verified?

The 2 main areas of concern are:

1) how are bank confirmation currently being done?
2) how does the Big 4 audit firm avoid management corrupting the bank reconciliation process via generation of fake bank statements?

Hi,

From my experience (never dealt with S-Chips myself), audit work on cash and bank balances tend to be.

1)Bank reconciliation review.
2)Review of large inflows and outflows from all bank accounts.
3)Bank confirmation. When performing this test for high risk clients, when possible, the auditor will visit the bank branch and personally look at the balances displayed on the screen from the bank's IT terminals.

[BlueKelah]

To answer the question,

I dunno.

ADVICE : Avoid all S-Chip no matter how juicy they look. Just like I now avoid all food that is Made in China. Support your local companies. Life will be much simpler.

[valuebuddies]

Hi, I was an auditor before but never dealt with any sgx listed company. Basically there are three ways to look at it:

1. Some auditors in PRC are paid to sign
2. Cash balances are real, but transactions are not, acquiring a subsidiary or buying a building could be just a fake transaction to withdraw cash from the company
3. Cash balances are real, but huge cash pile tend to appear on statements only at end of each quarter, when crisis hits, directors have problem to "repay" the cash and thus many S-chips frauds exposed

[minimax]

[quote='minimax' pid='72972' dateline='1391408192']

Regards your question to point 2, you are refering to a fraud case. Generally auditors have an analytical procedure on the FS to detect this. But they only gives a reasonable assurance and not a perfect assurance.

Hi,
thanks for your reply.

Care to enlighten us on what analytical procedures on the FS auditors are using?

Anyway, my understanding is that in order to fake cash balances and fool the auditor, management must:

1) corrupt the bank reconciliation process by faking bank statements
2) corrupt the bank confirmation process by getting someone inside the bank to fill in the cash balance figure desired by management in the bank confirmation form.

I've attached a sample of a bank confirmation form for those who wonder what a bank confirmation form looks like.

[arriyana]

The way auditors audit for cash balances are fairly straight forward. Cash must be held somewhere, either in physical form or banks.

Most of the time cash is held in numberous bank accounts. Auditors will prepare a letter of confirmation, get the client to sign for permission to retrieve account information, send the letter of confirmation to the banks and banks generally have a department dedicated to reply to auditors. Banks will then either confirm or disagree with the amount stated on the letter.

While visiting the bank branch itself is an option, generally audit fees do not justify the effort and time spent to verify. Hence rarely conducted unless there are reasonable suspicion.