Audit of cash and cash equivalents: bank letter should cover which items?

• A. Balances; overdrafts; securities for loans; other banking arrangements
• B. Only balances
• C. Investments in securities portfolio
• D. Bank service charges and fees

Answer: (A)

When auditing cash and cash equivalents, external confirmation from the bank provides reliable evidence about the entity’s liquidity and any factors that affect cash balances. The bank letter should confirm the actual cash balances across all accounts, any overdrafts outstanding (since these reduce the net cash position), and securities held by the bank on behalf of the entity as collateral for loans or other arrangements. It’s also important to disclose other banking arrangements that can influence cash, such as lines of credit, bank guarantees, or cash-management facilities, because these can affect available cash and liquidity. Investments in a securities portfolio and bank service charges or fees are not the primary items for confirming cash and cash equivalents.