Whether you're doing buy-side or sell-side due diligence, the Quality of Earnings (QoE) report is your financial flashlight. And one of the most overlooked—but critical—parts of that report?
👉 The cash proof.
It seems simple on the surface: does the cash in the bank line up with what's reported in earnings? But when it goes wrong, it erodes trust in the numbers—and your deal.
At Audit Sight, we’ve processed thousands of cash proofs, and we see these mistakes more often than you'd think. Here's what can go wrong and how to avoid them:
1. Mismatches Between Cash Movement and Reported Earnings
What goes wrong: The cash flow doesn’t reconcile cleanly with the reported EBITDA or net income—suggesting potential inaccuracies or manipulations.
Avoid it by:
- Tying every reconciling item back to a specific GL entry or bank transaction.
- Clearly identifying non-operating cash movements (debt, equity, taxes, dividends, etc.).
- Reconciliations should start with the right metric (e.g., EBITDA vs net income vs operating cash flow).
2. Timing Differences / Cutoff Errors
What goes wrong: Revenue or expenses are recorded in a different period than when cash hits—leading to misalignment in the cash proof.
Avoid it by:
- Carefully reviewing large invoices and payments around period ends.
- Performing a "cutoff" test: verify that receivables and payables are aligned with cash timing.
- Reconcile AR and AP rollforwards alongside the cash proof to catch lag effects.
3. Misclassification of Non-Operating or One-Time Items
What goes wrong: Cash from financing, investing activities, or unusual transactions (e.g., PPP loans, asset sales) gets lumped in with operating cash flow.
Avoid it by:
- Categorizing all cash activity (op vs non-op).
- Using a standardized structure (e.g., indirect cash flow format or 13-week cash model).
- Calling out and adjusting for one-time or non-recurring activity.
4. Unreconciled Bank Activity
What goes wrong: The cash balance per the general ledger doesn’t match the bank statements—or there are unknown/unexplained reconciling items.
Avoid it by:
- Getting all monthly bank recs and confirming cash with bank statements directly.
- Tracing unusual transactions back to source documents.
- Running bank recs as part of QoE fieldwork—not just relying on management reports.
5. Not Understanding Cash vs Accrual Nuances
What goes wrong: Analysts misinterpret cash flows because they don't fully understand how the company books revenue or expenses (e.g., heavy deferred revenue model).
Avoid it by:
- Mapping out how revenue is recognized vs when cash is received.
- Analyzing deferred revenue and prepaid expenses as part of working capital.
- Interviewing the controller/CFO to understand unusual accounting practices.
6. Leaving Out Key Working Capital Movements
What goes wrong: The cash proof doesn’t explain large swings in cash that are actually working capital-related (e.g., a buildup of inventory or AR).
Avoid it by:
- Rolling forward net working capital accounts as part of the proof.
- Calling out any seasonal or one-off WC impacts.
- Creating a bridge: EBITDA → Operating Cash Flow → Net Cash Change
7. Over-Reliance on Management's Cash Models
What goes wrong: You take management’s cash data at face value without validating or rebuilding the proof independently.
Avoid it by:
- Recreating your own cash proof from trial balance or GL data.
- Validating management schedules with source documents or third-party confirmations.
✅ Best Practices for Rock-Solid Cash Proofs
- Rebuild cash movement from bank statements and GL, not just P&L.
- Use schedules: WC rollforward, debt schedule, capex schedule, etc.
- Tie ending cash to audited/confirmed bank balances.
- Always identify and isolate non-operating cash flows.
- Explain reconciling items clearly in the report—no black boxes.
At Audit Sight, our technology automates and validates this work in hours, not days—giving you confidence in the cash and clarity in the earnings.
👉 Curious how we can support your next QoE? Let’s talk.
📩 Message us and request a demo HERE.
