Cash

Question 1

What is the schedule of interbank transfers used for?

Answer 1

It is used to verify that transfers between the entity’s bank accounts are recorded properly (and to detect kiting, which overstates the cash balance).

Question 2

What is meant by the term “kiting”?

Answer 2

An overstatement of the true cash balance at year-end caused by recording the receipt while failing to record the disbursement associated with a transfer between the entity’s cash accounts.

Question 3

What does the proof of cash compare?

Answer 3

The beginning balance per the bank plus deposits minus checks clearing the bank versus the beginning balance per the books plus receipts minus disbursements according to the books

Question 4

What is the purpose of a bank confirmation?

Answer 4

1. )To verify the existence and ownership of bank accounts

2. )To provide evidence about the completeness and terms of notes payable with the bank

Question 5

What is meant by the term “cutoff bank statement”?

Answer 5

It is a short-period bank statement obtained directly from the bank (normally for a 10-day period) useful in verifying the deposits in transit and providing some (usually partial) evidence about outstanding checks on a bank reconciliation.

Question 6

List some typical audit procedures applicable to cash accounts.

Answer 6

1. )Review and test the entity’s bank reconciliations.
2. )Prepare and test a schedule of interbank transfers if there are multiple bank accounts with transfers among them.
3. )Prepare proof of cash if fraud is suspected.
4. )Count petty cash (but usually do not do so due to its immateriality).
5. )Inquire about minimum balance requirements on bank accounts.