Question

Background Information Note the following:

• Acme Corporation is a publicly listed company

• ACME’s Fiscal year end is December 31

• In addition to the cash account being reconcile here; ACME has a separate Revolving Credit account.

  This is a revolving credit facility where interest is accrued on the average balance outstanding during the month. The interest amount is required to be paid on a monthly basis. The correct is amount calculated and taken from the account automatically by the bank.

• The facility has an annual interest rate of 4%

• Management has set-out in the Financial Statements that the average balance outstanding in this

  revolving credit facility is normally at around $ 150,000.

• The Audit Committee has also informed the Partner that the CRA audited ACME in the previous year

  and levied a penalty of $50,000 and has informed the Board that they plan continue their audit in the new year.

  Required

  Part 1

1. a) From the information provided in EXHIBIT A, perform and document a Bank Reconciliation. - 20 marks

2. b) From the Background info. provided above, identify potential errors and disclosure requirements - 5 marks

Part 2

1. a) Identify the financial assertions relating to the Cash account addressed by the Bank Reconciliation and explain how. – 5 marks

2. b) Identify what type of activity the Bank Reconciliation is. – 5 marks

3. c) Identify the 6 possible characteristics (of the activity above) and which apply to the Bank Rec. – 5 marks

BONUS
How would the Auditor test the identified characteristics. – 4 marks

EXHIBIT A

ABC Bank Statement Exerpt for Acme Corporartion Bank Account
for December 201X
Date	Description	Cash Out	Cash In	Balance
January 7, 2021	Cheque 1415	$ 2,500.00		$ 103,390.00
January 6, 2021	Cheque 1416	$ 3,000.00		$ 105,890.00
January 5, 2021	Cheque 1414	$ 2,000.00		$ 108,890.00
January 4, 2021				$ 110,890.00
January 3, 2021	EFT	$ 7,500.00		$ 110,890.00
January 2, 2021	EFT	$ 6,000.00		$ 118,390.00
January 1, 2021	Foreign Wire		$ 5,250.00	$ 124,390.00
December 31, 2020	Loan Interest - Dec.	$ 1,500.00		$ 119,140.00
December 30, 2020	Bank Charges - Dec.	$ 250.00		$ 120,640.00
December 29, 2020	Returned Cheque 1412		$ 500.00	$ 120,890.00
December 28, 2020	Cheque 1413	$ 1,500.00		$ 120,390.00
December 27, 2020	CRA Appropriation	$ 50,000.00		$ 121,890.00
December 26, 2020	Cheque 1412	$ 500.00		$ 171,890.00
December 25, 2020				$ 172,390.00
December 24, 2020				$ 172,390.00
		$ 74,750.00	$ 5,750.00	$ 172,390.00
Acme Corporation
General Ledger Cash Account Excerpt
Date	Transaction Detail	Type	Debit	Credit	GL Acct. Balance
January 7, 2021					$ 103,390.00
January 6, 2021	Payment to Supplier #11	Cheque 1418			$ 103,390.00
January 5, 2021	Payment to Supplier #12	Cheque 1417			$ 103,390.00
January 4, 2021	Loan Interest - Re: Dec.	Taken by Bank		$ 1,500.00	$ 103,390.00
January 3, 2021	CRA Appropriation	Taken by CRA		$ 50,000.00	$ 104,890.00
January 2, 2021	Returned Cheque (Supplier Account Closed)	Cheque 1412	$ 500.00		$ 154,890.00
January 1, 2021	Bank Charges - Re: Dec.	Taken by Bank		$ 250.00	$ 154,390.00
December 31, 2020	Payment to Supplier #4	EFT		$ 6,000.00	$ 154,640.00
December 30, 2020	Payment to Supplier #5	Cheque 1416		$ 3,000.00	$ 160,640.00
December 29, 2020	Payment to Supplier #1	EFT		$ 7,500.00	$ 163,640.00
December 28, 2020	Payment to Supplier #2	Cheque 1415		$ 2,500.00	$ 171,140.00
December 27, 2020	Receipt from Customer B	Foreign Wire	$ 5,250.00		$ 173,640.00
December 26, 2020	Receipt from Customer A	Cheque 1414		$ 2,000.00	$ 168,390.00
December 25, 2020	Payment to Supplier #2	Cheque 1413		$ 1,500.00	$ 170,390.00
December 24, 2020	Payment to Supplier #3	Cheque 1412		$ 500.00	$ 171,890.00
			$ 5,750.00	$ 74,750.00	$ 172,390.00

Answer 1

Part 1

Answer to Part (a)

In the given question, The Bank statement provided by the bank and the general cash ledger of the Acme Corporation is already tallying with each other. Therefore there is no need of performing Bank Reconciliation Statement.

Answer to Part (b)

Detecting errors: A bank reconciliation helps you in spotting accounting errors which are common to every business. These mistakes include errors such as addition and subtraction, missed payments and double payments.

Tracking Interest and Fee: Banks might add interest payments, fees or penalties on your account. Monthly bank reconciliation allows you to add or subtract such amounts in your books.

Detecting Fraud: You may not be able to prevent employees from stealing your money once, however, you could prevent it in future. Bank reconciliations statement helps you in detecting and spotting fraudulent transactions. It is advisable to employ an independent person to perform the reconciliations for preventing the accounting employee from falsifying your books and reconciliations.

Tracking Receivables: BRS allows you to confirm all your receipts, assisting you to avoid awkward situations and also identifying entries for receipts which you didn’t deposit.

Part-B

Answer to Part (b)

Businesses maintain cash book to record both the cash as well as bank transactions. A Cashbook has a cash column which shows cash available with the business and a bank column which shows cash at bank.
Bank also keeps an account for every customer in their books. All the deposits are recorded on credit side of customer’s account and withdrawals are on the debit side of their account. An account statement is sent regularly to the customers by the bank.

Sometimes the bank balances as per cash book and bank statement doesn’t match. In case balance available in the passbook doesn’t match the bank column of the cash book, the business should identify the reasons for the same. It is important to reconcile the differences.

For reconciling the balances as shown in the Cash Book and passbook a reconciliation statement is prepared known as Bank Reconciliation Statement or BRS. In other words, BRS is a statement which is prepared for reconciling the difference between balances as per cash book’s bank column and passbook on a given date.

It‘s not compulsory to prepare a BRS and there’s no fixed date for preparing BRS. BRS is prepared on a periodical basis for checking that bank related transactions are recorded properly in cash book’s bank column and also by the bank in their books. BRS helps to detect errors in recording transactions and determining the exact bank balance as on a specified date.

Answer to Part (c)

1. Firstly, it’s essential to have all the required documentation and information in hand. That means, if all the required documentation and information are at your disposal you get a better view of things.

2. Avoiding common errors, such as:

a. Error relating to duplication of entries.

b. Not accounting for a transaction that would cause a difference equal to the missed amount

c. Errors while entering commas and dots, which cause discrepancies that, could be of significant value. For instance, instead of entering INR 2,401.30, entering INR 240.13.

d. Transposition errors while entering figures in the books. For instance, instead of entering INR 221,200, entering INR 212,200.

3. Banks can make mistakes too: It is possible that your bank might have committed a mistake. They might debit incorrect amounts from your account, or credit deposits which doesn’t belong to you. For this reason, in case you find errors for which you don’t find any explanations, or for which you’re in doubt, the best thing is to consult your bank.

4. Reconciling items: Listing differences and reconciling them and then forgetting it is possible. In case differences keep on accumulating with no action taken, your bank reconciliation would become meaningless. It is needed that a constant check is kept on the reconciled transactions so that they are reflected in the right way in the bank column of the cash book and in the bank statement.

5. Normally it is prepared on closing date of accounts, i.e., Dec. 31st. Jan. 31 March 31.

6. Sometimes it is prepared at the end of the every month after preparing Cash Book or regularly after certain interval to check the accuracy of Cash Book.