Question

what is the purpose of the substantive procedure of analyzing bank transfers for the last week of the audit year and the first week of the following year

Answer 1

Bank balance form the major part of the company balance sheet and the balance in the bank provides a good support to the outsiders that there claims will be paid.

The amount that is in the bank will be shown on the asset side of the balance sheet and the more balance that is in the bank means more good financial position.

The main reason why the bank transactions are audited for the last week of the audit year and the first week of the following year is because of the following reasons.

1. Transfer from parent company

In many cases this is possible that the parent company transfers large sum of money from there bank account to the subsidiary bank account to make the financial position of the subsidiary company look better. This money is generally sent in the last week so that it can be in the financial position of the company. Once the financial position is prepared and then this amount is transferred back to the parent company.

So this is important that these type of transactions should be identified and must be noted on the balance sheet.

1. Money transferred as charity

In some cases this is seen that large amount of money is transferred to some related person as charity and the bank balance is reduced and hence the expenses are increased.

In this case this is important to see that the money that is transferred by the name of charity should have been returned back in the following year or not?

If the money is returned then this is important that the transaction is audited.

1. REPO-105

In the most popular case of Lehman brothers they have used REPO105 method to improve the financial position.

What they have done was that they have recorded short term loans as sales and used the money to pay back some of the creditors.

So this should be seen that the amount that is exceptionally received at the year-end is to be returned or actually that is an income and further to this there must be efforts to correctly categorize the bank transactions.

So in this way this is important the bank transactions that are near to the end of the financial position date should be audited to check for any fraudulent transaction that may impact the financials of the company.