Question

In the audit of a client with a fiscal year ending December 31, the CPAs obtain a January 10 bank statement directly from the bank. Explain how this cutoff bank statement will be used

a. In the review of the December 31 bank reconciliation.

b. To obtain other audit information.

Answer 1

Answer:

Accounting is a continuous process because business is always run ongoing concern basis & it is never halting & due to this it is necessary that transaction of one period would be separate from those in the ensuring period so that result of working of each period is correctly ascertained, such an arrangement is known as the cutt-off procedure.

(a) In the audit of a client with a fiscal year ending on December 31, the CPAs obtain a January 10 bank statement directly from the bank, this statement helps the auditor to ensure:

• Goods purchased etc in which has passed to the client, have in fact been included in the inventories & the liability has been provided for in case credit purchase has been made partially in cash & partially in credit. Also, CPAs ensure whether the amount paid for the assets, inventory for which amount paid on January 10 but related to fiscal year December 31 has been properly recorded or not.

• Goods sold have been excluded from the inventories & whether the amount received for Credit sales have been properly accounted for in the current fiscal year
• CPAs will ensure whether the amount shown in Bank reconciliation has been received in the Bank statement till January 10 to ensure the correctness of the financial statement.

(b) Bank statement obtain by the auditor o January 10 may be used as other audit evidence such as maybe management does not pay the liability related to current fiscal year & stating that they have been already made the payment for which in the next month, in such a case CPAs can easily verify the same.

CPA may use this as additional audit evidence if any charge of negligence is brought against him. it also help them to find out the transaction which has been occured in current fiscal year but payment is made in next fiscal year & also ensure coorect recording of transaction has been made in financial statment.