Suppose there were several large outstanding checks on the year-end bank reconciliation that did not clear...

Suppose there were several large outstanding checks on the year-end bank reconciliation that did not clear the bank by the cutoff date. Discuss the possible causes of this, and discuss the nature of the potential misstatement that could result

Expert Solution

Cutoff procedure

Accounting cutoff procedures restrict accounting information from being included in the company’s general ledger after a specific date. Cutoff procedures ensure the integrity of the small business’s accounting process.

Business owners can restrict access to accounting information to enforce cutoff procedures. Accounting software packages are a common tool for enforcing this procedure. Business owners can usually create individual employee login profiles to access the accounting software. Once the end of the accounting period passes, business owners can restrict employees from entering new information into the accounting system. Access restrictions also ensure employees cannot change information previously recorded into the accounting system.

The sending of bank confirmation is important to auditing of cash for the following reasons:

(a) Direct confirmation of bank balances gives the auditor independent, third-party evidence.

(b) The bank letter may reveal details of security, borrowings and contingent liabilities which need to be disclosed in the financial statements.

(c) Information obtained from bank confirmation requests assists the auditor in discharging his responsibilities to obtain sufficient appropriate audit evidence by providing external evidence in relation to such matters as the existence, completeness and valuation of assets and liabilities.

(d) The auditor may need to carry out additional tests on matters after reviewing the replies from banks.

Nature of possible mistatements that could result are

Suppose there was a deposit-in-transit on the year-end bank reconciliation that was not received by the bank by the cut-off-date. The possible cause could be that the person disbursing thedeposit put the wrong date on the disbursement or it happened on aweekend when the bank was closed.
If this happens, it could endup being an unrecorded deposit and the misstatement could come from the company recording the deposit.
The balances shown in financial statements in ''cash and cash equivalents" will be not recorded properly and can be missapproprated.
The balances of sundary debtors are reduced as they have paid the amount to the firm in form of cheques , the accounting professionals can defalcate the amount.

ekkarill92 answered 1 year ago

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