Question

Auditing Question:

You are the auditor of ABC Limited for the year ended 31 December 2016. There are $20,000,000 bank balances and time deposit of $500,000,000 recorded.

Bank balances
The following are the bank reconciliations prepared by ABC:

A Bank $   B Bank $  

Balance per bank statement : 24,000,000    (3,000,000)

Reconciling items:
(i) An unpresented cheque payable (5,000,000)

to a supplier which was issued

in January 2016

(ii) Cheque deposit from a customer 4,000,000

rejected by the bank (note a)


Balance per ledger   19,000,000     1,000,000

Note:
Further information:
(a) The rejected cheque was due to inadequate funds in the customer’s bank account.

Time deposit
The financial controller of ABC provided you with a time deposit slip issued by UK Bank on 1 September 2012. Its respective terms are as follows:

Principal amount: HK$500,000,000
Term: Not specified, withdrawal of the time deposit is permitted at any time
Interest rate: 3% per annum payable on a quarterly basis
Required:

(a) For reconciling item (i), explain the possible causes of this incidence. Propose adjustment(s) to correct the misstatements that may exist in ABC's 2016 financial statements.

(b) For reconciling item (ii), propose adjustment(s) to correct the misstatements and advise the implications that may exist in ABC’s 2016 financial statements.

(c) With respect to the time deposit, the financial controller of ABC considers that it may take too long for UK Bank to reply regarding the bank confirmation. He asks you to rely on the time deposit slip instead of sending a bank confirmation request to UK Bank. Advise and explain whether you would rely only on the time deposit slip as audit evidence to confirm its existence.

Answer 1

SOLUTION =

1.Possible causes of this incidence that an unpresented cheque payable (5,000,000)

to a supplier which was issued in January 2016 >

a. Cheque can be lost in transit

hence we still Debtor of the supplier.

After confirming from supplier We should present it in Accounts Payable in Financials.

b. There may be a dispute in Amount Payable as Supplier may be not agree on the issued amount hence not deposited in the bank again after confirming from the supplier we present the disputed amount as contingent liability.

B.The rejected cheque was due to inadequate funds in the customer’s bank account>

Again show it as Account receivable and We need to credit the supplier’s cash book and debit the customer’s account in the sales ledger i.e the customer is still owing us the money as his or her cheque has been dishonored.Secondly if there are no possibility to receive cheque again for any reason we must transfer the amount to Bad Debts to correct the misstatements.

C.Advise and explain whether you would rely only on the time deposit slip as audit evidence to confirm its existence>

We should not rely on the time deposit slip instead we should get confirmation from Bank about Actual amount of time deposit for following reasons:

1.Time Deposit > Term: Not specified, withdrawal of the time deposit is permitted at any time, hence the time deposit slip dated  1 September 2012 is not relevant for the year ended 31 December 2016.

As term is not fixed it could be withdrawn in previous years.

2. As interest paid on  quarterly basis may be reflected in Bank Account but Interest accrued amount must be confirmed by Bank.