1. Why would an auditor send a confirmation to a bank where the reporting entity's account has been closed-out during theyear?: A bank confirmation is designed to substantiate the actual balance in an account. The auditor wants to determine that the balanceis actually zero. Fraud can be carried out within a company by use of an account that has been supposedly closed out when it actually hasnot been. Thus, deposits can be made into the account without the company keeping any official record.

2. Why does the auditor verify the balances shown in a bank reconciliation?: A bank reconciliation is especially important to theauditor because the reconciliation often has to be manipulated in some manner to cover up the theft of funds that have been stolen from thecompany. Therefore, if the reconciling items can be verified, this is evidence that no cash has been stolen from the entity. However, theauditor should use great care when reviewing the reconciliations of a number of multiple bank accounts that an entity makes use of, as therecan be kiting issues to consider.

3. What is the difference between lapping and kiting?: Lapping occurs when cash is stolen upon receipt from one customer's account.Later, the cash that is received from a second account is applied to the first account to cover up the original theft. Either a certain amount ofmoney has been taken, or this amount could be increased by the theft of additional funds. All customer accounts stay relatively current bythe posting of later received funds from additional customer remittances.

Kiting occurs when funds are stolen from the company and, to cover this theft, the employee transfers money from one bank account toanother account right before year-end. The employee records an in-transit increase in one bank account in Year 1, but records the decreasein the other account in Year 2. This fraud is most convenient and prevalent at period end, especially when there are often several legitimateitems of cash always in transit between accounts.

4. What is a bank confirmation?

What information is provided to the auditor by a bank confirmation?

Who signs the bank confirmation request?: A bank confirmation is a request of a bank by the auditor for information on certainbalances either owned or owed by the client at the end of the reporting period. This request would include information regarding existingclient accounts, loans, interest rates, and security agreements.

The bank confirmation is used to substantiate reported balances for cash and notes payable. It also provides information to verify accruedinterest balances and for disclosure purposes.

As will all confirmations, a representative of the reporting entity must sign the confirmation request, but this document is kept within thecontrol of the independent auditor at all times.

5. How are the following balances in a bank reconciliation substantiated?1. Bank balance.2. Book balance.3. Outstanding checks.4. Deposits in transit.: 1. The bank balance can be verified by looking at the bank confirmation, by looking at the year-end bankstatement, and by looking at the bank cut-off statement.2. The book balance can be verified by looking at the general ledger account.3. Outstanding checks can be verified by examining the checks that clear the bank shortly after the end of the year, which are detailed in thebank cut-off statement.4. Deposits in transit, like outstanding checks, can be verified by examining the transactions reported in the bank cut-off statement.

This general process can also be performed for beginning bank and book balances and for outstanding checks and deposits in transit, ifthis work has not been performed during the prior year-end audit.

6. What is a bank cut-off statement?

What evidence is provided by a bank cut-off statement?: A bank cut-off statement is a partial-period bank statement, includingcopies or originals of the related cancelled checks, duplicate deposit slips, and any other documents normally included in bank statements,which is mailed by the bank directly to the CPA firm's office. It requests that evidence of all checks and deposits and other bankingtransactions that have occurred in the first seven to ten days after the end of the client's year-end be forwarded directly to the CPA.

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7. Because of the possibility of theft, companies should have a number of control procedures in place in connection with thereceipt of cash and checks.

What are some of these general controls?: Because of the possibility of theft, a company should do the following:1. Immediately record cash receipts, generally on a regular "first thing in the morning basis" each day after the company's mail has beenreceived, when two individuals are present to do this. One or two persons can open the mail, and one of these persons can initially managethe accumulation of the checks being received out of the day's mail.2. Ensure that all checks are made out in the company's name.3. Stamp all checks "For Deposit Only," and then one of these employees should run an adding machine listing of the batch of checks inorder to establish the total amount of cash received.4. Make the bank deposit each day just as soon as the deposit slip can be prepared and the total deposit amount can be verified.5. Send a validated bank slip directly to an independent party within the company for recording.6. Have an independent party within company prepare all bank reconciliations.

8. Why is cash usually not counted in an audit of nonfinancial entities?

If cash is counted, what rules should be followed?: Cash is usually not counted in a nonfinancial entity audit because the amount ofcash on hand is rarely of a material amount. In addition, internal control frequently requires the counting of cash on a regular periodicbasis, so little additional evidence is provided by another cash count by the auditor at year-end.

If cash is to be counted, all cash and liquid assets should be counted at the same time. The person with custody of the cash should do thecounting, while the auditor observes the count.

9. Who is usually responsible for generating the bank deposit slip?: Typically, the cashier prepares the bank deposit slip, which isreviewed and approved by a second party who actually makes the deposit.

10. How does the auditor obtain evidence that no material misstatements are present as a result of kiting?: In looking at thepossibility of kiting, the auditor gets a bank cut-off statement and seeks evidence of all inter-bank transfers around the end of the year. Eachof those transfers is scheduled so that the auditor can ensure that all appropriate receipts and disbursements have been recorded in theappropriate time period.