Why CPA Scans, Reviews, or Prepares Bank Reconciliations?

When the acceptable level of detection risk is high, the auditor may scan the client-prepared bank reconciliation and verify the mathematical accuracy of the reconciliation.

If detection risk is moderate, the auditor may review the client’s bank reconciliation. The review will usually include:

–Comparing the ending bank balance with the balance confirmed on the bank confirmation form

–Verifying the validity of deposits in transit and outstanding checks

–Establishing the mathematical accuracy of the reconciliation
–Vouching reconciling items such as bank charges and credits and errors to supporting documentation
–Investigating old items such as checks outstanding for a long period of time and unusual items

When detection risk is low, the auditor may prepare the bank reconciliation using bank data in the client’s possession. When the auditor suspects material misstatements, the auditor may obtain bank statements directly from the bank and prepare the bank reconciliation.

Why CPA obtains and uses Bank Cutoff Statements?

A bank cutoff statement is a bank statement as of a date subsequent to the date of the balance sheet. The date should be at a point in time that will permit most of the year-end outstanding checks to clear the bank. The client must request the cutoff statement from the bank and instruct that it be sent directly to the auditor.

Once in hand, the auditor should:

The tracing of checks is designed to verify the list of outstanding checks. If the auditor finds that a prior-period check not on the list of outstanding checks has cleared the bank then kiting may be present.

When the aggregate effect of uncleared checks is material, it may be a sign of window dressing. This is usually an intentional attempt by management to make the firm’s solvency appear better than it actually is. Here the auditor should trace the uncleared checks to the check register and supporting documentation and possibly make inquiries of the treasurer.