1. An auditor would prepare a proof of cash when there are significant internal control weaknesses in the client's cash handling. This includes ensuring that all cash received is deposited and recorded, all recorded cash disbursements are paid by the bank, and all bank-paid amounts are properly recorded. (6 marks)
2. The auditing of an interbank transfer schedule should focus on the following aspects: I. (5 marks)
The accuracy of the information on the interbank transfer schedule should be verified. The interbank transfers must be recorded in both the receiving and disbursing banks. The date of the recording of the disbursements and receipts for each transfer must be in the same fiscal year. Disbursement on the interbank transfer schedule should be correctly included in or excluded from year-end bank reconciliations as outstandi
...ng checks. Receipts on the interbank transfer schedule should be correctly included in or excluded from year-end bank reconciliations as deposits in transit. Explain kiting, and discuss how it is performed. Kiting is the transferring of money from one bank to another and improperly recording the transaction to cover a defalcation of cash or to window-dress the financial statements. Near the balance sheet date, a check is drawn on one bank account and immediately deposited in a second account for credit before the end of the accounting period. In making this transfer, the embezzler is careful to make sure that the check is deposited at a late enough date so that it does not clear the first bank until after the end of the period.
If the bank transfer is not recorded until after the balance sheet date, it will be considered as an asset in bot
banks, resulting in an overstatement of the kiter's total cash balance. In order to test for kiting, the auditor can obtain a schedule of interbank transfers which includes all bank transfers made a few days before and after the balance sheet date. The auditor then traces each transfer to the accounting records to ensure proper recording.
The following points should be considered regarding the interbank transfer schedule:
- The accuracy of the information on the schedule should be confirmed by comparing it with the cash disbursements and cash receipts records.
- The date of recording for each transfer should fall within the same fiscal year.
- Disbursements listed on the schedule should be appropriately accounted for as outstanding checks in year-end bank reconciliations.
- Receipts listed on the schedule should be appropriately accounted for as deposits in transit in year-end bank reconciliations.
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