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Lesson#36
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VERIFICATION OF BANK BALANCES
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VERIFICATION OF BANK BALANCES
Following points should be considered during verification of
Bank Balances:
i) Agree the balances with the bankbook, and/or general ledger
and bank statement.
ii) In case of difference between bank book and bank statement
obtain reconciliation for the bank
accounts.
iii) Check that outstanding cheques have been cleared with the
bank statement subsequent to the
year-end. If cheques have not been cleared subsequently ask for
any special reason why they have
not been cleared.
iv) Check that uncollected cheques have been realized, with the
statement for subsequent period.
v) Scrutinize the subsequent bank statement for dishonored
cheques in order to detect worthless
cheques deposited to conceal shortages.
vi) Investigate any significant reconciling items of an unusual
nature.
vii) Investigate about outstanding stale cheques.
viii) Obtain direct bank confirmation.
Letter of confirmation from bank.
The purpose of this letter is to confirm the bank balances and
other matters by the bank to the auditor
directly.
The letter is written by the Auditors to bank requesting them to
confirm the bank balances and allied matters
directly to them.
It contains the following information:-
Requesting bank to send following information directly to them:-
(a) Full title of account and balances thereon.
(b) Accounts closed during the period.
(c) Interest charged during the period.
(d) Details of security and charges.
(e) Details of investments or document held.
Standard Letter of Request for Bank Report
The Manager
(Bank Branch)
Date:
Dear Sir,
(CLIENT’S NAME)
STANDARD REQUEST FOR BANK REPORT
FOR AUDIT PURPOSES
In accordance with your above named customer’s instructions
given hereon, please send DIRECT to us at the
above address, as auditors of your customer, the following
information relating to their affairs at your branch
as at the close of business on ………….. (Balance sheet date) and,
in the case of items 2, 4 and 9, during the
period since………….. (Opening date of the period)
Please state against each items any factors which may limit the
completeness of your reply; if there is nothing
to report, state ‘NONE’.
It is understood that any replies given are in strict
confidence, for the purposes of audit.
BANK ACCOUNTS
1. Full titles of all accounts together with the account numbers
and balances thereon, including NIL
balances:
a) Where your customer’s name is the sole name in the title;
b) Where your customer’s name is joined with that of other
parties;
c) Where the account is in a trade name.
page
117
NOTES
Where the amount is subject to any restriction (e.g. a garnishee
order or arrestment) or exchange control
considerations (e.g. ‘blocked account’) this information should
be stated.
2. Full titles and dates of closure of all accounts closed
during the period.
3. The separate amounts accrued but not charged or credited as
at the above date, of
a) Interest and
b) Provisional charges (including commitment fees)
4. The amount of interest charged during the period if not
specified separately in the customer’s
statement of account.
5. Particulars (i.e. date, type of document and accounts
covered) of any written acknowledgment of setoff,
either by specific letter of set-off, or incorporated in some
other document or security.
6. Details of loans, overdrafts, cash credits and facilities,
specifying agreed limits and in the case of term
loans, date for repayment or review.
7. a) SECURITY: Please given:
(i) Details of any security formally charged to the bank,
including the date and type of charge, (e.g.
pledge, hypothecation etc.)
(ii) Particulars of any undertaking to assign to the bank any
assets. If a security is limited to any
borrowing, or if there is a prior, equal or subordinate charge,
please indicate.
b) Investments, bills of exchange, documents of title or other
assets held but not charged.
Please give details.
CONTINGENT LIABILITIES
8. All contingent liabilities, viz.:
i) Total of bills discounted for your customer, with recourse;
ii) Details of any guarantees, bonds or indemnities given to you
by the customer in favor of
third parties;
iii) Details of any guarantees, bonds or indemnities given by
you, on your customer’s behalf,
stating where there is recourse to your customer and/or to its
holding, parent or any
other company within the group.
iv) Total of acceptances;
v) Total of forward exchange contracts;
vi) Total of outstanding liabilities under documentary credits;
vii) Other - please give details.
9. A list of other banks, or branches of your bank, where you
are aware that a relationship has been
established during the period.
Yours faithfully,
DISCLOSURE AUTHORISED
For and on behalf of
(CUSTOMER’S NAME)
Signed in accordance with the terms
and conditions for the conduct of the
customer’s bank account.
page
118
Verification of Debtors Balances
Following points should be considered during verification of
Debtors Balance:
i) Obtain confirmation from debtors.
ii) Verify debts with reference to cash received since year-end.
iii) Check accuracy and completeness of debtors' listing.
iv) Check book-keeping in small sample of ledger accounts.
v) Check postings and enquire into unusual entries in the
control account.
vi) Verify nature, amount and classification of credit balance.
vii) Check transaction of foreign currency balances.
viii) Review post year-end credit notes.
ix) Enquire into debtor balances cleared by journal entries
after the year-end
x) Consider un-provided claims, enquire and review
correspondence.
xi) Check credit note cut-off, if material.
xii) Consider adequacy and check bases and calculations of
provisions for rebates
xiii) Verify existence and title to bills receivable, trace
proceeds.
xiv) Consider whether results of work on cutoff affect debtors.
xv) Review audit work on income.
Confirmation from Debtors:
Through verification of debtor’s balances by direct
communication the auditor obtains information regarding:
(i) Adequacy of the system of internal control over sales,
debtors, and collections;
(ii) Accuracy of accounting records in general and of cut-off
procedures for balance sheet purposes
in particular; and
(iii) Irregularities such as teeming and lading, overdue
balances & incorrect balances.
The above information helps an auditor to form an opinion
regarding:
(a) Reliability of debtors balances; and
(b) Quantum and nature of disputes existing between the company
and its customer.
Methods of obtaining Debtors Confirmation
(i) Positive
Method.
Under positive method the company
requests the debtor to confirm his
indebtedness to the company direct to the auditor and in case of
disagreement he is also required to
state the balance as per his records and provide the auditor
with full particulars of the difference.
(ii) Negative
Method. Under negative method the
company requests the debtor to communicate with
the auditor only if he disagrees with the balance. If no
communication is received within specified
time the auditor may assume that the balance is agreed.
Distinguish between Positive and Negative Confirmation
Positive Confirmation Negative Confirmation
a) In positive confirmation company request, the debtor
to confirm the balance direct to the auditor whether he
agrees while or not.
In negative confirmation company request, the
debtor to confirm the balance to auditor only
if he disagree with balance.
b) In positive confirmation if no reply is received the
auditors have to adopt other procedures to verify those
balances.
In negative confirmation if no reply is received
the auditor may assume that the balance is
agreed.
c) Positive confirmation is preferred when the internal
control system is not satisfactory.
Negative confirmation is preferred when the
internal control system is satisfactory or when
confirming a large number of small balances.
d) Confirming significant balances due from debtors under
positive confirmation.
Confirming a large number of small balances
under negative confirmation.
page
119
Other procedures if reply is not received to Positive
Confirmation
When no reply is received to a positive confirmation the auditor
should carry out the following procedures:
i) Check the outstanding balances as of balance sheet date have
been subsequently received.
ii) If subsequently not received then examine sale order,
dispatch note, invoices and relevant
documents and correspondence with concerned debtors. |
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