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Embezzlers occasionally cover a theft of cash by a practice known as kiting: transferring money from one bank to another and incorrectly recording the transaction. 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.
Lapping of account receivable
Receipt of a Bank Confirmation
Although bank confirmations are not required under auditing standards, auditors usually obtain a direct receipt of a confirmation from every bank or other financial institution with which the client does business, except when there is an unusually large number of inactive accounts. If the bank does not respond to a confirmation request, the auditor should send a second request or ask the client to communicate with the bank to ask it to complete and return the confirmation to the auditor.
Accessing Cutoff Bank Activity after Year-End
A cutoff bank statement is a partial-period bank statement and the related copies of or digital access to cancelled checks, duplicate deposit slips, and other documents included in bank statements, provided by the bank directly to the CPA firm’s office or through online access to the bank’s electronic records of the client’s bank account information. The purpose of the cutoff bank statement or electronic access to account information on the bank’s system is to verify the reconciling items on the client’s year-end bank reconciliation with evidence that is maintained by the bank, not the client. To fulfill this purpose, the auditor requests the client to have the bank provide directly to the auditor a partial-period statement, or digital access to the information, for 7 to 10 days subsequent to the balance sheet date.
Tests of the Bank Reconciliation
A well-prepared independent bank reconciliation is an essential internal control over cash. Auditors test the bank reconciliation to determine whether client personnel have carefully prepared the bank reconciliation and to verify whether the client’s recorded bank balance is the same amount as the actual cash in the bank except for deposits in transit, outstanding checks, and other reconciling items.

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