Verification of bank balance

Apart from comparing the entries in the cash book with those in the Pass Book the auditor should obtain a certificate from the bank confirming the balance at the close of the year as shown in the Pass Book. If the bank account is overdrawn, the auditor should obtain from the bank particulars of assets on which a charge has been created to secure the overdraft. The auditor should examine the bank reconciliation statement prepared as on the last day of the year. He may also examine the reconciliation statement prepared as on the last day of the year. He may also examine the reconciliation statements as at other dates during the year. It should be examined whether 1. cheques issued the entity but not presented for payment, and 2. cheques deposited for collection the entity but not credited in the bank account, have been duly debited/credited in the subsequent period. For this purpose, the bank statements of the relevant period should be examined. If the cheques issued before the end of the year have not been presented within a reasonable time, it is possible that the entity might have prepared the cheques before the end of the year but not delivered them to the parties concerned. In such a case, the auditor should examine that the entity has reversed the relevant entries. Where the auditor finds that postdated cheques are issued the entity, he should verify that any cheques pertaining to the subsequent period have not been accounted for as payments during the period under audit. The auditor should pay special attention to those items in the reconciliation statements which are outstanding for an unduly long period.

The auditor should ascertain the reasons for such outstanding items from the management. He should also examine whether any such items require an adjustment/ write-off. The auditor should be alert to the possibility that even though the balance in an apparently inoperative account may have remained stagnant, transactions may have taken place in that account during the year. Where a large number of cheques has been issued/deposited in the last few days of the year, and a sizeable proportion of such cheques has subsequently remained unpaid/uncleared, this may indicate an intention of understanding creditors/debtors of understating/overstating bank balances. In such a case, it may be appropriate for the auditor to obtain confirmations from the parties concerned, especially in respect of cheques involving large amounts. The auditor should also examine whether a reversal of the relevant entries would be appropriate under the circumstances. In relation to balances/deposits with specific charge on them, or those held under the requirements of any law, the auditor should examine that suitable disclosures are made in the financial statements. In respect of fixed deposits or any type of deposits with banks, the relevant receipts/certificates, duly supported bank advices, should be examined. Remittances shown as being in transit should be examined with reference to their credit in the bank in the subsequent period. Where the auditor finds that such remittances have not been credited in the subsequent period, he should ascertain the reasons for the same. He should also examine whether the entity has reversed the relevant entries in appropriate cases.

The auditor should examine that suitable adjustments are made in respect of cheques which have become stale as at the close of the year. Where material amounts are held in bank accounts which are blocked, e.g., in foreign banks with exchange control restrictions or any banks which are under moratorium or liquidation, the auditor should examine whether the relevant facts have been suitably disclosed in the financial statements. He should also examine whether suitable adjustments on this account have been made in the financial statements in appropriate cases. Where the auditor finds that the number of bank accounts maintained the entity is disproportionately large in relation to its size, the auditor should exercise greater care in satisfying himself about the genuineness of banking transactions and balances. The following areas may also be considered the auditor:

  1.  In relation to balances/deposits with specific charge on them, or those held under the requirements of any law, the auditor should examine that suitable disclosures are made in the financial statements.
  2.  In respect of fixed deposits or any other type of deposits with banks, the relevant receipts/certificates, duly supported bank advices, should be examined.
  3.  Remittances shown as being in transit should be examined with reference to their credit in the bank in the subsequent period. Where the auditor finds that such remittances have not been credited in the subsequent period, he should ascertain the reasons for the same. He should also examine whether the entity has reversed the relevant entries in appropriate cases.
  4.  The auditor should examine that suitable adjustments are made in respect of cheques which have become stale as at the close of the year.
  5.  Where material amounts are held in bank accounts which are blocked, e.g., in foreign banks with exchange control restrictions or any banks which are under moratorium or liquidation, the auditor should examine whether the relevant facts have been suitably disclosed in the financial statements. He should also examine whether suitable adjustments on this account have been made in the financial statements in appropriate cases.
  6. Where the auditor finds that the number of bank accounts maintained the entity is disproportionately large in relation to its size, the auditor should exercise greater care in satisfying himself about the genuineness of banking transactions and balances.
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