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CA Intermediate · Auditing and Ethics · Audit of Items of Financial Statements

While auditing cash and bank balances of Mehta Foods Ltd, the auditor receives a bank reconciliation statement showing several cheques issued before year end but cleared by the bank only in the following April. Which procedure is the MOST relevant to detect window dressing of year-end bank balance?

The auditor should examine cash book entries for cheques issued near year end and trace them to subsequent bank clearing dates, focusing on unusually large or delayed items. This tests cut-off and reveals window dressing, which simply agreeing the closing balance with the bank statement would not detect.

  1. AVerify only the closing bank balance against the passbook total
  2. BExamine the cash book entries and subsequent bank clearing dates for cheques issued near year end, especially unusually large onesCorrect
  3. CCheck the depreciation charged on bank premises
  4. DReview the minutes of the AGM for the previous year

Explanation

Cheques recorded as issued before year end but presented much later may indicate window dressing to show lower payables or better liquidity. Tracing the cash book entries to subsequent bank clearing and examining dates and amounts of year-end cheques addresses this risk. Merely agreeing the closing balance would not reveal the timing manipulation.

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