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

While auditing Kaveri Textiles Ltd, the auditor finds that the company's year-end bank balance per the cash book is Rs 12.40 lakh, whereas the bank statement shows Rs 14.10 lakh. The reconciliation lists cheques issued but not yet presented. Which procedure is the most reliable audit response to test the closing bank balance?

The best response is to obtain a direct bank confirmation and verify that the outstanding cheques cleared after the year end. This gives external, reliable evidence on both the balance and the reconciling items, unlike internal signatures, management representations or comparisons with prior year balances.

  1. AAccept the reconciliation if it is signed by the company's accountant
  2. BObtain a direct bank confirmation and check subsequent clearance of the reconciling chequesCorrect
  3. CCompare the cash book balance with the previous year's closing balance
  4. DAsk management to give a written representation on the bank balance

Explanation

A bank confirmation obtained directly from the bank is external evidence and is more reliable than internal documents. Checking that outstanding cheques cleared after year end in the next statement tests the reconciling items. A signed reconciliation and a management representation are internal evidence and are less reliable. Comparison with last year's balance gives no assurance about the current year.

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