Name 1: Levi T.

Ortiz Score: __________________

Schedule: MW(7:30-9:00) Date: November 23,2020
 

ACTIVITY 10-01 (50 points)

Required:

1. What is the importance of a bank letter confirmation? Outline the procedures for
obtaining confirmations from banks. (10 points)

A bank confirmation letter (BCL) is a letter from a bank or financial

institution confirming the existence of a loan or a line of credit that has been extended to
a borrower. The letter officially vouches for the fact that the borrower—typically an
individual, company, or organization—is eligible to borrow a specified amount of funds
for a specified purpose. It is important because it is independent confirmation of a
number of significant matters in the client's financial statements. It confirms cash and
bank balances which may well be a significant asset It also provides confirmation of
customers' assets held as security, customers other assets held fas custodian) and
contingent liabilities.

Audit procedures

 Obtain written authority from the client to the bank to disclose the necessary information.

 Send a bank letter in standard form to the bank in sufficient time for it to arrive at least a
month before the year end. The letter should state both the year-end date and the
previous year-end date, and should refer to the clients granting of authority

 If additional information over and above what is in the standard letter is requested, send
a separate letter requesting that information.

 When confirmation is received from the bank, check that the bank has answered all the
questions in the letter
 Follow up all points disclosed in the bank letter.

2. How would you test the bank reconciliation shown hereunder? (20 points)
I. Agree the balance per bank statement at 31 December 20X1 as shown on
the reconciliation ($35,111.91) to the bank statement and to the amount for
that account shown on the bank letter.
II. Test arithmetic of bank reconciliation by recasting it.
III. Review the bank reconciliation previous to the year-end bank reconciliation
(30 November reconciliation if carried out monthly) and test whether items
shown on it cleared in the last period or have been taken forward to the bank
reconciliation at 31 December.
IV. Trace the cheques shown as outstanding on the bank reconciliation to the
cash book prior to the year end and ensure they have cleared the bank by
looking at the after-date bank statements. Obtain explanations for any that
have not cleared at the time of the audit. In particular the outstanding cheque
for $10,250 has a reference (2411) which appears to suggest it was raised
much earlier in the year than the others and the fact it has not cleared is
unusual. Enquiries should be made in respect of this outstanding cheque.
V. Verify by checking paying-in slips that the uncleared bankings (deposits
outstanding – ref 1122 and 1123) were paid in prior to the year end, and
review whether they cleared quickly after the year end. Any that have not
cleared soon after the year end should be investigated.
VI. Verify that the year-end balance per the general ledger according to the
reconciliation ($43,500.36) agrees with the general ledger account balance at
31 December 20X1 and that this has been properly reflected in the financial
statements.
3. What other procedures should be performed by the auditor with respect to cash in bank
balances shown in the statement of financial position? (20 points)

ANSWER:

 Confirm cash balances

 Vouch reconciling items to the subsequent month’s bank statement
 Ask if all bank accounts are included on the general ledger
 Inspect final deposits and disbursements for proper cutoff
Agree the confirmed bank balance to the period-end bank reconciliation (e.g.,
December 31, 20X7). Then, agree the reconciling items on the bank reconciliation to the
bank statement subsequent to the period-end. For example, examine the January
20X8 bank statement activity when clearing the December 20X7 reconciling items.
Finally, agree the reconciled balance to the general ledger cash balance for the period-
end (e.g., December 31, 20X7).
Cut-off bank statements (e.g., January 20, 20X8 bank statement) may be used to
test the outstanding items. Such statements, similar to bank confirmations, are mailed
directly to the auditor. Alternatively, the auditor might examine the reconciling items by
viewing online bank statements.