VERIFICATION OF BANK BALANCES

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Fundamentals of Auditing ACC 311

Lesson 36

VERIFICATION OF BANK BALANCES

Following points should be considered during verification of Bank Balances:

Agree the balances with the bankbook, and/or general ledger and bank statement.

ii)

In case of difference between bank book and bank statement obtain reconciliation for the bank

accounts.

iii)

Check that outstanding cheques have been cleared with the bank statement subsequent to the

year-end. If cheques have not been cleared subsequently ask for any special reason why they have

not been cleared.

iv)

Check that uncollected cheques have been realized, with the statement for subsequent period.

Scrutinize the subsequent bank statement for dishonored cheques in order to detect worthless

cheques deposited to conceal shortages.

vi)

Investigate any significant reconciling items of an unusual nature.

vii)

Investigate about outstanding stale cheques.

viii)

Obtain direct bank confirmation.

Letter of confirmation from bank.

The purpose of this letter is to confirm the bank balances and other matters by the bank to the auditor

directly.

The letter is written by the Auditors to bank requesting them to confirm the bank balances and allied matters

directly to them.

It contains the following information:-

Requesting bank to send following information directly to them:-

(a)

Full title of account and balances thereon.

(b)

Accounts closed during the period.

(c)

Interest charged during the period.

(d)

Details of security and charges.

(e)

Details of investments or document held.

Standard Letter of Request for Bank Report

The Manager

(Bank Branch)

Date:

Dear Sir,

(CLIENT'S NAME)

STANDARD REQUEST FOR BANK REPORT

FOR AUDIT PURPOSES

In accordance with your above named customer's instructions given hereon, please send DIRECT to us at the

above address, as auditors of your customer, the following information relating to their affairs at your branch

as at the close of business on .............. (Balance sheet date) and, in the case of items 2, 4 and 9, during the

period since.............. (Opening date of the period)

Please state against each items any factors which may limit the completeness of your reply; if there is nothing

to report, state `NONE'.

It is understood that any replies given are in strict confidence, for the purposes of audit.

BANK ACCOUNTS

Full titles of all accounts together with the account numbers and balances thereon, including NIL

balances:

Where your customer's name is the sole name in the title;

Where your customer's name is joined with that of other parties;

Where the account is in a trade name.

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Fundamentals of Auditing ACC 311

NOTES

Where the amount is subject to any restriction (e.g. a garnishee order or arrestment) or exchange control

considerations (e.g. `blocked account') this information should be stated.

Full titles and dates of closure of all accounts closed during the period.

The separate amounts accrued but not charged or credited as at the above date, of

Interest and

Provisional charges (including commitment fees)

The amount of interest charged during the period if not specified separately in the customer's

statement of account.

Particulars (i.e. date, type of document and accounts covered) of any written acknowledgment of set-

off, either by specific letter of set-off, or incorporated in some other document or security.

Details of loans, overdrafts, cash credits and facilities, specifying agreed limits and in the case of term

loans, date for repayment or review.

SECURITY: Please given:

(i) Details of any security formally charged to the bank, including the date and type of charge, (e.g.

pledge, hypothecation etc.)

(ii)

Particulars of any undertaking to assign to the bank any assets. If a security is limited to any

borrowing, or if there is a prior, equal or subordinate charge, please indicate.

Investments, bills of exchange, documents of title or other assets held but not charged.

Please give details.

CONTINGENT LIABILITIES

All contingent liabilities, viz.:

Total of bills discounted for your customer, with recourse;

ii)

Details of any guarantees, bonds or indemnities given to you by the customer in favor of

third parties;

iii)

Details of any guarantees, bonds or indemnities given by you, on your customer's behalf,

stating where there is recourse to your customer and/or to its holding, parent or any

other company within the group.

iv)

Total of acceptances;

Total of forward exchange contracts;

vi)

Total of outstanding liabilities under documentary credits;

vii)

Other - please give details.

A list of other banks, or branches of your bank, where you are aware that a relationship has been

established during the period.

Yours faithfully,

DISCLOSURE AUTHORISED

For and on behalf of

(CUSTOMER'S NAME)

Signed in accordance with the terms

and conditions for the conduct of the

customer's bank account.

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Fundamentals of Auditing ACC 311

Verification of Debtors Balances

Following points should be considered during verification of Debtors Balance:

Obtain confirmation from debtors.

ii)

Verify debts with reference to cash received since year-end.

iii)

Check accuracy and completeness of debtors' listing.

iv)

Check book-keeping in small sample of ledger accounts.

Check postings and enquire into unusual entries in the control account.

vi)

Verify nature, amount and classification of credit balance.

vii)

Check transaction of foreign currency balances.

viii)

Review post year-end credit notes.

ix)

Enquire into debtor balances cleared by journal entries after the year-end

Consider un-provided claims, enquire and review correspondence.

xi)

Check credit note cut-off, if material.

xii)

Consider adequacy and check bases and calculations of provisions for rebates

xiii)

Verify existence and title to bills receivable, trace proceeds.

xiv)

Consider whether results of work on cutoff affect debtors.

xv)

Review audit work on income.

Confirmation from Debtors:

Through verification of debtor's balances by direct communication the auditor obtains information regarding:

(i)

Adequacy of the system of internal control over sales, debtors, and collections;

(ii)

Accuracy of accounting records in general and of cut-off procedures for balance sheet purposes

in particular; and

(iii)

Irregularities such as teeming and lading, overdue balances & incorrect balances.

The above information helps an auditor to form an opinion regarding:

(a)

Reliability of debtors balances; and

(b)

Quantum and nature of disputes existing between the company and its customer.

Methods of obtaining Debtors Confirmation

(i)

Positive Method. Under positive method the company requests the debtor to confirm his

indebtedness to the company direct to the auditor and in case of disagreement he is also required to

state the balance as per his records and provide the auditor with full particulars of the difference.

(ii)

Negative Method. Under negative method the company requests the debtor to communicate with

the auditor only if he disagrees with the balance. If no communication is received within specified

time the auditor may assume that the balance is agreed.

Distinguish between Positive and Negative Confirmation

Positive Confirmation

Negative Confirmation

a) In positive confirmation company request, the debtor

In negative confirmation company request, the

to confirm the balance direct to the auditor whether he

debtor to confirm the balance to auditor only

agrees while or not.

if he disagree with balance.

b) In positive confirmation if no reply is received the

In negative confirmation if no reply is received

auditors have to adopt other procedures to verify those

the auditor may assume that the balance is

balances.

agreed.

c) Positive confirmation is preferred when the internal

Negative confirmation is preferred when the

control system is not satisfactory.

internal control system is satisfactory or when

confirming a large number of small balances.

d) Confirming significant balances due from debtors under

Confirming a large number of small balances

positive confirmation.

under negative confirmation.

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Fundamentals of Auditing ACC 311

Other procedures if reply is not received to Positive Confirmation

When no reply is received to a positive confirmation the auditor should carry out the following procedures:

Check the outstanding balances as of balance sheet date have been subsequently received.

ii)

If subsequently not received then examine sale order, dispatch note, invoices and relevant

documents and correspondence with concerned debtors.

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