Audit of Property Plant and Equipment

1. Discuss the circumstances in which an auditor would prepare a proof of cash. (6 marks)
Auditors would prepare a proof of cash when the client has material internal control weakness in cash. If all cash receipts were deposited and all deposits were recorded in the accounting records, all recorded cash disbursements were paid by the bank and all amounts that were paid by the bank were recorded.

2. What should be audited on an interbank transfer schedule? (5 marks)
The following should be audited on an interbank transfer:
I. The accuracy of the information on the interbank transfer schedule should be verified.
II. The interbank transfers must be recorded in both the receiving and disbursing banks.
III. The date of the recording of the disbursements and receipts for each transfer must be in the same fiscal year.
IV. Disbursement on the interbank transfer schedule should be correctly included in or excluded from year-end bank reconciliations as outstanding checks.
V. Receipts on the interbank transfer schedule should be correctly included in or excluded from year-end bank reconciliations as deposits in transit.

3. Explain kiting, and discuss how it is performed. (5 marks)
Kiting is the transferring of money from one bank to another and improperly recording the transaction to cover a defalcation of cash or to window-dress the financial statements. Near the balance sheet date, a check is drawn on one bank account and immediately deposited in a second account for credit before the end of the accounting period. In making this transfer, the embezzler is careful to make sure that the check is deposited at a late enough date so that it does not clear the first bank until after the end of the period. If the bank transfer is not recorded until after the balance sheet date, the amount of the transfer is recorded as an asset in both banks, overstating the kiter’s total cash balance.
4. Discuss how an auditor can test for kiting. (6 marks)
To test for kiting, the auditor obtains a schedule of interbank transfers that lists all bank transfers made a few days before and after the balance sheet date, and traces each to the accounting records for proper recording. Specific items of interest include:
• The accuracy of the information on the interbank transfer schedule should be verified by reference to the cash disbursements and cash receipts records.
• The date of the recording of the disbursements and receipts for each transfer must be in the same fiscal year.
• Disbursements on the interbank transfer schedule should be correctly included in or excluded from year-end bank reconciliations as outstanding checks.
• Receipts on the interbank transfer schedule should be correctly included in or excluded from year-end bank reconciliations as deposits in transit.