a) Bank balances
i) The auditor should obtain the bank reconciliation statement as at the end of the period and perform the following procedures:
Verify that the reconciliation is accurately prepared;
Ensure that the correct balances as per the bank statement and the cash book have been picked in the reconciliation;
Verify that the reconciling items have subsequently cleared;
Ensure that there are no unexplained variances;
Verify that all un-presented cheques had been dispatched to the payees and that all un- credited deposits have cleared.
This will assist the auditor in testing for window dressing. Window dressing in this context refers to attempts to overstate the liquidity of the company by keeping the cash book open such that money received after year end is credited to the cash book increasing the cash balance and reducing debtors. It could also take place by debiting cheques paid in the period under review but are not dispatched until after year- end.
This procedure of inspecting the bank reconciliation statement assists in verifying the completeness and accuracy of the bank balance.
ii) The auditor should obtain a direct confirmation from the bank of the amount holding on behalf of the client. The auditor should obtain the clients consent to communicate directly with the bank. Where consent is granted a standard letter of request should be sent to the bank.
The reply to this request is a good source of corroborative audit evidence to confirm the existence of the bank balance and other information such as the interest earned, any loans granted to the company or any restrictions placed on the operation of the account.