Final answer:
A bank reconciliation helps detect discrepancies in the bank statement balance and the company's cash balance. It can identify unrecorded checks, stolen cash sales, embezzlement of unrecorded cash receipts, and duplicate credit sales. Therefore, the correct option is 3).
Step-by-step explanation:
By preparing a four-column bank reconciliation (‘proof of cash’) for the last month of the year, an auditor will generally be able to detect the following:
- An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation.
- A cash sale which was not recorded on the books and was stolen by a bookkeeper.
- An embezzlement of unrecorded cash receipts on receivables before they had been deposited into the bank.
- A credit sale which has been recorded twice in the sales journal.
The four-column bank reconciliation is a tool used by auditors to compare the bank statement with the company’s cash records. The four columns are:
- Deposits in transit
- Outstanding checks
- Bank errors
- Book errors
By comparing these columns, the auditor can identify discrepancies between the bank statement and the company’s cash records. For example, if a check was written at the beginning of the month but was not recorded in the company’s cash records, the auditor would be able to detect this discrepancy by comparing the outstanding checks on the bank statement with the company’s cash records. Similarly, if a cash sale was not recorded on the books and was stolen by a bookkeeper, the auditor would be able to detect this discrepancy by comparing the deposits in transit on the bank statement with the company’s cash records.
However, the four-column bank reconciliation is not foolproof and may not detect all discrepancies. For example, if an employee embezzled cash receipts on receivables before they had been deposited into the bank, the auditor would not be able to detect this discrepancy using the four-column bank reconciliation.
Therefore, the correct option is 3).