Question

On receiving the bank cutoff statement, the auditor should trace:

1) Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal.
2) Checks dated prior to year end to the outstanding checks listed on the year-end bank reconciliation.
3) Deposits listed on the cutoff statement to deposits in the cash receipts journal.
4) Checks dated subsequent to year end to the outstanding checks listed on the year-end bank reconciliation.

Answer 1

The auditor should verify bank transactions by tracing various items between the bank cutoff statement, bank reconciliation, cash receipts journal, and outstanding checks to ensure accuracy and completeness in the representation of the company's financial statements.

Step-by-step explanation:

When an auditor receives a bank cutoff statement, there are several procedures they perform in order to verify the accuracy and completeness of the bank transactions reported in the financial statements. The auditor should:

1. Trace deposits in transit on the year-end bank reconciliation to the entries in the cash receipts journal to ensure that the deposits in transit were indeed deposited shortly after the year-end and are not stale.
2. Trace checks dated prior to year end to the outstanding checks listed on the year-end bank reconciliation to ensure that these checks were properly outstanding and not cleared prior to year-end.
3. Trace deposits listed on the cutoff statement to the entries in the cash receipts journal to ensure that these deposits were properly included in the bank reconciliation and are reflected in the financial records.
4. Finally, confirm checks dated subsequent to year end against the outstanding checks listed on the year-end bank reconciliation to verify that they have not been erroneously included as outstanding at the year-end.