Final answer:
A cutoff bank statement is a bank statement provided for a specific period around the fiscal year-end, used by auditors to ensure the accuracy of financial statements. It allows the verification of cash transactions and serves as a control mechanism to prevent discrepancies in the audit of cash.
Step-by-step explanation:
A cutoff bank statement is a partial-period bank statement and the corresponding cancelled checks, typically sent directly to the auditor by the bank at the end of the audit period. This document covers a specific period in time, often a few days before and after the fiscal year-end. Its primary purpose in the audit of cash is to help auditors verify the proper recognition of banking transactions near the fiscal period end, thereby ensuring that the cash balances reflected in the financial statements are accurate and complete.
During an audit, auditors will examine the cutoff bank statement to compare recorded transactions in the company's books against the actual bank transactions. This enables them to check whether checks issued by the company before the end of the fiscal year were presented for payment at the bank relatively promptly and if deposits recorded shortly before year-end were made timely and in the correct amount.
The use of a cutoff bank statement prevents the double-counting of assets or transactions and helps identify any unusual delays in check clearing or deposits, which could be indicative of cash flow problems or potential fraudulent activity. It's a preventive and detective control mechanism which ultimately contributes to the reliability of the financial statement audit.