Final answer:
The most likely explanation for the majority of checks listed as outstanding at year-end not having cleared the bank is that the year-end cash disbursements records were held open past year-end. These checks are then not presented and recorded by the bank in a timely manner.
Step-by-step explanation:
During the testing of a year end bank reconciliation, an auditor noticed that the majority of checks listed as outstanding at year-end had not cleared the bank. The likely explanation for this situation could be that the year-end cash disbursements records had been held open past year-end. If the records had been held open past year-end, it means that checks issued just before the year's end may be recorded in the following year's accounting records. This can lead to checks that are outstanding longer than they should be, as they are not promptly presented and recorded by the bank.
Regarding the information for reference:
- The money listed under assets on a bank balance sheet may not actually be in the bank because these assets can include outstanding loans made to customers, which signifies money the bank has a right to but doesn't currently possess physically. Money in transit or in the process of collection could also be a reason.
- When buying loans in the secondary market, the price you would pay for a given loan might be:
- Less if the borrower has been late on a number of loan payments as this indicates a higher risk of default.
- Less if interest rates in the economy as a whole have risen since the bank made the loan, meaning the loan's fixed interest rate might be lower than current market rates.
- More for a firm that has just declared a high level of profits as this suggests the firm is in a better position to fulfill its loan obligations.
- More if interest rates in the economy as a whole have fallen since the bank made the loan, given that the higher interest rate of the loan becomes more valuable.