Question

An auditor ordinarily should send a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balance, because this procedure

A. Provides for confirmation regarding compensating balance arrangements
B. Detects kiting activities that may not otherwise be discovered
C. Seeks information about indebtedness to the bank
D. Verifies securities held by the bank in safekeeping

Answer 1

The standard confirmation request sent by auditors to banks seeks information about a client's indebtedness, as well as details on other financial arrangements and activities, to ensure accurate financial reporting and system integrity.

Step-by-step explanation:

An auditor ordinarily should send a standard confirmation request to all banks with which a client has conducted business during the year being audited, regardless of the year-end balance. This audit procedure primarily seeks information about indebtedness to the bank. By doing so, the auditor can obtain confirmation regarding various aspects such as compensating balance arrangements, potential kiting activities, and the verification of securities held by the bank in safekeeping. This practice is crucial in ensuring that the financial statements reflect the true financial position of the client.

Bank supervision is conducted by various government agencies, such as the Office of the Comptroller of the Currency, which monitors banks and savings and loan institutions to ensure they maintain a positive net worth and do not take excessively high risks. The balance sheets of banks include assets like loans and bonds, and liabilities such as deposits, highlighting the importance of meticulous auditing procedures to safeguard the financial system.

Answer 2

Auditors send a standard confirmation request to all banks the client has interacted with over the year to confirm compensating balance arrangements, which could reveal material financial information for audits.

Step-by-step explanation:

An auditor sends a standard confirmation request to all banks with which a client has dealt during the fiscal year in order to seek information about various banking relationships and unconditionalities. The correct answer here, relates to confirming information regarding compensating balance arrangements.

This procedure helps auditors verify that the client has maintained any required compensating balances, which are often stipulated in loan agreements to offset the cost of a bank's services or as a requirement for obtaining a loan. Confirmation requests might also reveal undisclosed liabilities, arrangements, or other financial transactions between the bank and the client that could be material to the financial statements and are therefore relevant to the audit process.

While confirmation requests might indirectly help in uncovering kiting activities or validating securities, these are not the primary reasons for sending confirmation requests to every bank where the client has had transactions during the year. The main purpose is to obtain direct bank confirmation for financial reporting integrity and disclosure completeness.