Audit and Assurance Practice Exam

What is the primary action needed to test a client's bank reconciliation for a note collected by the bank at year-end?

1. Review the bank's audit report

2. Inspect documentation related to the bank's credit memo

3. Check cash balance against the general ledger

4. Conduct interviews with bank personnel

The correct answer is: Inspect documentation related to the bank's credit memo

The primary action needed to test a client's bank reconciliation for a note collected by the bank at year-end is to inspect documentation related to the bank's credit memo. When a bank collects a note on behalf of a client, it typically credits the client's account with the amount collected, often issuing a credit memo. To ensure that this collection has been properly recorded in the client's accounting records, an auditor will inspect the documentation that supports this transaction. Inspecting the credit memo allows the auditor to confirm the amount collected by the bank and verify that it aligns with what the client has recorded as income or receivables. This documentation serves as evidence that the transaction occurred and provides details on the collection process, making it a crucial step in validating the accuracy of the bank reconciliation. Additionally, reviewing the bank's audit report or checking the cash balance against the general ledger may be useful in the audit process but would not specifically address the note collection issue. Conducting interviews with bank personnel could provide insights but does not substitute for the need to verify the actual documentation related to the collection. Thus, focusing on the credit memo documentation is essential to effectively testing the bank reconciliation for the note collected.