Kiting is where, in the bank account of one entity within a group of companies, a cheque is drawn on balance date payable to another entity within the group but is recorded in the general ledger of the first entity as a disbursement that occurred after balance date. The cheque is then recorded as a deposit in the bank account of the second entity on balance date and appears as an outstanding deposit in the reconciliation of that entity's general ledger "cash at bank" account with the bank statement. Kiting may also take place within the one entity, where the entity has more than one bank account.




For example, consider the general ledger bank accounts of a group comprising entity A and entity B with a balance date of December 31. The same employee is responsible for drawing cheques on the bank accounts of both entities, and is also responsible for the reconciliation of the balance in the bank accounts in the general ledger with the balance on the bank statements. On December 31, a cheque is drawn on A's bank account payable to B for an amount of 60 but is recorded in the general ledger of A as a disbursement that occurred after balance date. The cheque is treated by B as an outstanding deposit as at December 31, and deposited into B's bank on January 1. The general ledger accounts for cash at bank would appear as follows:



Entity A - Cash at bank





Entity B - Cash at bank

Dec 30

Balance

100


Dec 30

Balance

100

Dec 31




Dec 31

Deposit from A

60

Dec 31

Balance

100


Dec 31

Balance

160

Jan 1

Cheque to B

60


Jan 1



Jan 2

Balance

40


Jan 2

Balance

160


The group financial statements based on the above recorded values will show total cash at bank of 260 at year end, whereas the correct amount is 200. Note that the same principle applies to one entity that has more than one bank account.
The auditor can detect this form of kiting by ensuring any outstanding deposit appearing on a bank reconciliation at balance date that arises from an inter-entity cheque (in the example, the deposit from A of 60) is also recorded by the paying entity as a cheque drawn prior to balance date (and not, as shown above, as a cheque drawn after balance date).

Clients can reduce the risk of this type of fraud by ensuring that persons responsible for authorizing or signing cheques are not also responsible for the preparation of the reconciliation of the general ledger "cash at bank" account with the bank statement (in other words, by ensuring organizational independence).

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Exercises

1 - Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting?
a) Review composition of authenticated deposit slips.
b) Review subsequent bank statements and canceled checks received directly from the bank.
c) Prepare a schedule of bank transfers from the client's books.
d) Prepare year-end bank reconciliations.

2 - 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 otherwise not be discovered.
c) Seeks information about indebtedness to the bank.
d) Verifies securities held by the bank in safekeeping.

3 - An auditor should trace bank transfers for the last part of the audit period and first part of the subsequent period to detect whether
a) The cash receipts journal was held open for a few days after the year end.
b) The last checks recorded before the year end were actually mailed by the year end.
c) Cash balances were overstated because of kiting.
d) Any unusual payments to or receipts from related parties occurred.

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Friday, July 7, 2006
Carrollton hit with $1.2M loss in kiting scheme

Baltimore Business Journal - by Rachel Sams Staff

Carrollton Bancorp said Friday afternoon that it will record a $1.2 million after-tax loss because it was defrauded by a commercial customer.



Carrollton CEO Robert Altieri confirmed in an interview that the customer is A&B Check Cashing of Baltimore. Carrollton will recognize the loss in its second-quarter, which ended June 30.

"It will basically eliminate our earnings for the second quarter," Altieri said. But, he added, "fortunately for us, we have earnings to support this loss." In a news release, Carrollton said it is financially sound, with net income of $886,000 for the first six months of the year even after recognizing the $1.2 million loss.

A&B was involved in a "check-kiting" scheme, Carrollton said, in which a company writes worthless checks that are exchanged between banks. For example, a company might kite checks by writing a check drawn against one empty bank account and depositing it into another empty account. If the company's credit at the second bank is good, it would be allowed to draw money against the newly deposited check before it is sent back to the first bank for payment.

"They were moving money from one account to the next, and whenever the musical chairs stopped, they didn't have any money," said Altieri.

Last week, Baltimore County Savings Bank (NASDAQ: BCSB) said it would record a $6.9 million after-tax loss because it had been the victim of a check-kiting scheme by a commercial customer. Baltimore County Savings Bank officials have declined to name the customer.

On June 28, A&B Check Cashing -- also known as Colleen Inc. -- filed Chapter 11 bankruptcy in U.S. District Court in Baltimore. In its bankruptcy petition, A&B said it owed $5 million to Baltimore County Savings Bank, $5 million to Carrollton Bank and $1.8 million to Global Express Money Orders of Silver Spring.

A&B's bankruptcy filing came six days after co-owner Alec Satisky was found dead in a back office at the company. Baltimore City Police responded that afternoon to a call saying a man had shot himself at A&B's office, said spokesman Troy Harris. Satisky, 57, was pronounced dead at the scene, Harris said. Alec Satisky's brother Brian, co-owner of the business, was interviewed at the scene and said his brother had talked about killing himself because their businesses were ruined financially, Harris said.

Attorney Marc Kivitz, who is representing A&B in the bankruptcy case, said he could not comment on Carrollton's report of the check-kiting loss.

The day after A&B filed bankruptcy, the Maryland Commissioner of Financial Regulation ordered A&B to stop operating. The commissioner's office began investigating after receiving a complaint from a bank about A&B, spokeswoman Liz Williams said this week. Her office ordered A&B to shut down after finding that it owed large amounts of money to Baltimore County Savings Bank, Carrollton Bank, Farmers and Merchants Bank in Upperco and Global Express. A&B had already begun closing its offices before the order, Williams said, and has agreed to voluntarily relinquish its check-cashing license.

Williams said her office's investigation found no evidence that any customers had been harmed. The Commissioner of Financial Regulation referred the matter to the FBI, she said.

Carrollton Bancorp (NASDAQ: CRRB) will "use every legal remedy" in hopes of recovering the money it lost, Altieri said, though he did not yet know what those options might be. Carrollton expects the recovery process will be a long one, Altieri said.

On June 23, Global Express Money Orders entered a $1.8 million complaint for confessed judgment against Colleen Inc., Alec Satisky and his wife, and Brian Satisky in Baltimore City Circuit Court. In a confessed judgment, a party that borrows money agrees that if he defaults on the agreement, a judgment will be entered against him in court for the amount he owes.

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Other Matching Articles fo "audit kiting"
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1 - Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting?

b) Review subsequent bank statements and canceled checks received directly from the bank.

2 - 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

c) Seeks information about indebtedness to the bank.

3 - An auditor should trace bank transfers for the last part of the audit period and first part of the subsequent period to detect whether

c) Cash balances were overstated because of kiting.

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