- This topic has 9 replies, 9 voices, and was last updated 6 years, 2 months ago by Anonymous.
November 13, 2010 at 12:27 am #15904132CPAParticipantNovember 13, 2010 at 12:36 am #686263potatogunParticipant
You are fraudulently overstating cash by making it seem like there is cash in two places at once. Obviously overstatement of cash is relevant to auditing…November 13, 2010 at 1:01 am #686264AnonymousInactive
^ what he said. To put it simply, you have 2 separate bank accounts (each with their own individual checkbooks). Bank account A has a balance of $100, and Bank account B has a balance of $0. You write a check on 12/30 from A's account and deposit it at B.
On 12/31, B will have a balance of $100 (from the deposit), and A will still have a balance of $100 (because the check is still in transit, and hasn't hit your account at A yet).
Say on 1/03 of the next year, the check finally hits A and you will have the correct balances of $0 at A and $100 at B, but as of 12/31 you are fraudulently reporting $200 in total cash.
So I guess in terms of auditing, you'd need to look at the checkbooks and bank statements of both accounts, paying attention to the dates of the transactions.November 13, 2010 at 3:23 am #686265PleasePassParticipant
what everyone has said above is correct, and, in terms of audit procedures, what the auditor does to detect kiting would be to obtain cutoff bank statements. These usually show the 7-14 days following the balance sheet date. By this date (the date of the cutoff bank statement) withdrawals and deposits would have occurred therefore you can get a sense of the true cash balance of your client. I guess you could say this tests the existence of cash (since you're worried about overstatement of an asset)November 13, 2010 at 11:55 am #686266AnonymousInactive
Check kiting is like If I write you a check for $50.. my bank account will still show $50 in my account (because the bank does not know I wrote the check and of course it hasn't been presented to my bank for payment)
You deposit the check, so YOUR bank account will show a positive of $50.. … so we will both show a +$50 while the check is in transit. It only happens for a day or sooo.
Now imagine if I had two bank accounts in my name at two seperate banks in 2 seperate ends of the world and I write one bank account a check from the other bank account. While the check is in transit (could be days), BOTH of my bank accounts will show I have money in them when in reality I'm still waiting for the one check to clear and show that one account actually has less than it does.
This is also FRAUD from a personal non-business stand point. If I write a check from A, deposit it in B then quickly withdraw it from B. That is kiting aka stealing! I believe you can go to jail for it. People can get really creative and continue to write a check from B to C, C to D, D to E and end up overstating numerous bank accounts and withdrawing money from accounts from pending deposits. Don't think the Bank doesn't let you withdraw cash from a deposit that hasn't cleared, Chase will allow you to do this up to a certain odd dollar amount.. I think it's like $405 or something weird.
I hope this helps!November 13, 2010 at 12:17 pm #68626732CPAParticipant
Thanks a lot! That is very helpful!August 8, 2013 at 7:26 am #686268AnonymousInactive
Thanks everyone, i needed the explanation. 🙂August 8, 2013 at 2:25 pm #686269
Kiting — verb — a leisurely activity that is unavailable to CPA-candidates, as they are stuck inside with their books 😉August 8, 2015 at 4:16 am #686270lysol12345Participant
Kites float in the air. Check kiting is taking advantage of the float (the time it takes to clear funds) to overstate your balance sheet's cash or bank balances.August 8, 2015 at 7:30 pm #686271AnonymousInactive
@CPA Someday All banks are federally required to make at least a portion of the funds available the same day and the next day, even if they haven't gotten it cleared through yet. I believe when I worked in banking it was $100 same-day and $100 next-day, so $200 total, but I'm sure the amounts and timing have changed as the years go on. I was at the bank when it changed from just $100 to $100 each day for $200 total, so sure it's changed more since then.
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