[md27]

Hi Everyone,

I feel like I need a solid explanation on what kiting is because I keep missing MCQ’s on this topic. I don’t understand how this is a risk as it seems like it would be a book issue and not a bank issue, and we would catch a difference between the two when we confirm 100% of the cash accounts. Shouldn’t we see exactly what they’re doing when we investigate the difference? Maybe I’m not understanding it correctly. Any help would be appreciated.

[aaronmo]

It's something that with electronic payments is increasingly less important, but it's actually an issue for both.

So think of it as a timing difference that just gets perpetually played with…the check kiter is likely to try and cover tracks later by changing another account, maybe inventory. In a smaller company without proper controls, the amount might just get written off to retained earnings…or distributions. It's hard to understand this within the context of an academic world where everything works correctly and the text questions provide you all information. In the real world, people don't remember what a check was for…and/or it's done on estimates. It's much uglier…and, in that environment, the kiting might not be noticed.

From an MCQ perspective, the important piece is to remember what the proper controls are to eliminate kiting and to understand what the mechanics are. Don't over think it…because you're right, in a clean, text book world…it's a temporary timing difference that will be reconciled. Or reconciled through additional manipulation.

Also keep in mind, real world, the types of people who might do this:

The desperate person. An addict type. It's not rational…it will eventually get resolved…but the person is focused on RIGHT NOW, not tomorrow. That's actually the smaller threat.

A true higher up looking to take money out of the company…who, especially without audits/controls, will cover his tracks nearly perpetually.

[Allsheneededwassome]

What helps me with these questions is that I try to find overlapping dates for the checks. Anytime cash appears in both banks at the same time – Kiting likely happened. A bank transfer schedule and bank cutoffs are great audit techniques.

Bank Transfer Schedule:
For bank to bank transfers, the disbursement date on the check and the corresponding disbursing account should PRECEDE the receipt date in the second bank and in the ledger for the receiving account.

Bank Cutoff statement:
Any outstanding and deposit in transit on the bank rec should be verified to make sure they cleared in the next period. This should be done 7-14 days after balance sheet date because while the checks are still in transit BOTH accounts will reflect the cash which is an overstatement and therefore FRAUD.

[Author]

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