Interbank Transfer Schedules and Kiting Detection: A Year-End Cash Cutoff Test

Money that moves between the client's own bank accounts near year end can be counted twice or not at all. A transfer recorded as a deposit in one account on December 31 but as a withdrawal from the other account on January 2 inflates cash by the transfer amount. At the extreme, a client may run a kiting scheme, writing checks between accounts at different banks to cover balances that do not exist. The test is a simple schedule. It belongs in every audit with more than one bank account.

What the schedule does

The interbank transfer schedule lists every transfer between the entity's own accounts in a window around year end. For each transfer it records the date each side hit the books and the date each side cleared the bank. The test is that each transfer is recorded in the same period on both sides, and cleared in a way that is consistent with the books.

Cutoff matters because the net effect of an in-transit transfer should be zero. If the recording dates fall on either side of year end, cash is overstated or understated by the transfer amount, with a matching misstatement elsewhere.

Step 1: Set the window

Cover the last week or two before year end and the first week or two after. For clients with a history of problems or heavy cash movement, widen the window. Include all bank accounts in the entity, including accounts at the same bank, accounts of affiliates and subsidiaries that sweep to the parent, and credit card or line of credit payments made from operating cash.

Step 2: Pull the data from three sources

• The cash disbursements and cash receipts journals for the window, searched for transfers, internal checks and wires.
• Bank statements for each account for the window and one month after, obtained directly from the bank or from the confirmation process.
• The year-end bank reconciliations and the outstanding items listings.

Search the books for descriptions such as "transfer", "wire", "from savings", "to payroll", and for payee names that match the entity or its affiliates. Compare amounts that appear as a disbursement in one account and a receipt in another.

Step 3: Build the schedule

Step 4: Evaluate each line

For each transfer, ask:

1. Is the disbursement recorded in the same period as the receipt?
2. If the item is in transit at year end, is it on the reconciliation of the sending account as an outstanding check, and is the corresponding receipt included in the receiving account's book balance?
3. Did the transfer clear the sending bank in the period you expect from the check date?
4. Does the transfer have a business purpose?

Transfer 3 fails. The receipt is in the year and the disbursement is in the new year, so total cash at year end is overstated by $180,000. The adjustment: record the disbursement from Reserve at December 31, reducing cash. Net effect on the balance sheet is a $180,000 reduction in reported cash.

Transfers 2, 4 and 5 are recorded in the year on both sides, so book cash is right. But each left a check outstanding at year end while the receiving bank had already credited the deposit. Tie the schedule to the reconciliations: outstanding checks are $475,000 on Operating ($400,000 from transfer 2 and $75,000 from transfer 4) and $120,000 on Subsidiary (transfer 5), $595,000 in total. Bank balances at year end include that amount twice until the checks clear in early January.

Transfers 4 and 5 deserve the closer look. Money moves in a circle between the same two accounts: $75,000 out of Operating and $120,000 back, with both checks clearing in the new year. That is allowed when the transfers are real. It is a kiting indicator when the same pattern repeats each month.

Step 5: Look for kiting patterns

Check kiting needs float. The schemer deposits a check from account A into account B before the check clears, and the balance in B is available against it. The pattern repeats with growing amounts between the same accounts. Indicators:

• Large, frequent transfers between accounts at different banks with round amounts.
• Deposits that appear in an account before the matching disbursement posts at the other bank.
• A pattern of checks clearing after year end that were deposited before year end.
• Bank account balances that stay low, with large deposit and withdrawal activity.
• Unusual bank notices, returned items or overdraft charges.

If the schedule shows a pattern, expand the window to the whole year, request a bank confirmation on every account and discuss with the engagement partner. The matter belongs under AU-C 240 as a fraud risk, and under AU-C 260 for communication to governance.

Step 6: Window dressing

A related practice is holding the books open a few days to count January receipts as December cash, or recording a transfer in the year while delaying the other side. The schedule catches the transfer variant. Test receipts cutoff separately: compare the last day's receipts to the daily average, and look for receipts recorded in December that appear on the January bank statement as deposits.

What to document

• The window and why it was chosen.
• Sources for each side of each transfer and the tick marks.
• The completed schedule with the conclusion on each line.
• Adjusting entries for lines that fail.
• Discussion of any kiting indicators with the partner.
• Cross-reference to the bank reconciliations and the cash lead schedule.

See bank reconciliation testing and cutoff testing for the related procedures.

CORAA prepares ready-to-review audit files for US CPA firms; the firm keeps the client, the review and the signature. See /us.

Sources

• AICPA, AU-C Section 330, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained; AU-C Section 240, Consideration of Fraud in a Financial Statement Audit
• AICPA, AU-C Section 505, External Confirmations

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error