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Auditing a Company’s Interest-Bearing Bank Accounts

Some accounts can accrue interest. As an auditor, you need to keep track of these accounts as well as cash and investment accounts. Keep in mind that all interest income from all bank accounts must be recorded on the income statement as revenue. Here are three examples of bank accounts that earn interest income:

  • Savings: Your client may have a savings account in order to set aside extra sources of cash that are earmarked for special purposes or to earn interest income. The interest from this type of account is usually calculated based on an average daily balance, meaning the total cash balance in the account at the end of each day during the month is divided by the number of days in the month.

  • Certificate of deposit: With a certificate of deposit (CD), your audit client puts money in an account that can’t be touched for a specified time frame — usually ranging from six months to five years. The interest paid on a CD is usually higher than the rates for other investment-type bank accounts, and the interest rate increases along with the amount of time the account is encumbered.

  • Sweep: A sweep account is a way for a company to automatically earn investment income. The way it works is that each evening, any extra cash in the company’s operating account is gathered up and transferred (swept) into investment accounts. Money from many different companies is pooled into a bigger pot, providing the advantage of a higher rate of return. When a company needs the money back to cover checks and withdrawals, the money is swept back into its operating account.

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