Assume that you are auditing a small bank that uses the cash basis of accounting to record interest on its customers’ accounts and uses the accrual basis of accounting for interest earned on its investments.

a. If most of the bank’s investments were earning daily interest, while most of the bank’s customers had their money invested in five-year certificates of deposit, do you think that the income reported by the bank represents a fair or useful measure of accomplishment? Why?

b. Reconsider your prior answer. What if you find out that most of the five-year certificates of deposit had just been issued? What if you find out that the bank issued and redeemed the same number of five-year certificates every month? How do the issues of timing or renewal cycles affect your view of this situation? p-968