In the audit of Wheat, Inc., for the year ended December 31, you discover that the client had been drawing checks as creditors’ invoices became due but had not been mailing the checks immediately. Because of a working capital shortage, some checks have been held for two or three weeks.
The client’s controller informs you that unmailed checks totaling $48,500 were on hand at December 31 of the current year. He states that these December-dated checks had been entered in the cash disbursements journal and charged to the respective creditors’ accounts in December because the checks were prenumbered. However, these checks were not actually mailed until early January. The controller wants to adjust the cash balance and accounts payable at December 31 by $48,500 because the Cash account had a credit balance. He objects to submitting to his bank your audit report showing an overdraft of cash.
Discuss the propriety of adjusting the cash balance and accounts payable by the indicated amount of outstanding checks.