A real estate agency's trust account reconciliation reveals a shortage of $5,000 that cannot be immediately explained. What should the agency do?
Correct Answer
B) Investigate at once and make good the shortfall so client money is fully covered
Trust money belongs to clients and may be paid only to the person entitled (s 122 of the Real Estate Agents Act 2008), so an unexplained shortfall must be investigated at once and restored from the agency's own funds. The agency's auditor, who examines the trust account at least three times a year, must promptly report any deficiency to the Real Estate Authority under regulation 23 of the Real Estate Agents (Audit) Regulations 2009.
Why This Is the Correct Answer
Trust money belongs to clients and may be paid only to the person entitled (s 122 of the Real Estate Agents Act 2008), so the agency must find out at once why the account is short and restore the missing money from its own funds. The auditor, who examines the account at least three times a year, must promptly report any deficiency to the Authority (Audit Regulations reg 23).
Why the Other Options Are Wrong
Option A: Leave it until the auditor's next scheduled examination, when the auditor will resolve it
The shortfall is the agency's responsibility now; waiting months for the auditor leaves client money unaccounted for.
Option C: Freeze the trust account and write to every client with money held in it
Freezing the account would stop legitimate payments to clients and does nothing to find or fix the shortfall.
Option D: Cover the gap by moving money temporarily from another client's ledger balance
Using one client's money to cover another's shortfall is itself a breach; each client's funds must be held for that client (s 122).
Deep Analysis of This Compliance Question
A reconciliation shortfall means some client's money is not there. The agency's job is to fix that immediately, from its own money, and to find the cause: a banking error, a mis-posted receipt, or something worse. Covering it from another client's balance simply moves the hole. The regulatory reporting line runs through the auditor, who must report deficiencies to the Authority, so an agency that sits on a shortfall will be found out.
Background Knowledge for Compliance
Sections 122 to 125 of the Real Estate Agents Act 2008 govern money held by agents: it must be banked in a trust account, paid only to the person entitled or as they direct in writing, held for at least 10 working days (s 123), accounted for (s 124) and audited (s 125). The Real Estate Agents (Audit) Regulations 2009 require at least three auditor examinations a year and oblige auditors to report defaults and irregularities, including any deficiency, to the Authority.
Memory Technique
Trust shortfall: Find the cause straight away, and Fund the gap from the agency's own money. Never borrow from another client's balance.
Use it for any question about an unexplained trust account shortage discovered by the agency itself.
Exam Tip for Compliance
An agency that finds a trust shortfall investigates and restores it at once; the auditor, not the agency, has the statutory duty to report deficiencies.
Real World Application in Compliance
A month-end reconciliation shows the trust account $5,000 short. The principal pays $5,000 from the office account into trust the same day, then traces the gap to a refund paid twice. The auditor reviews the matter at the next examination and reports it to the Authority as the regulations require.
Common Mistakes to Avoid on Compliance Questions
- •Believing the agency has a statutory duty to notify the Authority before doing anything else
- •Covering the shortfall with another client's money
- •Waiting for the auditor to find and fix the problem
Related Topics & Key Terms
Key Terms:
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