How to Perform a Bank Reconciliation Audit

A bank reconciliation audit confirms the accuracy of an entity’s cash records against the bank’s independent statements. This process compares the cash balance in the company’s accounting records, or general ledger cash account, with the balance reported by the bank at a specific point in time. The objective is to identify and resolve any differences.

Bank reconciliation is a fundamental internal control. It verifies that all cash transactions are properly recorded, reducing the risk of financial misstatements. Regularly performing this reconciliation helps detect errors, such as duplicate entries or missed payments, and uncover potential fraud, including unauthorized transactions or theft. This review ensures the integrity of financial data for accurate reporting and compliance.

Preparing for the Bank Reconciliation Audit

Beginning a bank reconciliation audit requires careful preparation, ensuring all necessary documentation is readily available. The initial step involves identifying the specific bank account and the precise period under review, typically a month. This focus helps streamline the audit process.

Gathering key documents is part of this preparatory phase. The official bank statement for the designated period is a primary document, providing an external record of all transactions and the bank’s ending balance. Access to the company’s internal accounting records, specifically the general ledger cash account for the same period, is necessary; this record reflects the company’s cash inflows and outflows and its ending cash balance.

Previously prepared bank reconciliation statements for the preceding period are valuable. These offer insights into timing differences or outstanding items that may impact the current reconciliation. Understanding the company’s internal policies and procedures related to cash handling, recording, and reconciliation is also important, as these provide context for how transactions are managed.

Verifying the Bank Reconciliation

Once preparatory documents are assembled, verification of the bank reconciliation commences by systematically comparing the company’s records with the bank statement. This process begins with reconciling the bank statement’s ending balance to the general ledger cash balance, identifying initial differences. Every transaction on the bank statement must be cross-referenced with the corresponding entry in the company’s cash records, and vice versa.

Deposits in transit, which are cash receipts recorded by the company but not yet reflected on the bank statement, are verified by tracing them to the subsequent month’s bank statement. Auditors confirm that these deposits cleared the bank within a reasonable timeframe. Similarly, outstanding checks, which have been issued and recorded by the company but have not yet been presented to the bank for payment, are identified. These checks are verified by examining the bank statement for their eventual clearing or noting them as still outstanding.

Other reconciling items also require review. This includes bank charges, such as service fees or electronic transfer fees, which appear on the bank statement but may not yet be recorded in the company’s books. Interest income earned on the account needs to be identified on the bank statement and properly recorded. Non-Sufficient Funds (NSF) checks, which are checks received by the company but returned by the bank due to insufficient funds, must be confirmed and appropriate adjustments made. Any identified errors in either the bank’s records or the company’s books are noted for correction.

Investigating Discrepancies and Documenting Outcomes

Upon identifying discrepancies, a thorough investigation begins to understand the nature and cause of each difference. This involves reviewing supporting documentation for affected transactions, such as deposit slips or check images, to confirm their validity and accuracy. Inquiries with relevant personnel, like those responsible for cash receipts or accounting entries, are often necessary to gain clarity on unusual items or missing information.

The investigation aims to determine if discrepancies result from timing differences, errors in recording, or potential unauthorized activities. Any identified errors in the company’s records necessitate a journal entry to correct the cash balance and ensure accurate financial statements.

Documenting the audit findings is an important step. This involves preparing comprehensive audit working papers that detail each discrepancy, the investigation steps, and the ultimate resolution. These papers should clearly show how the bank balance was reconciled to the company’s book balance, including all adjustments made. The overall assessment of the bank reconciliation’s accuracy is then summarized, noting any internal control weaknesses or recommendations for improvement. This detailed documentation provides an audit trail and supports the conclusions reached regarding the integrity of the cash account.