Bank reconciliation
Reconciliation identifies and explains the difference between the total shown on the bank statement and the total in the computerised cash book. Our guide explains the risks and issues of reconciliation, to help you plan your audit.
What is reconciliation?
Why is bank reconciliation important?
How does bank reconciliation work?
Risks and responses
What can internal audit do?
Top 10 things to look out for
What is reconciliation?
The objective of bank reconciliation is to match the cash transactions going through the organisation's accounts, which is likely to be a computerised accounting system, to cash transactions going through the organisation's bank account(s), reflected on bank statements.
Reconciliation, which is normally done monthly, can become complicated due to the volume of transactions, increased reliance upon technology, the number of bank accounts and timing differences between the accounts and bank statements.
For example, a cheque may be posted to the accounts but may not appear on the bank statement at the time of reconciliation, and vice versa.
The reconciliation process therefore identifies and explains the difference between the total shown at the bottom of the bank statement(s) and the total in the computerised cash book, which is recorded as cash at the bank on the balance sheet.
Why is bank reconciliation important?
Bank reconciliation is normally part of the wider routine of reconciling balance sheet totals. In some organisations this may be done monthly, quarterly or at half year point.
Reconciliation of the individual items on the balance sheet to supporting records and reports is therefore an important part of the financial system of internal control as it provides assurance that the accounting records are accurate, complete and up-to-date. Bank reconciliation itself provides an accurate statement of the cash position of the organisation
It is management's responsibility to perform, supervise and monitor the reconciliation process, providing timely reports on financial performance to the board, including assurance that financial information is reliable and accurate.
There are no laws or regulations that require bank reconciliation to be completed it is a process generally recognised as good accounting practice.
How does bank reconciliation work?
The steps involved in the bank reconciliation process are shown in the tables below.
The first step is to adjust the balance on the bank statement to the true, adjusted, or corrected balance.
Typically an organisation's payments are performed using batch processing such a BACS payroll and BACS supplier payment runs based upon predetermined dates. Batch processing minimises the number of transactions on the bank statement but one error in posting to a creditor's bank account by the bank means all the individual payments that form the total will need to be checked.
In the past, the identification of un-presented cheques was time consuming. However, most accounting systems now contain a bank reconciliation module that compares cheques raised in the finance system to cheques presented at the bank.
Use of a bank reconciliation module relies upon the download of data from the bank. Handwritten, 'manual' cheques do not form part of this process and require individual posting to the accounts.
Step 1
Bank reconciliation statement |
Notes |
|
Balance as per bank statement(s) at 31/12/1X £ Adjustments: |
Your organisation may have several bank accounts which may require separate reconciliation. |
| Add deposits in transit | Income received and posted to the accounts but not currently showing on the bank statements |
| Deduct payments in transit | Income received and posted to the accounts but not currently showing on the bank statements |
| Add or deduct banking adjustments | Postings made in the accounts that may have been recorded inaccurately by the bank |
| Revised bank statement position 31/12/1X £ |
Step 2
Bank reconciliation statement |
Notes |
|
Balance as per cash book at 31/12/1X £
Adjustments: |
|
|
Deduct bank fees and other service charges from the cash book total
|
Bank fees and charges shown on the bank statement not recorded in the cash book and the accounts |
| Deduct standing charges from the cash book total | Standing orders or direct debits that are automatic charged to the bank statements not recorded in the cash book and the accounts |
| Deduct returned cheques from the cash book total | Income that has been recorded in the cash book but where the cheque has not been honoured by the debtor's bank - bounced cheque |
| Add interest earned to the cash book total | Interest from the bank recorded on the bank statement not recorded in the cash book and the accounts |
| Add any income shown on the bank statement not recorded in the cash book | Income collected by the bank on behalf of the organisation, where there is no debtor's account in the accounts |
| Add or deduct accounting adjustments | Correction of accounting entries - posting errors or omissions |
| Revised cash book position 31/12/1X £ |
After adjusting the balance per bank (Step 1) and after adjusting the balance per cash book (Step 2), the two adjusted amounts should be equal. If they are not equal, the person responsible for the process usually repeats the steps until the balances are identical.
The balances should therefore be the true, correct amount of cash as of the date of the bank reconciliation.
Risks and responses
Risks will vary from one situation to another. You should review management's risk assessment and assurances, and consider whether controls have been adequately described and assigned.
1. Without bank reconciliation, the organisation may not have a clear idea of how much cash is available.
Possible impact
- Overdraft charges.
- Loss of interest on investing surplus cash.
- Inability to pay employees and creditors.
- Inability to respond to opportunities.
- Loss of confidence in the organisation - customers and stakeholders.
Potential response
- Establishment of bank reconciliation timetable that links into period end balance sheet preparation.
- Full documentation of bank reconciliation procedure.
- Documentation of monthly reconciliation - to include all bank accounts.
- Reporting of consolidated cash position - linked to KPI.
- Comparison of month-end reconciled cash position at the bank to cash flow projections
Possible impact
- Potential, large scale loss of funds.
- Money laundering.
- Adverse publicity with damage to the organisation's reputation.
- An unscheduled visit from regulatory inspectors or third party assurance providers.
- Increased insurance premiums.
- Inability to fund future projects.
Potential response
- Assigned responsibility for monthly bank reconciliation with senior management review and sign-off.
- Limited and authorised use of manual cheques and movement of cash between bank accounts.
- A minimum of two signatories of each bank account.
- Senior management counter-signature required on all transactions over a specified value.
- Use of exception reports to highlight banking transaction outside normal parameters.
- A separation of duties within the Finance team - particularly between posting accounting transaction and to bank reconciliation.
Possible impact
- Potential loss of funds.
- Inaccurate or excessive bank interest and charges.
Potential response
- Use of automated processes such as BACS and bank reconciliation modules that incorporate control totals.
- Tracking, verification and posting of specific transaction types.
- Annual review of the purpose and requirement for all bank accounts - close unused or unnecessary accounts.
Possible impact
- Loss of confidence in the organisation.
- Inability to raise finance.
Potential response
- Authorisation of high value accounting journals and adjustments.
- Monthly review and clearance of accounting transactions posted to holding accounts.
- Avoid reliance upon manual records such as spreadsheet cashbooks and transaction matching. If this occurs rigorously test spreadsheet methods before use - ensure reconciliation between bank accounts, manual cashbook and computer system cashbook.
- Use of error and discrepancy exception reports from the accounting system.
What can internal audit do?
Periodic bank reconciliation is an essential part of good governance as it is a discipline for accurately representing the status of the organisation, as shown in the balance sheet and reflected in the profit and loss statement. The process therefore contains aspects of governance, risk management and control and falls within the remit of the internal audit plan. The organisation will gain value from independent and objective assurance from internal audit.
The decision to include bank reconciliation within the internal audit plan will be determined by a number of factors:
- Where bank reconciliation fits into the wider view of risk exposures.
- Problems that may have occurred in the past.
- Changes in personnel and systems.
- The level of management supervision and assurance.
- The nature and timing of external audit involvement.
In performing a bank reconciliation assurance engagement, the internal auditor should:
- Determine how management has identified, evaluated and responded to risks.
- Review the reliability of management assurances.
- Consider how well risk responses are working.
This will involve understanding how the bank reconciliation process works, 'walking through' the defined steps and verifying the accuracy of selected bank reconciliations.
The internal auditor will need to interview those managers and staff who have responsibility for bank reconciliation and review information, working papers and source documents.
Assuming an audit of bank reconciliation is included in the plan, the internal auditor undertaking the engagement should be competent - have sufficient knowledge and experience and have an appreciation of accounting principles and techniques to perform the review.
This does not mean that the internal auditor should be in a position to complete the bank reconciliation but should be able to recognise the existence of problems or potential problems.
Top 10 things to look out for
- Is the bank reconciliation procedure fully documented with detailed instructions that are easy to follow? This should include standardised documentation.
- Does anyone have responsibility for bank reconciliation? Where bank reconciliation is allocated to a junior member of staff they should be given adequate training and instruction and supervised by a senior manager.
- Is there a monthly timetable for bank reconciliation, which would link into the reconciliation of other balance sheet items? Any delays or gaps in the completion of bank reconciliation may indicate there are problems.
- Are there a large number of bank accounts making bank reconciliation more difficult to complete? Does the organisation really need all these accounts and is this a full list? Asking the bank(s) to provide a full list of bank accounts will help to ensure reconciliation is occurring on all banking transactions.
- Are the bank reconciliation working papers and supporting records easy to follow? The auditor should be able to follow how bank reconciliation is done according to the instructions. If it is difficult to follow the procedure then something is wrong.
- Are there a large number of unexplained accounting adjustments? The proliferation of journals required to complete bank reconciliation may indicate that someone in the accounting process is unsure about what they are doing or could even be the basis of a fraud.
- Are there unnoticed and regular problems with bank accounts? This may indicate problems are arising at the bank(s).
- Are there 'balancing' items to enable a reconciliation. This indicates that the reconciliations does not in fact reconcile so be certain to obtain a full explanation of anything that looks as though it be a balancing item.
- Are reconciliations being made to a spreadsheet cash book rather than the cash balance within the accounting system? If so this is not bank reconciliation unless there is an addition reconciliation and cross check to the computer system total.
- Is there an over reliance on external audit? Bank reconciliation is management's responsibility.