How to Check Bank Reconciliations

Your audit customer will prepare bank reconciliations, which compare and adjust its cash balance per its bank statements with its book cash balances. When you audit the bank reconciliations, you must make sure your customer adjusts for three things:

• Deposits in transit, which are deposits the company makes that haven’t appeared on the bank statement yet.
• Outstanding checks, which are checks the company has written that haven’t yet cleared the bank account.
• Account charges, which contain any bank charges and customer or vendor electronic transfers shown on the bank statements that haven’t yet remained recorded.

Your job is to check your customer’s bank reconciliations to confirm it has recorded the correct amount of cash on the balance sheet. If your customer doesn’t show correct cash balances on its books, the customer might have misstated revenue or expenses.

This audit process should be fairly easy to do:

1. Get a bank confirmation to verify ending bank account balances. This confirmation also asks the bank to disclose any loan(s) the customer has with the bank, which will come in handy when you authorize liabilities.

2. Get a cutoff bank statement showing transactions that hit your audit customer’s bank statement for the 7- to 10-day period after the end of the financial period.

Trace all deposits clearing on the cutoff statement to the customer’s bank reconciliation. Also, check all checks clearing on the cutoff statement to the outstanding checks on the customer’s bank reconciliation.

3. Discuss any differences between the cutoff statement and the bank reconciliations with client management. You might have to give the customer an adjusting entry to correct mistakes. For instance, if a deposit in transit didn’t clear on the cutoff statement, it most likely wasn’t received by the customer by year-end. The adjustment possibly will result in a reduction to revenue.

4. Confirm all adjusted bank balances agree with what your customer reflects on the balance sheet. The adjusted bank balance is the definite amount of cash in the account. Make sure the customer hasn’t neglected to journalize any corrections to bring the book value of cash to definite.

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