How to Check Bank Reconciliations
Your audit client 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 client 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 include any bank charges and customer or vendor electronic transfers shown on the bank statements that haven’t yet been recorded.
Your job is to check your client’s bank reconciliations to make sure it has recorded the correct amount of cash on the balance sheet. If your client doesn’t show correct cash balances on its books, the client may have misstated revenue or expenses. This audit procedure should be fairly easy to do:
Get a bank confirmation to verify ending bank account balances.
This confirmation also asks the bank to disclose any loan(s) the client has with the bank, which will come in handy when you confirm liabilities.
Get a cutoff bank statement showing transactions that hit your audit client’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 client’s bank reconciliation. Also, check all checks clearing on the cutoff statement to the outstanding checks on the client’s bank reconciliation.
Discuss any differences between the cutoff statement and the bank reconciliations with client management.
You may have to give the client an adjusting entry to correct mistakes. For example, if a deposit in transit didn’t clear on the cutoff statement, it most likely wasn’t received by the client by year-end. The adjustment probably will result in a reduction to revenue.
Make sure all adjusted bank balances agree with what your client reflects on the balance sheet.
The adjusted bank balance is the actual amount of cash in the account. Make sure the client hasn’t neglected to journalize any corrections to bring the book value of cash to actual.
Accounting Glossary
accounting equation
The equation Assets = Liabilities + Equity, which demonstrates the two-sided nature of accounting and is useful for explaining the concept of double-entry accounting (or double-entry bookkeeping).
Accounting Glossary
accounting period
The time period for which financial information is being tracked in a business, such as monthly, quarterly, or annually.
Accounting Glossary
accounts receivable
An account that records the amounts that customers owe to a business.
Accounting Glossary
adjusting entry
A correction made to a bookkeeping account that adjusts for accounting errors or other necessary changes at the end of the accounting period.
Accounting Glossary
cash flows
Used to describe the source or sources of cash or how cash is used.
Accounting Glossary
Chart of Accounts
A list of all the accounts used by a business, including what types of transactions go into each account.
Accounting Glossary
debit
An accounting entry that increases an asset or expense account, and decreases a liability or income account.
Accounting Glossary
dividends
A portion of a company’s profits paid by share of common stock on a quarterly or annual basis.
Accounting Glossary
FASB
Financial Accounting Standards Board. FASB is the highest-ranking authority in the private (non-government) sector of the U.S. for making pronouncements on GAAP and for keeping accounting standards up-to-date.
Accounting Glossary
Federal Unemployment Tax
In the U.S., the fund that used to be known simply as Unemployment. Employers contribute to the fund, and states also collect taxes to fill their unemployment fund reserves. (The acronym FUTA means Federal Unemployment Tax Act.)
Accounting Glossary
fidelity bonds
A type of insurance — typically carried by employers for their employees — that helps guard against theft and reduce the risk of loss.
Accounting Glossary
FIFO
First-in, first-out. A method for costs of goods sold in which a business charges out product costs to cost of goods sold expense in the chronological order in which the goods were acquired.
Accounting Glossary
fungible
Describes a product that is interchangeable and virtually indistinguishable from another product.
Accounting Glossary
General Ledger
A summary of all of a business’s accounts and transactions.
Accounting Glossary
IASB
International Accounting Standards Board. The IASB (based in London) is the main authoritative accounting standards setter outside the U.S.
Accounting Glossary
Journals
The location in which bookkeepers keep records (in chronological order) of daily company transactions.
Accounting Glossary
LIFO
Last-in, first-out. A method for costs of goods sold that selects the last item you purchased first, and then works backward until you have the total cost for the total number of units sold during the period.
Accounting Glossary
LLP
Limited liability partnership. A legal structure that state laws offer to qualified professionals in which all the partners have limited liability.
Accounting Glossary
PC
Professional corporation. A legal structure that state laws offer to qualified professionals who otherwise would have to operate as an unlimited partnership liability.
Accounting Glossary
petty cash
A cash account that businesses keep on hand for unexpected expenses.
Accounting Glossary
revenue
Monies that are collected in the process of selling a company’s goods and services.
Accounting Glossary
salvage value
The amount that an asset is worth after it has been fully depreciated.
Accounting Glossary
statement of cash flows
A financial statement that summarizes a business’s cash inflows and outflows during an accounting period.
Accounting Glossary
transactions
Economic exchanges between a business or other entity and the parties with which the entity interacts and makes deals.
Accounting Glossary
worker’s compensation insurance
A type of insurance carried by employers that covers its employees in case they are injured on the job.
