Author: Neil Conway
Many users will use ClearRec to help reconcile bank statements in preparation for a financial statement audit. It may be that bank reconciliations are the most important preparation tool for any audit. Many users, though, tend to focus on the wrong aspects of a bank reconciliation in their preparations.
Let’s start with the ultimate goal of an audit. An auditor is tasked to examine your financial records on a test basis to form an opinion about those financial records. They are not there to nitpick the format nor complain about recording a $5 invoice to miscellaneous expense. A bank reconciliation is an important tool to provide an auditor evidence that you have in fact properly maintained financial records.
Given the amount of misinformation about the bank reconciliations role in the audit, I will give you the top five misconceptions about auditing bank reconciliations:
1) The auditor is very concerned about the format of the bank reconciliation report.
Users seem to be very concerned about which report style they use. Do you use the AICPA recommended format? Will the book to bank method work?
I have yet to meet an auditor that wants more than a clear concise listing of the differences between your book and bank balances. In other words, they are more concerned about whether your bank reconciliation works than they are about the format you use.
2) If I am off by a penny, the auditor will consider the bank reconciliation improper. A penny error can mean that two very large inflows and outflows were simply off by a penny.
ClearRec is not designed to allow you to show a penny difference on your bank reconciliation summary. However, I have never seen a scenario where a penny difference meant that someone had severe bank reconciliation issues. Auditors use a concept called materiality. If a mistake is below a certain amount (determined by the auditors judgement), then they do not make an issue of the error.
3) I need to write off all of my outstanding items.
The more appropriate action is to monitor your outstanding items. An outstanding items is one that cleared your accounting system but has not cleared the bank. Most accountants would advise that you write off (or escheat if you are a government) any check over a year old. In fact, banks tend not to honor year old checks. If your checks are less than 90 days old, it is acceptable to almost any auditor to have them listed appropriately as outstanding.
4) We trust fellow employees here. So, we don’t have anyone sign off on the bank reconciliations.
That statement may seem silly to some but it is quite common. If I were tasked with doing bank reconciliations as an employee, I would insist to the point of threatening to quit if my supervisor refused to sign off on my bank reconciliations. The approval signature is protection for you in case some accounting irregularity occurs or an accusation is made. Not only does an approval process generally add another pair of eyes to look for errors, it helps to protect you the employee from suspicion.
It also affects the risk level an auditor assigns to your audit. The higher the risk, the more you will see the auditors ask detailed questions. That generally means you will lose valuable time answering inquiries that would be unnecessary in a lower risk audit. Do whatever you can to make your audit low risk.
5) Bank reconciliations have never been done. We need to go back to the beginning to reconcile.
Generally, it is not useful to go back several years to reconcile. That is not a hard rule. Sometimes the situation does require reconciling from five years ago. However, the vast majority of cases I have encountered required going back a maximum of two years.
As well, if you were audited in the previous year, the auditor likely obtained a rough bank reconciliation if you received a clean opinion. In fact, nearly every audit I’ve witnessed required accurate bank reconciliations. So, a prior year audit, generally means you don’t have to go back beyond the last successful audit.
If you have never been audited, I would have a serious conversation with your supervisor before attempting to go back beyond two years. Many times the type of detailed data needed for a bank reconciliation may not be available for several years back. So, find out the true goals from your supervisor. Make sure s/he understands the cost in time and labor is severe for a multi year bank reconciliation.
In most cases, understanding these five important concepts listed above can save you a lot of time and heartache. Remember that an auditor is focused on whether the job of the bank reconciliation was completed in a timely fashion. S/he is also focused on whether bank reconciliations as an internal control process is consistent. Other concerns like penny errors, report formats, having few or no outstanding items just are not as important as achieving an accurate and descriptive list of differences between your book and bank balances.