A client arrives with eleven months of unreconciled bank accounts, a payables ledger nobody trusts and a lender asking for reviewed financial statements. The work needed to get there is cleanup, and the common mistake is to quote it as bookkeeping at an hourly guess. Cleanup is investigative, its scope depends on what the first two weeks reveal, and it ends with a sign-off that the books are fit for the purpose. This article sets out how to scope, run and close it. The audit-side view is in QuickBooks cleanup before the audit.
Decide the purpose first
The purpose sets the standard. Books prepared for a tax return, a bank loan, a review or an audit each need different support. A firm should write the target in the engagement letter: the periods to be cleaned up, the statements to be produced, the basis of accounting (see cash vs accrual accounting) and who will rely on them. The SBA notes that private companies are not required to follow GAAP, so the target basis is a choice the client and the firm make together and record.
Phase 1: Assessment
Before quoting the full job, run a paid, bounded assessment:
- Access. Confirm the firm can see every bank, card, loan, payroll and merchant account, and the accounting file with its audit log.
- Statements on hand. List which bank statements and credit card statements are missing and request them from the institutions.
- Tie-out. Compare ending balances in the books with the bank statements for the latest date. The size of the gap measures the work.
- Sample scan. Review uncategorized transactions, suspense and clearing accounts, duplicate vendors and customers, and large round-dollar items.
- Tax filings. Collect filed returns, payroll returns and sales tax returns to compare with the books. See W-2 and 1099 filing.
- Report. Give the client a written list of findings, the proposed plan and a fee range with the assumptions behind it.
Phase 2: Work plan by account
Work in a fixed order so each step supports the next:
| Order | Area | Procedure |
|---|---|---|
| 1 | Cash | Reconcile every bank and card account to statements for each month, oldest first. Clear stale items. |
| 2 | Opening balances | Agree opening balance sheet to the prior filed return or the last issued statements. Document differences. |
| 3 | Receivables | Match customer ledger to the receivables control account, apply unapplied payments, review old balances. |
| 4 | Payables | Match vendor ledger to control account, remove duplicates, identify unrecorded bills. |
| 5 | Payroll | Reconcile payroll registers, liabilities and deposits to filed returns. See payroll tax deposits. |
| 6 | Fixed assets | Rebuild the register, depreciation and disposals. |
| 7 | Debt and equity | Agree loan balances to lender statements and rollforward equity and owner activity. |
| 8 | Revenue and expense | Reclassify suspense, test cutoff, and review unusual items. |
Reconcile first and reclassify second. Reclassifying before the cash is reconciled moves errors around without finding them.
Documenting judgments
A cleanup is full of decisions: which transactions are personal, whether a deposit is revenue or a loan, what to do with an unidentified item. Keep a decision log with the date, the item, the evidence, the conclusion and who approved it. Items the client cannot support should go to a defined holding account, and the log should show how each was resolved. This log becomes the audit trail for the cleanup. See audit trail explained.
Adjusting entries and period locks
Post corrections as dated journal entries with descriptions that cite the source, not as edits to the original transactions, so the change history survives. Once a period is reconciled and approved, lock it in the accounting system. See adjusting journal entries.
Independence and management responsibility
If the client is also an attest client, bookkeeping is a nonattest service with specific safeguards under the AICPA Code, and management must accept responsibility for the books and the decisions. Management designates someone with suitable skill, knowledge and experience to oversee the work and approve entries. See independence and nonattest services.
Sign-off
The deliverable closes with management's written acknowledgment:
- The periods covered and the accounts reconciled.
- The open items still unresolved, with amounts and owners.
- The decisions made on judgment calls, and approval of them.
- The date the periods were locked.
- A statement that management is responsible for the books going forward.
Handoff to an ongoing process
A cleanup that is not followed by a monthly close falls apart. Move the client to a repeatable routine. See month-end close process checklist and chart of accounts design.
FAQ
Should cleanup be priced hourly or fixed?
Price the assessment as a fixed small project. Price the cleanup after the assessment, with assumptions and a change-order clause for scope growth.
Can the firm also audit the cleaned-up books?
Independence rules limit it. Document the safeguards or decline one of the services.
Which period comes first?
The oldest unreconciled month, so that each month's opening balance is reliable.
CORAA prepares ready-to-review audit files for US CPA firms; see /us.
Sources
- SBA, Manage your finances: https://www.sba.gov/business-guide/manage-your-business/manage-your-finances
- IRS, Publication 538, Accounting Periods and Methods: https://www.irs.gov/publications/p538
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AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error