Definition
An account reconciliation agrees the general ledger balance to an independent source, lists each reconciling item with its nature and age, and shows that the unexplained difference is zero or trivial. Typical reconciliations cover cash, receivables, payables, intercompany accounts, payroll liabilities, inventory and debt. A strong reconciliation is dated, signed by the preparer, reviewed by a second person and cleared of stale items.
Why it matters in an audit or review
Reconciliations are the main detective control over balance sheet accuracy, and the auditor tests both their design and their operation. Old unreconciled items, plugs and unsupported adjustments suggest weak controls or concealed errors. When the team relies on the control, it obtains evidence that the review was performed and that differences were followed up.
Example
Illustrative: the general ledger shows $410,000 in cash and the bank statement shows $437,500. Outstanding checks of $30,000 and a deposit in transit of $2,500 reconcile the difference (437,500 - 30,000 + 2,500 = 410,000). The reconciliation shows no unexplained difference.
Common mistakes
- Leaving items open for months without investigation.
- Preparing the reconciliation from a ledger that has been adjusted to match the support.
Sources
- AICPA, AU-C Section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement (control activities)
- AICPA, AU-C Section 330, Performing Audit Procedures in Response to Assessed Risks
- COSO, Internal Control, Integrated Framework (2013), Principle 10 on selecting and developing control activities (coso.org)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error