Definition
The auditor obtains the client's reconciliation for each significant account, agrees the bank balance to the confirmation and statement the auditor received directly, agrees the book balance to the general ledger, recalculates the reconciliation and tests each reconciling item. Deposits in transit are traced to January bank activity. Outstanding checks are traced to checks clearing after year end.
Why it matters in an audit or review
The reconciliation is the link between the books and an outside source of evidence. Old outstanding checks, repeated adjustments and long-standing unreconciled differences are warning signs of errors or fraud. A reconciliation prepared by the same person who handles cash receipts may not be reliable without further testing.
Example
Book balance $412,300 and bank $438,900 (illustrative). Outstanding checks of $31,700 and a deposit in transit of $5,100 bridge the gap. The auditor sees two checks over 90 days old totaling $2,250, asks about them, and finds both were voided but not reversed. A proposed entry removes the checks and raises the book balance.
Common mistakes
- Reviewing a copy of the reconciliation without agreeing balances to the bank source.
- Ignoring a deposit in transit that clears days later.
- Not checking who prepared and who reviewed the reconciliation.
FAQ
Does a signed reconciliation prove the balance?
No. A signature shows review took place, not that the amounts are correct.
Sources
- AICPA, AU-C Section 330, Performing Audit Procedures in Response to Assessed Risks
- AICPA, AU-C Section 505, External Confirmations
- AICPA, AU-C Section 500, Audit Evidence
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