Even if you and your bank record everything correctly, your ledger and the bank statement may not match. Deposits and checks don't always clear before your statement goes out. Reconciling the bank statement can correct for that, but reconciliation can go wrong too. The next level of correction is to audit the bank account.
TL;DR (Too Long; Didn't Read)
To audit a bank account, gather the bank statement, your accounting ledger and the reconciliation statement for the period you want to review. If the bank statement and the ledger don't agree, the reconciliation document should fix the discrepancy. If the reconciliation statement is wrong, you need to dig further.
Analyzing the Bank Statement
Reconciling your bank statement is less rigorous and demanding than an audit, but it's based on the same principle: You need to know how much cash you have on hand. Reconciliation is a way to spot errors, both yours and the bank's. If you pay for a professional audit, the auditor is going to want a reconciliation statement before they audit the bank account.
Suppose you've just received your March statement from the bank, listing deposits, checks, withdrawals and service charges. Sit down with the statement and your accounting journal and go over them in detail. If there are inconsistencies, note them on the reconciliation statement.
For example, if you wrote a $1,500 check on March 30 and it hadn't cleared the bank when the statement went out, you note the difference on the reconciliation statement. When you finish reconciliation, you should have an explanation for every difference between the figures on the bank statement and the figures in your ledger.
To Audit a Bank Account
You should schedule a regular internal audit of each bank account as well as occasional external audits. Whether internal or external, it should follow audit procedures for deposits and withdrawals.
To audit the bank account for March, say, you need your accounting records, bank statement and reconciliation statement for that month. Go over them and confirm that the reconciliation document captures any differences between the bank statement and the ledger. If there were errors, such as the bank not recording a deposit, confirm they were fixed; if there were deposits or checks that hadn't cleared, see if they cleared later.
If the reconciliation statement bridges the gap between your ledger and the bank's records, you're in good shape. If it doesn't explain all the differences, you'll have to dig deeper to find out why. Sometimes it's simple, like misreading the cutoff date for the bank statement, but other times digging unearths serious problems.
Review Your Bank Procedures
An in-depth audit of a bank account doesn't just look at the dollar totals but also the procedures you use for managing money. Sooner or later, you'll need a professional to audit your procedures for deposits and withdrawals, but reviewing things yourself can bring issues to light.
Among the questions a professional would ask when they audit the bank account:
- Are you reconciling your bank statement regularly or burying it under more urgent paperwork?
- Do you reconcile every bank account? Is every bank account listed in the ledger?
- Do you put a second pair of eyes on the reconciliation?
- Have any bank accounts been opened or closed?
- If you're not running a one-person business, do you divide up the money-managing responsibilities? If the same person makes deposits, records deposits and reconciles the bank statements, that's an opportunity to siphon off money.
- Does the person reconciling the statements know what they're doing? Not everyone is good with figures.
Solving the Problems
If, when you reconcile the statements or audit the bank account, you find inconsistencies that can't be explained, you may have a serious problem. For example, if reconciliation shows an unexplained $3,000 difference between the ledger and the bank statement, you need to figure out the reason:
- There's an error somewhere in the bank statement.
- The reconciliation doesn't cover the same period as the bank statement.
- Someone at the bank or your company is stealing.
It's vital to determine if the problem is criminal or simply sloppy bookkeeping.
- Hire staff, such as a part-time bookkeeper or a temporary assistant, to help sort information. However, consult with a Certified Public Accountant (CPA) if you encounter complex problems.
- Separate duties that involve cash to strengthen internal controls. For example, an employee who records information should not be the same person that counts cash daily.
Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com