Bank Reconciliation-part 2

Bank Reconciliations-part 2— useful for internal control

In our last article we examined the Bank reconciliation and how it is prepared.
In this article we will examine the usefulness of the bank reconciliation report to the company. We try to write this article so that it will be understood by individuals who have little or no accounting knowledge, but who might have an interest in the topic.

Our past experience with auditors, who examined the accounts at year-end, is that they paid much attention to the bank reconciliation. Not just the year-end reconciliation, but also to some or all of the monthly reconciliations. Why is this so important to the audit process and the company?

TIMELY PREPARATION
When the reconciliation is done on a timely basis, expense and revenue items that were missing can be booked in the correct period, not in subsequent period. This will help to ensure that the company’s profit and loss statement more accurately reflects the results of operation for the period. Thus management, owners and shareholders will not be deceived by operating results that are incorrect.

Profit and Loss error
A possible danger when the account is in error is that management could make significant decisions, such as declaring a dividend, agreeing on wage increases, buying expensive equipment, agreeing on bonus etc, bases on erroneous results.

Budgetary control
Another problem when errors are not discovered on a timely basis is that some company budgets that are prepared using prior year monthly expenses and revenue as a base, could be in error, as a result of errors in the source data.

Faulty balance sheet analysis
Yet another problem could be that a non-expense item that is omitted will affect the company’s balance sheet, and the resulting financial analysis. For example, let’s say the bank has provided a loan to the company, and the monthly repayment is being deducted by a standing charge to the company’s bank. If the company’s accountant did not have a timely prepared bank reconciliation, and he forgot to book the repayment,
the company’s working capital will be overstated because the bank balance is higher than it should be. Note that the books are in balance, but the cash and liabilities are overstated.

MONITORED BY SENIOR MANAGERS
All bank reconciliations should be monitored by a senior employee to ensure that proper investigation and corrective measures are done for any reconciling items. Some of the items on a reconciliation that should cause a red flag are:

A) Reconciling items carried over from month to month

If the same reconciling item remains on the bank reconciliation for more than one accounting period, it should raise a red flag. A good example is un cashed checks.
Most companies and individuals would cash or deposit a check they receive within a few days. If this did not happen after a full accounting cycle, it could mean that the check should have been written back for some reason, that the payee may have died, or that the check was a duplicate, in which case another check for the same service was already cashed.

ACT AS DETERRENT
A dishonest employee knowing that bank reconciliations are monitored on a timely basis, will think twice before committing fraud involving the company’s bank account, since he or she knows that the fraud might be discovered very soon after it is committed.