This Top Tip gives advice on how to check a bank reconciliation statement.
A bank reconciliation is a very powerful control tool that enables the organisation to identify omissions and errors in its own records, as well as being the only way to spot cheque fraud, bank errors and even bank fraud.
It is therefore very important for managers to carefully check bank reconciliation statements every month.
What is a Bank Reconciliation?
The bank reconciliation process involves checking the entries and the closing balance in the Cashbook (also called the Bank Book) with the entries and closing balance on the bank statement for the same period, to make sure the closing balances agree and to explain any differences.
This helps to pick up any missing items and incorrect entries in the records and to ensure that our accounts are accurate and complete.
For most NGOs, bank reconciliation is a monthly routine. For bank accounts that have a high volume of transactions, weekly or even daily reconciliation is advised. Even for bank accounts that are not very active, a monthly bank reconciliation is recommended due to the risk of bank fraud.
A bank reconciliation statement should be prepared every month end for every bank account held and then reviewed and signed by another responsible person such as the manager or Treasurer. The signed statements should then be carefully filed in date order for each account.
To complete the review of a bank reconciliation statement, you will need access to:
- Previous bank reconciliation statements
- The cashbook
- Bank statements
- Supporting documents, if a closer inspection is required.
What should you look for on the Bank Reconciliation Statement?
1. Check the dates
Is the date of the closing balance on the bank statement the same as the closing balance date in the cashbook? For example, if the bank statement is dated 29 January and the cashbook date is 31 January, the bank reconciliation will not be comparing like with like.
2. Check the cashbook balance
Does the stated cashbook closing balance actually agree to the cashbook?
3. Check the bank statement balance
Does the stated bank statement closing balance actually agree to the bank statement?
4. Check the structure of the reconciliation statement
Does the reconciliation statement provide details of the differences between the bank statement and cashbook balances at the month end? Do the figures add up correctly?
5. Check the outstanding items listed on the reconciliation statement
Does each of the outstanding items seem to be reasonable? These will include un-cleared cheques or cash deposits, bank interest or charges, and direct debits or bank transfers. Anything very old, very large or peculiar should be checked out. For example, a cheque that keeps appearing as un-cleared month after month could mean it is lost. Cheques do eventually become “stale” (usually after 6 months) so these must be followed up.
Check to see if missing items such as bank charges and deposits (ie appearing on the bank statement) have now been entered in the cashbook.
6. Check some cashbook entries
From time to time, it is a good idea to do a ‘spot check’ on some cashbook entries (eg for unusual or large purchases and cash receipts) to ensure the entries are valid.
For example, check the cash paying-in book to see how long it took between the cash being received and the actual banking date. It is reasonable to expect that cash is paid into the bank within 3 to 5 days for cashflow and security reasons (but check your NGO’s own policy on this). If it regularly takes 3 to 4 weeks, the money could be being ‘borrowed’ or put at risk of theft.
7. Check for ‘transposed’ numbers with the ‘magic number 9’
Sometimes the reconciliation statement will show an unexplained difference. In such cases, divide the difference figure by 9 (or add up the digits and see if it comes to 9). If it divides out evenly, then there’s a good chance that the difference is caused by a transposed number (ie where two numbers are reversed when entered).
For example, if $2,196 is entered incorrectly as $2,916 this would result in an unexplained difference of $720. We can see that 720 is divisible by 9 because 7 + 2 + 0 = 9. Magic! [If the difference figures add up to more than 9, eg 18, add together those digits too, so 1 + 8 = 9].
8. Show you’ve been here!
It can be helpful to put ticks against what you have checked, and then sign and date the reconciliation statement as evidence for the auditors that the reconciliation has been reviewed by a manager. The person preparing the reconciliation statement should also sign the form, of course.