Analyzing the Importance of Bank Reconciliation in the Auditing

This report examines the critical role of bank reconciliation statements in the auditing process. It defines auditing and bank reconciliation, detailing the preparation process of a BRS and its advantages and disadvantages in audit reporting. The report emphasizes how BRS helps auditors identify deviations and potential frauds in financial statements by comparing cash book and bank book balances. It covers the importance of detecting errors, omissions, and fraudulent activities like cash embezzlement. The analysis concludes that bank reconciliation is essential for assessing an organization's financial stability and ensuring the accuracy of cash balance assessments, making it a vital tool for auditors.

Running head: IMPORTANCE OF BANK RECONCILIATION IN AUDITING
IMPORTANCE OF BANK RECONCILIATION IN AUDITING
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1IMPORTANCE OF BANK RECONCILIATION IN AUDITING
Executive Summary
The purpose of this project is to understand the importance of the bank reconciliation statement
in the audit procedure. The report contains a brief understanding about the concept of auditing
and bank reconciliation statement. It also explains how and why the statement is being prepared.
There is also discussion related to the advantages and the disadvantages of the bank
reconciliation statement while preparing audit reports. It is thereafter concluded by analysing that
bank reconciliation statement is an important task in the audit process that helps in the
determination of frauds if any.

2IMPORTANCE OF BANK RECONCILIATION IN AUDITING
Table of Contents
Introduction......................................................................................................................................3
Bank Reconciliation Statement (BRS)............................................................................................3
How to prepare the BRS..................................................................................................................3
BRS and Auditing............................................................................................................................4
Conclusion.......................................................................................................................................5
References........................................................................................................................................6

3IMPORTANCE OF BANK RECONCILIATION IN AUDITING
Introduction
Auditing is an integral part of all financial organization. It determines the feasibility of
the financial position of the company. This process is specifically conducted in order to
determine the authenticity in the process of accounting. Auditing is done in order to determine
whether the information provided is valid and to determine its reliability as well (Knechel &
Salterio, 2016). There are several tasks that are needed to be performed while conducting this
process and it includes the reconciliation of bank statements as well.
Bank Reconciliation Statement (BRS)
Bank reconciliation statement analyses the difference between the cash book and the
bank book and thereafter finds out the deviation if any. These deviations in the two books are
thereafter corrected in this process. The financial record of an organization is compared with its
respective bank accounts. It helps in finding out the reasons for the difference in the balances of
the bank as per the cash book and the pass book. This statement is often prepared periodically in
order to keep a proper record in the cash ledgers. It helps in measuring the exact balance of the
bank on a particular date.
How to prepare the BRS
The preparation of the bank reconciliation statements requires the following process:
i. Comparison of the balance as per the bank statement and as per the cash book.
ii. The credit side of the cash book is matched with the debit side of the pass book
and the debit side of the cash book is matched with the credit side of the pass
book.

4IMPORTANCE OF BANK RECONCILIATION IN AUDITING
iii. Pointing out the differences and making a list of it.
iv. Any one of the balance is being considered and with that the adjustments are
made in order to find the end balance. For example if bank balance as per cash
book has been taken under consideration, then the bank balance as per the pass
book will be determined and the adjustments are to be made accordingly (Weil,
Schipper & Francis, 2013).
v. Any cheques issued but not presented, cheques deposited but not recorded, bank
charges and such items are to be adjusted accordingly.
vi. Thereafter the final value of either cash book bank balance or pass book balance
has to be determined and the balances should tally with their respective books.
BRS and Auditing
BRS is a very important part in the auditing procedure. It helps the auditor in determining
the various severe deviations that have taken place within the organization while preparing the
financial statements (Sunarya, Nurhaeni & Haris, 2017). The auditor can find out any kind of
mistakes in the addition and subtraction of the receipts and payments. If there are any payments
that have been missed and if any double payments are there, it can be also tracked by the auditor.
There are certain charges that the banks deduct on their own such as interests, fees, service
charges, locker rents or any payments as per the standing orders. These charges can be missed
out by the accountants (Maheshwari, Suneel & Sharad, 2017). All these missing items can be
detected in the auditing process with the help of the bank reconciliation statement. The most
important element of BRS is that it helps in the elimination of frauds such as the cash
embezzlement. The process of reconciliation helps in the correct assessment of the cash balance
at the end of a particular period and if there is any difference in the balance being calculated,

5IMPORTANCE OF BANK RECONCILIATION IN AUDITING
then the fraud can also be detected (Lisic et al., 2015). The auditing of the bank reconciliation
statements also helps in the checking of the old records and thereafter determining mistakes in
the past if any.
The problems that might arise in case of bank reconciliation is that there can be uncleared
cheques that remain as unpresented. In the long run those cheques might be needed to be
cancelled and a new issue should be done. In certain cases the cheques might be cleared right
after the cheques have been voided. The payee must be kept in loop in such cases. If the old
cheques have been encashed then the new cheque issued must be voided. In certain cases the
banks refuse to deposit the cheques that belong to separate countries or branches and in that case
a reverse entry is needed to be done (Sharma & Panigrahi, 2013).
Conclusion
It can be concluded that the bank reconciliation statement is very helpful instrument used
by the auditors while assessing the degree of financial stability of the organization. The various
types of deviations and the frauds can be analyzed from the bank reconciliation statement and
thereafter the necessary steps can be taken.

6IMPORTANCE OF BANK RECONCILIATION IN AUDITING
References
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Routledge.
Lisic, L. L., Silveri, S. D., Song, Y., & Wang, K. (2015). Accounting fraud, auditing, and the
role of government sanctions in China. Journal of Business Research, 68(6), 1186-1195.
Maheshwari, S. N., Suneel, K., & Sharad, K. (2017). Advanced Accountancy-Vol.
Sharma, A., & Panigrahi, P. K. (2013). A review of financial accounting fraud detection based
on data mining techniques. arXiv preprint arXiv:1309.3944.
Sunarya, P. A., Nurhaeni, T., & Haris, H. (2017). Bank Reconciliation Process Efficiency Using
Online Web Based Accounting System 2.0 in Companies. Aptisi Transactions On
Management, 1(2), 124-129.
Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to
concepts, methods and uses. Cengage Learning.