How to audit a bank reconciliation

In this guide, we’ll walk you through the steps to effectively audit a bank reconciliation, ensuring your financial records remain reliable and compliant.

Understanding bank reconciliations

What is bank reconciliation?

Bank reconciliation is the process of comparing a company’s internal financial records against its bank statements to ensure that all transactions are correctly accounted for. Any discrepancies between the two must be identified and resolved. Performing reconciliations regularly gives businesses a reliable view of their cash position and ensures management decisions are based on trustworthy financial data.

Why is auditing bank reconciliations important?

Auditing bank reconciliations is essential for:

• Ensuring financial accuracy: Matching financial records with bank statements shows that the company’s cash balance is correct.
• Identifying fraudulent transactions: Unauthorised transactions, unauthorised withdrawals, or manipulation of records can be detected through bank reconciliations.
• Reducing accounting errors: Mistakes such as duplicate entries, missing transactions, and incorrect figures can be spotted and corrected.
• Supporting compliance and accountability: Regular audits help businesses comply with financial regulations and maintain transparency with stakeholders.
• Improving decision-making: Reliable financial data facilitates better cash flow management and forecasting.
• Promoting investor and stakeholder confidence: Accurate financial records improve trust and credibility among investors, lenders, and stakeholders.

Steps to auditing bank reconciliations

A systematic approach to auditing bank reconciliations involves several key steps:

Step 1: Compare bank statements with the general ledger

Start by comparing the company's general ledger and bank statements for the selected period. All deposits, withdrawals, and transactions should match between both sources.

• Identify transactions that appear in one source but are missing on the other.
• Highlight any inconsistencies in amounts between the two sources.
• Check for any reversed or duplicate postings.
• Cross-check entries against supporting documentation such as invoices and receipts.

Step 2: Identify and investigate discrepancies

If discrepancies arise, they need to be investigated and documented. The most common issues include:

• Timing differences between transactions recorded in the general ledger and their appearance on the bank statement, such as outstanding checks that have been issued but have not yet been cleared by the bank, or deposits made late that the bank has not yet reflected.
• Unposted bank fees or interest charges where the bank’s notification has not yet been received.
• Unauthorised transactions or fraudulent activity that do not align with legitimate business activity
• Manual posting errors, including duplicate entries, incorrect amounts, or using the wrong sign.
• Foreign currency variances, where exchange rate fluctuations between the transaction date and the settlement date affect reconciliation accuracy

Step 3: Confirm reconciled balances match

The balances in the general ledger and the bank statement will not always be identical. What matters is that any differences are clearly identified, explained, and adjusted where appropriate, so that the reconciled balances can be aligned. If unexplained discrepancies remain, they must be investigated further.

Maintaining clear documentation of all adjustments ensures transparency and strengthens accountability in the financial reporting process.

Software to simplify the audit process

Manual bank reconciliation auditing can be tedious, but technology offers solutions to improve efficiency and accuracy. Automated reconciliations can help you avoid common errors, making the audit process more efficient and accurate.

Automated bank reconciliations

Automated reconciliation software helps businesses streamline the auditing process by:

• Automatically detecting inconsistencies: Software can flag discrepancies between bank statements and ledgers in real time.
• Improving accuracy: By reducing human error, financial reporting becomes more reliable.
• Providing real-time reporting: Instant reconciliation updates help finance teams make informed decisions.
• Scalability and standardisation of processes: Software handles high transaction volumes across multiple accounts or entities without adding proportional workload, significantly reducing manual workload and ensuring consistent reconciliation practices across teams, locations, or subsidiaries.
• Offering integration with other accounting systems: Seamless data flow reduces errors and duplication.
• Regulatory compliance support: Many solutions are designed to align with accounting standards and industry regulations, reducing compliance risk.

Best practices for effective bank reconciliation auditing

To allow for a smooth and efficient auditing process, businesses should follow these best practices:

• Conduct reconciliations regularly: Weekly or monthly reconciliation reduces the risk of significant discrepancies building up over time.
• Maintain proper documentation: Keep records of reconciliations, adjustments, and justifications for any discrepancies.
• Use reconciliation checklists: A structured checklist means all necessary steps are followed consistently.
• Train finance teams on best practices: Educating staff on common errors and fraud prevention can improve reconciliation effectiveness.
• Leverage automation: Implementing reconciliation software reduces time spent on manual processes and improves data accuracy.
• Ensure segregation of duties: Assign different employees to reconciliation and approval tasks to reduce fraud risks.

Conclusion

Auditing bank reconciliations is an essential practice for financial accuracy, fraud detection, and compliance. By following a structured audit process and leveraging automation, organisations can improve efficiency and reduce errors in financial reporting. Regular reconciliation audits help maintain financial integrity and provide reliable data for business decision-making. A robust reconciliation process strengthens internal controls and supports regulatory compliance.

Discover how Aurum Solutions’ automated bank reconciliation software can strengthen your audit process and facilitate accurate financial reporting. Request a demo today.

Fiscal responsibility statement:

At Aurum Solutions, we take fiscal responsibility seriously across all our financial operations. We focus on sound financial management, ensuring transparency and accountability in how we allocate and utilise resources. Our commitment extends to our stakeholders, building trust and promoting sustainability in our financial practices.