To audit a bank reconciliation, you confirm the bank balance directly with the financial institution, tie the book balance to the general ledger, verify every reconciling item against a cutoff bank statement, run a cash cutoff test to catch period-shifting, and — when the client holds multiple accounts or controls are weak — add an interbank transfer schedule and, if warranted, a proof of cash. The work tests two assertions above all: that the reported cash exists on the reporting date, and that every transaction belonging to the period made it onto the books.
Start With the Right Documents and Tie Out the Schedule
Pull the client’s prepared reconciliation schedule, the final bank statement for the period, the detailed general ledger activity for the cash account, and the prior period’s reconciled schedule. The prior schedule is the one auditors most often skip and most often regret skipping. Without it, you have no way to tell whether a stale reconciling item has been sitting on the schedule for two months or two years.
Before you test anything substantively, do two tie-outs. Trace the ending balance on the bank statement onto the reconciliation schedule. Trace the book balance back to the general ledger cash account. Then foot the entire schedule and confirm the adjusted bank balance equals the adjusted book balance. If it doesn’t foot, send it back to the client. Hunting the error yourself wastes time and blurs the line between preparing and auditing.
Confirm the Bank Balance Directly
The bank statement comes from the client’s files, so you need independent proof the bank actually holds what the statement reports. That proof comes from a standard bank confirmation form jointly approved by the American Bankers Association, the AICPA, and the Bank Administration Institute.1AICPA & CIMA. Standard Form to Confirm Account Balance Information with Financial Institutions
Control over the confirmation matters as much as the form itself. Send the request directly to the bank and receive the response directly back at the firm. PCAOB AS 2310 is explicit: the auditor should send the confirmation request directly to the confirming party and obtain the response directly from the confirming party.2Public Company Accounting Oversight Board. AS 2310 – The Auditors Use of Confirmation Any client involvement in the chain defeats the evidence.
Know what the form covers and what it doesn’t. The standard confirmation addresses deposit account balances and loan account balances. It does not ask the bank about contingent liabilities, letters of credit, or guarantees — those were removed from the form years ago, so a separate inquiry letter is required for contingent obligations.3The CPA Journal. The New Confirmation Form for Financial Institutions – Section: What are the Changes?
When the confirmed figure and the bank statement figure don’t match, investigate immediately. The confirmed balance is the strongest existence evidence available for cash, and unexplained differences could signal a timing issue or something worse.
Electronic Confirmation Platforms
Most firms now route confirmations through electronic intermediaries. AS 2310, effective for fiscal years ending on or after June 15, 2025, addresses this in Appendix B.2Public Company Accounting Oversight Board. AS 2310 – The Auditors Use of Confirmation Before relying on the platform, understand its controls against interception and alteration, confirm those controls are designed and operating effectively, and assess whether the client has any relationship with the intermediary that could allow override. If the controls fall short or the client can override them, you can’t use that platform; send directly or fall back on alternative procedures.
Test the Reconciling Items
Reconciling items are where the audit risk concentrates. Each one is a timing difference between the client’s books and the bank’s records, and each needs evidence it is both valid and in the right period.
Deposits in Transit
A deposit in transit is cash on the books that the bank has not yet credited. Trace each one to the cutoff bank statement. If it clears shortly after the balance sheet date, the item is legitimate.
The risk is overstatement. The classic manipulation is booking a deposit right before year-end that never happened or holding the receipts journal open past the closing date. The longer a deposit takes to appear after year-end, the harder you should look at the remittance advice and supporting documentation. There is no bright-line number of days that invalidates a deposit, but delay warrants skepticism.
Outstanding Checks
Outstanding checks run the other direction: recorded disbursements the bank hasn’t paid yet. Trace them to the cutoff statement to confirm they cleared shortly after year-end.
The risk is understatement of the list. An entity can inflate the book cash balance simply by leaving checks off the reconciliation. Trace all checks issued before year-end to the subsequent bank statement, and pay attention to check number sequence. Gaps around year-end are a red flag that a check was written and intentionally excluded.
Any check outstanding for an unusually long time needs its own documentation — the original voided check, a stop-payment confirmation, or a journal entry reversing the liability.
Stale Checks and Escheatment
Long-outstanding checks also carry a reporting obligation outside the reconciliation. Every state has unclaimed property laws requiring companies to turn over dormant funds after a specified period. Dormancy periods for vendor payments are predominantly three or five years, and the trend has been toward shorter periods, with many states recently reducing from five years to three.4Sales Tax Institute. Managing Unclaimed Property: Understanding Dormancy Periods, Due Diligence, and Escheatment
Before reporting funds to the state, the company must perform due diligence. At a minimum, for property worth $50 or more, that means sending a letter to the payee’s last known address between 60 and 120 days before the reporting deadline.4Sales Tax Institute. Managing Unclaimed Property: Understanding Dormancy Periods, Due Diligence, and Escheatment When you see long-outstanding checks, verify the client is tracking escheatment. Non-compliance brings state penalties and interest, and the liability belongs on the financial statements either way.
Service Charges, Interest, and NSF Items
Reconciliations also pick up bank service charges, interest income, and returned checks — items the bank has recorded that the client has not yet booked. Vouch each one to supporting documentation. A service charge should tie to a bank debit memo showing the specific fee. Interest income should tie to a credit memo with the rate and calculation. For NSF checks, confirm the client reversed the original receipt entry and reestablished the receivable. Failing to reverse an NSF check inflates cash and understates accounts receivable at the same time.
Compare the current reconciliation against the prior period’s. Any item that appeared last time and still appears now needs investigation. Long-standing reconciling items often signal an error in the original recording or an unrecorded liability that no one has cleaned up.
Perform the Cash Cutoff Test
The cutoff test is a separate procedure focused on whether transactions landed in the correct accounting period. Obtain a cutoff bank statement covering roughly the first ten to fifteen business days after the balance sheet date. The client should request it from the bank with instructions to send it directly to the auditor, preserving your control over the evidence.
Focus on the checks written just before year-end. Pull the last sequence of check numbers from the client’s books and trace them to the cutoff statement. If those checks cleared the bank during the cutoff window, you have reliable external evidence they were actually issued before the balance sheet date.
The test is designed to catch window dressing — the improper shifting of receipts or disbursements to manipulate reported balances. Holding the receipts journal open past year-end inflates cash and reduces receivables. Delaying disbursement recording has the opposite effect on payables. Bank clearance timing on sequentially numbered checks gives you an external timestamp the client cannot alter after the fact.
Check for Kiting When Accounts Are Multiple
Kiting is a fraud scheme that moves money between accounts to make the same funds appear in two places at once, exploiting the float between when a transfer leaves one account and arrives in another. If the client has more than one bank account, this test is not optional.
Build an interbank transfer schedule listing every transfer between company accounts around year-end. For each transfer, capture four dates: when the company recorded the debit on its books, when the bank debited the sending account, when the company recorded the credit on its books, and when the bank credited the receiving account. A properly recorded transfer shows both sides hitting the books and the bank in the same period.
Kiting shows up as asymmetry in those dates. The telltale pattern is a receiving account showing a deposit recorded before year-end while the sending account was not reduced until after year-end, so the same dollars appear in both accounts on the balance sheet date. If the book dates fall in different fiscal years, the entity may have been inflating cash to improve reported earnings; if the bank deposit date falls in the current year while the other three dates fall in the subsequent year, that pattern can indicate kiting used to conceal a cash shortage.5The CPA Journal. Auditing
Scope the schedule to the client’s banking footprint. Local accounts might need only a few days on either side of year-end. International accounts need a wider window because cross-border clearings take longer.
Escalate to a Proof of Cash When Risk Justifies It
A standard reconciliation compares ending balances at a single point. When internal controls over cash are weak or fraud is suspected, that snapshot is not enough. A proof of cash extends the reconciliation across the entire period, reconciling beginning balances, total receipts, total disbursements, and ending balances in four separate columns.
The formula is straightforward: beginning balance plus receipts minus disbursements equals ending balance. Each column reconciles the book figure to the bank figure independently. If someone diverted cash during the period and papered over it with a timing adjustment, the receipts or disbursements columns will not reconcile even when the ending balances look clean.
A proof of cash is an extended procedure, not a default one. The circumstances that typically justify it include a history of cash discrepancies, an unusually high volume of reconciling items, turnover in the accounting staff responsible for cash, or specific fraud indicators identified during planning. When the standard reconciliation and cutoff testing already give you comfort, the proof of cash adds effort without proportionate value. When something feels off, it is one of the most effective tools you have.