To audit a bank reconciliation, pull the bank statement and general ledger independently, compare the two ending balances, investigate every item that explains the gap, post adjustments with supporting evidence, and have someone other than the preparer review and sign off before archiving the package. The work is methodical rather than complicated, and each step exists to catch a specific kind of error or fraud.
Pull the Documents Before You Start
The audit begins with a clean set of records for the period. You need the month-end bank statement, the general ledger report for the cash account covering the same dates, the prior month’s completed reconciliation, and the outstanding check and deposit-in-transit lists carried forward from that prior period.
Where the bank statement comes from matters. Pull it directly from the bank’s online portal rather than accepting a printout from the person who recorded the transactions. Verifying data against an independent source is the whole point; if the same person hands you the ledger and the statement, the control is already compromised.
Set up the worksheet with the account number and the exact period-ending date before you do anything else. Mislabeled worksheets are one of the most common reasons reconciliations get questioned during external review. Every document you collect is evidence, so label it and keep it intact.
Compare the Ending Balances
Write down the ending balance from the bank statement, then write down the ending balance from the general ledger for the same date. The difference is your unreconciled variance, and every dollar of it needs an explanation before you can close the audit.
Record the variance on the worksheet right away. It defines the scope of what’s ahead. A small gap may be a single missed bank fee. A large one may hide dozens of uncleared items or a recording error that cascaded through the month. Either way, once all reconciling items are identified and adjustments posted, the adjusted bank balance and the adjusted book balance must land on the same figure.
Work Through the Reconciling Items
This is the heart of the audit. Auditors call the technique tick-and-tie: match each transaction on one record to its counterpart on the other, and account for every item that creates a difference.
Deposits in Transit
Start with the prior month’s deposits in transit. Each should appear as a cleared deposit on the current bank statement. A deposit that still hasn’t posted is a red flag worth investigating immediately: it could be a processing delay, a lost deposit, or something worse. Deposits made near the end of the current month that haven’t cleared yet get added to the outstanding list and carried forward.
Outstanding Checks
Match cleared checks on the bank statement against the prior month’s outstanding list and any new checks issued during the period. Checks that cleared come off the list; those that haven’t stay on it.
Check the amounts, not just the numbers. If your ledger shows a check for $500 but the bank cleared it for $550, the $50 difference needs a journal entry to correct the book balance. Transposition errors and mis-keyed amounts are surprisingly common.
Bank-Initiated Transactions
Banks post service fees, wire transfer charges, and interest credits without waiting for you to record anything. Identify every bank-initiated item on the statement and make sure the ledger reflects it.
Returned checks (NSF items) deserve extra scrutiny. When a deposited check bounces, the bank reverses the credit, but your books may still show the deposit as income received. Reverse that entry so the ledger reflects cash you never actually collected. Interest earned, even a few dollars, also needs to be posted.
Posting the Adjustments
Once you’ve identified every reconciling item, update the ledger through journal entries. Each entry needs support: a check image, a digital deposit receipt, a bank fee notice. Unsupported journal entries are one of the first things external auditors flag, because they look like someone forcing the numbers instead of actually reconciling them.
Decide What Counts as Material
Not every penny discrepancy carries the same weight, but the threshold for “material” isn’t as simple as picking a percentage. The SEC addressed this in Staff Accounting Bulletin No. 99, which states that exclusive reliance on any percentage or numerical threshold has no basis in accounting literature or the law.1U.S. Securities and Exchange Commission. SEC Staff Accounting Bulletin No. 99 – Materiality A 5% rule of thumb can be a starting point, not a substitute for analysis.
The real test is whether a reasonable person would consider the discrepancy important when making decisions based on the financial statements. Both size and context matter. A small misstatement that turns a quarterly loss into a profit is material regardless of dollar amount, as is one that masks a trend, affects a loan covenant, or conceals an unauthorized transaction.1U.S. Securities and Exchange Commission. SEC Staff Accounting Bulletin No. 99 – Materiality
In practice, you can’t dismiss a $200 variance just because total cash is $4 million. If that $200 traces to an unexplained wire or an altered check image, qualitative context makes it worth pursuing. Set your materiality threshold before you start, document how you got there, and apply it consistently.
Watch for Fraud Patterns
Bank reconciliation is one of the most effective places to catch fraud, which is why it needs to be performed by someone independent of the cash-handling process. PCAOB Auditing Standard 2401 identifies the lack of complete and timely reconciliations as a condition that increases the risk of asset misappropriation.2PCAOB Public Company Accounting Oversight Board. AS 2401 – Consideration of Fraud in a Financial Statement Audit
Several patterns should raise suspicion as you work through the reconciliation:
- Checks clearing out of sequence. If check numbers jump around or clear in an unusual order, someone may be intercepting and reissuing payments.
- Round-dollar adjustments. Legitimate bank transactions rarely land on perfectly round numbers, so repeated round-dollar ledger entries deserve a closer look.
- Perpetually outstanding items. Deposits that sit “in transit” for weeks or checks that never clear are classic markers of fictitious entries used to inflate cash balances.
- Subsidiary ledgers that don’t reconcile to control accounts. AS 2401 flags this specifically as a condition suggesting possible fraud.2PCAOB Public Company Accounting Oversight Board. AS 2401 – Consideration of Fraud in a Financial Statement Audit
Check kiting also surfaces during reconciliation. The scheme involves writing checks between two or more accounts to artificially inflate balances, exploiting the float between deposit and clearance. The tell is a pattern of large, frequent transfers between accounts right before statement dates with no clear business purpose. If you see it, pull statements for all related accounts and map the timing of every transfer.
Handle Stale Checks
An outstanding check list that never shrinks is its own problem. Under federal law, a bank is not obligated to honor a check presented more than six months after its issue date.3Consumer Financial Protection Bureau. The Bank Refused to Cash a Check Because It Was More Than Six Months Old Banks may still choose to pay a stale check, but they aren’t required to.
A stale check on the outstanding list is a liability that hasn’t gone away just because the check expired. Every state, the District of Columbia, and U.S. territories have unclaimed property laws requiring businesses to report and eventually turn over uncashed checks to the state.4U.S. Department of Labor. Introduction to Unclaimed Property and State Reporting Requirements Dormancy periods for payroll checks can be as short as one year, and other check types may run longer depending on the state.
Flag any outstanding check older than six months during the audit. The accounting team should attempt to contact the payee, reissue if appropriate, and track the dormancy timeline for escheatment. Ignoring stale checks doesn’t just clutter the reconciliation; it can trigger state reporting penalties.
Report Bank Errors Before the Clock Runs Out
Sometimes the bank is wrong. When the audit uncovers a duplicate charge, a deposit credited to the wrong account, or an incorrect transaction amount, there’s a clock on when you can force a correction.
For consumer accounts, Regulation E gives you 60 days from when the bank sends the statement to notify the institution of the error. Once notified, the bank generally has 10 business days to investigate and report its findings.5Consumer Financial Protection Bureau. Regulation E 1005.11 – Procedures for Resolving Errors Business accounts operate under different rules that vary by the deposit agreement, and the window is often shorter. This is one reason to reconcile monthly rather than quarterly: reconcile too late and you may find the error after the reporting deadline has passed.
When the audit identifies a bank error, note it on the worksheet as an adjustment to the bank balance, not the book balance, because your records were correct. Then notify the bank in writing and track the resolution. Don’t adjust your books to match the bank’s mistake.
Review, Sign Off, and Retain
When the adjusted bank balance and adjusted book balance match, the reconciliation is technically complete. The audit isn’t done until someone other than the preparer reviews the work. This separation of duties is a foundational internal control: the person posting transactions should not be the same person reconciling the account, and the person reconciling should not be the only one reviewing the results.6Office for Victims of Crime Financial Management Resource Center. Internal Controls and Separation of Duties Guide Sheet
The reviewer should check specific things, not just glance at the bottom line. Verify that the bank statement came from an independent source. Confirm every adjustment has supporting documentation. Look at outstanding items carried forward and ask whether any have been sitting there too long. Check that the reconciliation was completed promptly after the period ended; a reconciliation done three months late defeats much of its purpose as a control. A formal, dated sign-off from the reviewer completes the audit package, and that sign-off is what external auditors look for when they evaluate internal controls over cash.
Then archive everything: the completed reconciliation, supporting worksheets, journal entries, bank statements, and check images. The IRS generally requires records supporting tax returns to be kept for three years, extends that to seven years for claims involving worthless securities or bad debt deductions, and requires indefinite retention if no return was filed. Employment tax records must be kept for at least four years.7Internal Revenue Service.