What is an account reconciliation control?
Performing account reconciliations is a critical control that ensures that the underlying data reconciles with the accounting records (i.e. general ledger). Account reconciliations are a detective control that can identify issues in a business process.
Why should a company perform account reconciliations?
Here are a handful of reasons as to why a company should perform account reconciliations on a periodic basis:
1) Confirm accuracy of financials: The underlying data must reconcile with the general ledger, otherwise the financial statements will not be accurate.
2) Identify fraud or errors: Performing account reconciliations can help identify material differences and the company will be able to determine whether the difference was due to fraud or error.
3) Accurate tax reporting: If the financial statements aren’t accurate, then the company will inaccurately prepare their tax filings. A company does not want to inaccurately report information to the tax authorities!
4) Validate data entry: Account reconciliations can be used to identify if data entered into the system isn’t working properly. For example, the system could be inaccurately capturing inputted data, data could be duplicated or deleted, or there could be other data entry errors.
How often should account reconciliations be performed?
Account reconciliations can be performed on a monthly, quarterly, or annual basis. The company’s management team needs to assess which reconciliations have the highest risk of fraud or error, and that will help determine how frequently the account should be reconciled. Additionally, the materiality or the dollar amount of the reconciliation plays a critical role in determining how often the account should be reconciled.
What are some examples of account reconciliations?
Now that you understand the importance of performing account reconciliations, let’s go through a few examples so that you have a clear understanding. The company should perform an account reconciliation for any account that is deemed significant or critical to a business process. A few common examples include:
1) Bank reconciliation: Reconciling the cash balance per bank statement to cash balance per accounting records ensures that the cash inflows and outflows of the business have been properly recorded. The two sources of information will typically have reconciling differences due to deposits in transit, outstanding checks, fees, etc.
2) Accounts receivable aging: The accounts receivable aging schedule summarizes all of the outstanding invoices that a company’s customers have not yet paid. The company will want to reconcile the aging schedule to the accounts receivable balance in the financial statements to make sure all receivables have been captured.
3) Inventory in warehouse: A company typically has a separate system for tracking inventory (i.e. inventory subledger). The company should reconcile the value of the inventory in the warehouse to the value of the inventory in the financial statements.
Account reconciliation controls are key controls that every company should have implemented in a business process. Other key controls include segregation of duties, data entry input controls, controls over standing data, data processing controls, spreadsheet controls and supervisory controls.
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