To test bank reconciliation assertions, match each claim the reconciliation makes to a procedure. Existence is tested by the bank confirmation, completeness by looking for unrecorded items on later statements, and cutoff by checking which side of the date each transaction falls. Valuation and presentation matter little for plain cash, and the last section explains why.
Which assertions does a bank reconciliation test?
A bank reconciliation supports a handful of assertions about the cash balance: existence, completeness, cutoff, accuracy, and in a few cases rights and presentation. An assertion is a claim management makes in the financial statements, such as "this cash exists." Each one needs its own evidence, so the useful question is which procedure answers which claim.
The matrix below is an example of that pairing for one bank account. The evidence column lists what you would keep on file.
| Assertion | The claim | Procedure | Evidence |
|---|---|---|---|
| Existence | The cash and every reconciling item are real | Bank confirmation; trace items to later clearing | Confirmation reply, subsequent statement |
| Completeness | No cash, account or reconciling item is missing | Review later statements for unrecorded items; compare the confirmation's account list with the client's | Statement review, account list |
| Cutoff | Each transaction sits in the right period | Compare dates of checks and deposits with the reconciliation date | Check register, deposit slips, cutoff statement |
| Accuracy | The amounts and the arithmetic are right | Foot the reconciliation; agree balances to the ledger and statement | Recalculation on the workpaper |
| Rights and obligations | The client owns the cash and it is free of restriction | Read the confirmation for restrictions and compensating balances | Confirmation text |
Example only. Your firm's program may group or name these differently. The full audit program built around these assertions lists the procedures in the order you would run them.
Existence: confirming the reconciled cash balance
Existence asks whether the cash on the balance sheet is really in the bank. The best evidence is a bank confirmation sent by the auditor and returned directly, which gives a balance the client could not have changed. Reconciling items then need their own tests, because the confirmation proves only the bank side.
How confirmation supports it
Agree the confirmed balance to the bank balance on the reconciliation. If they match, the bank side exists. For each outstanding check and deposit in transit, you still have to show the item was real at the date, by tracing it to the check register or receipts record and to clearing on a later statement.
Reconciling items are where existence fails
A fictitious outstanding check lowers the adjusted bank balance, and a fictitious deposit in transit raises it. Either one can force a reconciliation to agree when the books are wrong. Both are existence errors in the reconciling items, not in the bank balance. The statement itself must also be trustworthy, so foot each statement and check that balances carry forward before you use it as evidence.
Completeness: testing for unrecorded reconciling items
Completeness asks whether anything is missing: an account, a deposit, a check or a bank charge. You cannot find a missing item by looking at the list, because the item is not on it. You look at independent sources, mainly the statements after the date, and check what appears there that the reconciliation lacks.
How to look for what is missing
Three tests carry most of the weight:
- Subsequent statement scan. Read every line that clears early in the new period and ask whether it belongs on the old reconciliation.
- Check sequence. List the check numbers used in the period. A number missing from both the cleared list and the outstanding list is a gap to explain.
- Account list. Compare the accounts on the confirmation with the accounts the client reconciled.
The sequence test and the matching of repeated charges are described in finding duplicate and missing transactions on statement lines. A gap in the check numbers is a lead, not a finding, until you have traced the missing number.
Cutoff at the bank reconciliation date
Cutoff asks whether each transaction is recorded in the period it belongs to. For a bank reconciliation, that means a check written on December 30 belongs in December even if it clears on January 4, and a deposit made on January 2 does not belong in December cash. Dates, not clearing, decide the period.
Which transactions fall either side
Take the last check written before the date and the first check written after it, and read their dates and numbers. Checks issued in the new period but dated and booked in the old one understate cash and liabilities, and the reverse overstates cash. The cutoff statement shows when each one cleared, but clearing date is evidence about the item and does not set the period. For deposits, read the deposit slip date and the posting date, and ask whether the delay is ordinary for that bank.
A short example
Suppose a client's last check of the year is number 4812, dated December 31, and the first check of the new year is number 4813, dated January 3. If check 4813 appears on the old reconciliation as outstanding, cutoff has failed. These numbers are made up for illustration. The same pair of checks, read in the register, is often enough to expose the problem.
Edge case: does a bank reconciliation test valuation or presentation?
Valuation barely applies to cash in a domestic bank account, since a dollar on deposit is worth a dollar. Presentation applies in two ways: overdrafts and restricted cash may need separate disclosure. The two edge cases are foreign-currency accounts and cash held for a specific purpose.
Valuation
Valuation becomes a real assertion when the account is in a foreign currency, because the balance must be translated at the right rate on the date. It also matters if a bank has failed or the balance exceeds what the bank can be expected to return. Outside those cases, a clean confirmation and arithmetic that foots cover it.
Presentation
Presentation asks whether cash is classified and disclosed correctly. An overdrawn account should not be netted against a positive balance at a different bank without a right of offset. Cash that is restricted by a loan agreement or held in escrow may need to be shown apart from unrestricted cash. The confirmation often shows the restriction, so read it for that purpose as well as for the balance.
For a worked month of numbers to practice on, the bank reconciliation worked example walks through a full reconciliation. If you want the footing and the exception list done before you start, PreciseBankFlow is built to produce both from the statements.