Bank reconciliation audit procedure for statutory audit

A bank reconciliation audit procedure verifies that the client's book balance for each bank account agrees to the bank statement balance after accounting for every timing difference between the two, and that each reconciling item is genuine, correctly valued and clears within a reasonable period. The auditor obtains or prepares the BRS for the year-end date, traces every reconciling item to its subsequent clearing in the bank statement, and separately investigates any item that does not clear or that recurs month after month without resolution.

What a BRS is actually reconciling

A bank reconciliation statement explains the difference between the balance as per the client's bank ledger (the book balance) and the balance as per the bank's own statement, as of the same date. The difference exists because the two records update at different points in the transaction cycle, not because either one is wrong.

• Cheques or payment instructions issued and recorded in the books but not yet presented at the bank (outstanding cheques / cheques issued but not cleared).
• Deposits recorded in the books but not yet credited by the bank (deposits in transit, including cheques sent for collection).
• Bank charges, interest, or fees debited by the bank but not yet recorded in the books.
• Interest credited by the bank, or standing instruction collections, not yet recorded in the books.
• Direct credits or debits by third parties through NEFT/RTGS/UPI that the bank has processed but the client has not yet booked, and vice versa.
• Errors by either the client or the bank — a transposed digit, a wrong account debited, a cheque of another entity cleared against this account.

The audit procedure, step by step

1. 01Obtain the BRS for the year-end date and the bank statement independentlyThe bank statement should come from the bank portal or the year-end confirmation, not only from what the client has printed and filed, so that the closing balance on the statement cannot be altered before it reaches you.
2. 02Agree the book balance on the BRS to the general ledgerThe opening figure on the reconciliation must tie to the bank ledger balance in the trial balance for that account. A BRS that starts from an unreconciled figure is not evidence of anything.
3. 03Agree the bank balance on the BRS to the statement and, where obtained, to the bank confirmationAny difference between the statement balance and the confirmed balance needs its own explanation before the reconciliation can be relied on.
4. 04Trace every reconciling item to subsequent clearingFor outstanding cheques and deposits in transit, check the bank statement for the following one to two months and confirm each item actually cleared. An item that never appears in the subsequent statement is not a timing difference.
5. 05Recompute the reconciliation arithmeticBook balance plus deposits in transit, less outstanding cheques, adjusted for unrecorded bank charges and credits, should equal the bank statement balance exactly. Footing errors in the BRS itself are common and easy to miss when reviewing a client-prepared file.
6. 06Investigate items outstanding beyond a reasonable periodFlag any cheque or deposit still outstanding after ninety days (adjust the threshold to the client's own cheque validity period, typically three months in India) and ask for a specific explanation for each.
7. 07Scan for one-sided or unusual entriesRound-sum unexplained reconciling items, items that reverse and reappear across months, and reconciling items booked directly to an expense or suspense account instead of being cleared, are all worth a closer look.

Red flags that separate a timing difference from a problem

How many months of BRS to review

Reviewing only the year-end BRS tells you the position was reconciled on one day. It does not tell you whether reconciliation is a monthly discipline or a year-end exercise performed once, under audit pressure, to make the numbers tie.

• For every bank account, review the year-end BRS in full, tracing every item to subsequent clearance.
• Sample at least two or three interim months spread through the year, more for accounts with higher transaction volume or a history of control weaknesses, to confirm reconciliation is actually performed monthly and not reconstructed at year end.
• Where the client's accounting software auto-reconciles against a bank feed, test the mapping rules rather than the output — an auto-reconciliation that silently matches unrelated entries by amount is worse than no reconciliation, because it hides the items that most need review.
• For dormant or rarely used accounts, confirm the balance directly with the bank even if the account shows no activity; dormant accounts are a common place for an unreported balance or an unauthorised transaction to sit unnoticed.

Linking the BRS to the rest of the audit

The year-end BRS is also the bridge between the cash flow statement's closing cash and bank balance and the balance sheet. Outstanding items that are unusually large relative to the account's normal activity should be cross-checked against subsequent bank statements received after the balance sheet date but before the audit report is signed, as part of subsequent events review.