Question

You are the lead auditor performing a walkthrough of the bank reconciliation performed by the company controller. What is the design deficiency of the control below ? What additional steps should the Controller perform ?

The Controller says, "I first review the sorted list of returned checks and find which numbers are missing. Second I determine the amount uncleared checks by referring to the cash disbursements journal. If the bank accounts reconcile at that point, the review is done. If it does not reconcile I search for in transit deposits, checks from the beginning outstanding checks list that still have not cleared, other reconciling items and bank errors until it reconciles."

Answer 1

There is a major design deficiency of the control and steps performed buy the controller in reconciling the bank statement.

The Controller says, "I first review the sorted list of returned checks and find which numbers are missing. Second I determine the amount uncleared checks by referring to the cash disbursements journal.”

In simple words the controller first looks for the cheques deposited but not cleared or dishonoured cheques and then looks for the cheques issued by looking on the cash disbursements journal. If cash book and bank statement reconciles at this point, his work is done.

Now such steps may cause a major deficiency as explained by the example below:

Suppose the Cash book balance is 10000/- previous month and Bank Balance is 12000/-

Lets make a bank reconciliation statement

Balance as per Cash book	10000
Cheques issued but not cleared	5000
Cheques deposited but not isssued	-3000
Balance as per Bank Statement	12000

           

Now coming to next month let’s suppose Entity receives Rs 5000/- worth of cheques and issued Rs 5000/- cheques and there is no other entry in Bank. Then Balance of cash book shall be Rs 10000.(10000+5000-5000)

Also assume that previous month cheques are reflecting now in bank statement and from current month the Rs 2000/- worth of cheques are returned and 4000/- worth of cheques issued are not cleared and Cheque printing, service charges and other charges of banks amount to 500/-.Interest credited is also 500/-. Balance in bank statement will reflect 12000/-. (12000+3000-5000+3000-1000-500+500)

As per the design followed by the Controller bank reconciliation shall be prepared as follows:

Balance as per Cash book	10000
Cheques issued but not cleared	4000
Cheques deposited but not isssued	-2000
Balance as per Bank Statement	12000

           

As we can see above balances are reconciled but previous cheques which were reflecting in bank reconciliation statement are not taken into account Bank charges and Interest credited is also not taken. If this design is followed it will result in major inaccuracies and omission of bank transactions in books of accounts.

The steps which should be followed by the controller are:

1. He should check whether entries appearing in previous month reconciliation are now cleared in the bank statement.
2. Then He should look for current month cheques dishonoured, issued but not cleared.
3. He should then look for deposits in transits and make appropriate entry in Bank reconciliation.
4. Then he should also check the bank statement for any Interest credited and charges debited and make appropriate entries in books of accounts.

With this, his reconciliation will be correct.

Hope this answers the question.

Good Luck!