To audit a bank reconciliation, you verify the schedule ties to the general ledger and the bank statement, confirm the bank balance directly with the financial institution, substantively test each reconciling item against a cutoff bank statement, perform a cash cutoff test for window dressing, and, when the client has multiple accounts or elevated fraud risk, add an interbank transfer schedule or a full proof of cash. The order matters. Each step assumes the prior one held up.
Start With the Documents and the Math
Pull the client’s reconciliation schedule, the period-end bank statement, the detailed general ledger activity for cash, and the prior period’s reconciled schedule. You need the prior schedule to see whether last year’s outstanding items actually cleared. Without it, a reconciling item that has been sitting there for two years looks the same as one that has been sitting there for two months.
Trace the ending bank statement balance onto the reconciliation, and trace the book balance back to the general ledger cash account. Those two ties confirm the schedule starts from the right numbers. Then foot the schedule. The adjusted bank balance has to equal the adjusted book balance before you touch a single reconciling item. If it doesn’t foot, send it back to the client. Hunting for the client’s arithmetic error is not audit work.
Confirm the Bank Balance Directly
The bank statement came from the client. You need independent evidence that the bank actually holds what the statement says. The standard bank confirmation form, jointly approved by the American Bankers Association, the AICPA, and the Bank Administration Institute, is the tool for that.1AICPA & CIMA. Standard Form to Confirm Account Balance Information with Financial Institutions
Send the confirmation request directly to the bank and receive the response directly at the audit firm. PCAOB AS 2310 is explicit: the auditor should send the confirmation request directly to the confirming party and obtain the response directly from the confirming party.2Public Company Accounting Oversight Board. AS 2310 – The Auditors Use of Confirmation Any client involvement in the transmission chain defeats the point of the procedure.
Know what the standard form covers and what it doesn’t. It covers deposit account balances and loan account balances. It does not cover contingent liabilities, letters of credit, or guarantees. Those items were removed years ago, so if you need information on contingent obligations, request it through a separate inquiry letter.3The CPA Journal. The New Confirmation Form for Financial Institutions – Section: What are the Changes?
Any difference between the confirmed figure and the bank statement needs immediate investigation. The confirmed balance is the strongest existence evidence you have for cash, and an unexplained gap could be anything from a timing item to outright fraud.
Electronic Confirmation Platforms
Most firms now confirm through electronic intermediaries rather than on paper. AS 2310, effective for fiscal years ending on or after June 15, 2025, addresses this in Appendix B.2Public Company Accounting Oversight Board. AS 2310 – The Auditors Use of Confirmation Before relying on a platform, understand its controls against interception and alteration, confirm those controls are designed and operating effectively, and assess whether the client has any relationship with the intermediary that could let it override those controls. If the controls are inadequate or the client can override them, send directly without the intermediary, or fall back on alternative procedures.
Test the Reconciling Items
The reconciling items are where most of the audit risk sits. Each one is a timing difference, and each one needs evidence that it is valid and lands in the right period.
Deposits in Transit
A deposit in transit is cash on the client’s books that the bank hasn’t credited yet. Trace each one to the cutoff bank statement. If it appears shortly after the balance sheet date, it’s legitimate.
The risk on this side is overstatement. A common manipulation is booking a year-end deposit that never happened or holding the receipts journal open past closing. Timely clearance on the cutoff statement is the check against that. A deposit that takes an unusually long time to show up deserves a closer look, including the remittance advice and other support. There’s no bright-line day count that makes a deposit invalid, but the longer it takes to clear, the more skepticism is warranted.
Outstanding Checks
Outstanding checks run the other direction. The client recorded the disbursement, but the bank hasn’t paid it. Trace them to the cutoff statement and confirm they cleared shortly after year-end.
The fraud risk here is understatement of the list. Leaving checks off the reconciliation makes the book balance look higher than it is. Trace all checks issued before year-end to the subsequent bank statement to catch omissions, and watch the check number sequence. Gaps around year-end are a red flag that a check was written and intentionally excluded.
A check that’s been outstanding an unusually long time needs its own attention. It might be lost, voided, or never delivered. Ask for the original voided check, a stop-payment confirmation, or a journal entry reversing the liability.
A Note on Stale Checks and Escheatment
Long-outstanding checks bring in unclaimed property obligations. Every state has escheatment laws requiring companies to turn over dormant funds after a specified period. For vendor payments, dormancy periods are predominantly three or five years, with a trend toward shorter periods as states move from five to three. Due diligence at a minimum requires, for property worth $50 or more, sending a letter to the payee’s last known address between 60 and 120 days before the reporting deadline.4Sales Tax Institute. Managing Unclaimed Property: Understanding Dormancy Periods, Due Diligence, and Escheatment When you see stale checks on the reconciliation, ask whether the client is tracking escheatment. The liability belongs on the financial statements either way.
Bank Charges, Interest, and NSF Checks
Reconciliations also carry bank service charges, interest income, and returned checks that the bank has already recorded and the client has not yet booked. Vouch each to supporting documentation. A service charge should tie to a bank debit memo showing the specific fee. Interest income should tie to a credit memo showing the rate and calculation. For NSF checks, confirm the client reversed the original receipt entry and re-established the receivable. Missing that reversal inflates cash and understates accounts receivable at the same time.
Compare the current schedule to the prior period’s. Anything that appeared last time and still appears now needs investigation. Long-standing reconciling items often signal an error in the original entry or an unrecorded liability nobody has cleaned up.
Run the Cash Cutoff Test
The cutoff test is a separate procedure aimed at whether transactions landed in the right period. Get a cutoff bank statement covering roughly the first ten to fifteen business days after the balance sheet date. The client should request it from the bank with instructions to send it directly to the auditor, preserving your control over the evidence.
Focus on checks written just before year-end. Pull the last sequence of check numbers from the books for the period and trace them to the cutoff statement. If they cleared during the cutoff window, you have external evidence they were actually mailed or delivered before the balance sheet date.
This test is built to catch window dressing, meaning any improper shifting of receipts or disbursements to manipulate reported balances. Holding the receipts journal open past year-end inflates cash and reduces receivables. Delaying disbursements has the opposite effect on payables. Bank clearance timing on sequential check numbers gives you a timestamp the client can’t alter after the fact.
Build an Interbank Transfer Schedule for Kiting
If the client has more than one bank account, kiting testing is not optional. Kiting moves money between accounts to make the same funds appear in two places at once, exploiting float between when a transfer leaves one account and arrives in another.
The tool is an interbank transfer schedule listing every transfer between company accounts around year-end. For each transfer, track four dates: when the company recorded the debit on its books, when the bank debited the sending account, when the company recorded the credit on its books, and when the bank credited the receiving account. A clean transfer shows both sides hitting the books and the bank in the same period.
Kiting shows up as asymmetry. The receiving account shows a deposit recorded before year-end, while the sending account isn’t reduced until after year-end, so the same dollars appear in both accounts on the balance sheet date. When the book dates fall in different fiscal years, the entity may be inflating cash to improve reported earnings. When the bank deposit date is in the current year and the other three dates fall in the subsequent year, that pattern can indicate kiting used to conceal a cash shortage.5The CPA Journal. Auditing
Scope the schedule to the banking relationships. A company with only local accounts might need only a few days on either side of year-end. Cross-border clearings take longer, so international accounts need a wider window.
Extend to a Proof of Cash When Risk Warrants
A standard reconciliation compares balances at a single point in time. When controls over cash are weak or you suspect fraud, that snapshot isn’t enough. A proof of cash reconciles beginning balances, total receipts, total disbursements, and ending balances in four separate columns. Beginning plus receipts minus disbursements equals ending, and each column reconciles book to bank independently.
That structure is what makes it useful. Someone who diverted cash during the period and covered it with a timing manipulation will leave the receipts or disbursements columns out of balance even when the ending figures tie. A proof of cash isn’t required on every engagement. Deploy it when the risk assessment justifies the extra work: a history of cash discrepancies, unusually high volume of reconciling items, turnover in the staff responsible for cash, or specific fraud indicators identified in planning. When the standard reconciliation and cutoff testing already give you comfort, the proof of cash adds effort without proportionate value. When something feels off, it’s one of the most effective tools available.