Why is it important for a business to prepare a monthly bank reconillation statement? state two points (b)what should the internal auditor do about this? Name two points
It is important for a business to prepare a monthly bank reconciliation statement for a couple of reasons:
1. Identifying Errors: Bank reconciliation helps in identifying discrepancies between the balance reported by the company's accounting records and the balance reported by the bank. These discrepancies can include errors made by either party, such as incorrect posting of transactions, missing deposits or withdrawals, or bank charges that were not accounted for. By reconciling the bank statement with the company's records, any errors or mistakes can be identified and rectified. This process ensures that the financial records are accurate and reliable.
2. Detecting Fraud or Unauthorized Activities: Bank reconciliation also plays a significant role in detecting fraudulent activities, such as unauthorized transactions or embezzlement. By comparing the company's records with the bank statement, any discrepancies or suspicious transactions can be immediately flagged for further investigation. This helps in preventing financial losses and ensuring the business's financial security.
As for the internal auditor, their role in relation to the monthly bank reconciliation statement would typically involve:
1. Reviewing and Validating the Reconciliation Process: The internal auditor should review the bank reconciliation statement prepared by the accounting department. They should ensure that the reconciliation process is accurate and that all outstanding items have been properly investigated and resolved. This includes verifying the accuracy of the starting balances, ensuring that all reconciling items have been appropriately documented and validated, and reviewing any adjustments made to the company's records.
2. Performing Periodic Spot Checks: In addition to reviewing the monthly bank reconciliation statement, the internal auditor should periodically perform spot checks throughout the year. This involves randomly selecting certain transactions and comparing them with the bank records to ensure that they have been correctly recorded. These checks help in detecting any potential errors or irregularities in the reconciliation process and provide an added layer of assurance for the reliability of financial records.