Why is a bank reconciliation considered an internal control over cash? How does it provide control? What control violations might the bank reconciliation highlight?
A bank reconciliation is considered an internal control over cash because it helps ensure the accuracy and completeness of an organization's cash balance. It provides control by comparing the company's records of cash transactions to the bank's records, identifying any discrepancies, and taking appropriate action to correct them. Here's how it provides control:
1. Identifying errors or mistakes: A bank reconciliation compares the company's cash records with the bank statement, which enables the identification of errors or mistakes made by either party. For example, if a company mistakenly records a transaction in its cash register but fails to deposit the funds in the bank, the bank reconciliation will flag this discrepancy.
2. Detecting fraudulent activities: A bank reconciliation helps uncover any unauthorized transactions or fraudulent activities. For instance, if there are fraudulent withdrawals or unauthorized checks cashed, they would be revealed during the reconciliation process.
3. Ensuring accuracy: By reconciling the cash balance with the bank statement, discrepancies such as omitted transactions, duplicated entries, or recording errors can be identified and rectified. This ensures that the cash balance in the company's books is accurate and reliable.
Control violations that a bank reconciliation might highlight include:
1. Outstanding checks: If checks issued by the organization are still outstanding but have not been deducted from the bank balance, it would raise concerns about adequate control over the disbursement process.
2. Deposits in transit: Deposits made by the company but not yet recorded by the bank may indicate control violations, such as delayed or incomplete depositing procedures.
3. Unauthorized transactions: If there are transactions on the bank statement that the company did not authorize or record, it could be an indication of control breaches, such as internal fraud or lack of proper segregation of duties.
4. Bank errors: Discrepancies caused by bank errors, such as incorrect deposits or withdrawals, may indicate control weaknesses in terms of monitoring and reviewing bank transactions.
In summary, a bank reconciliation is a critical internal control over cash as it helps ensure the accuracy, completeness, and integrity of an organization's cash balance by identifying errors, detecting fraud, and uncovering control violations that may exist in the cash management process.