Key Points
- Every bank account the entity holds must be reconciled at the reporting date, including dormant accounts and foreign currency accounts.
- Unexplained reconciling items older than 30 days are a red flag for misstatement or unrecorded transactions.
- External bank confirmations under ISA 505 supplement the reconciliation but do not replace it.
- Most inspection findings on cash relate to stale reconciling items left unresolved rather than to the confirmed balance itself.
What is Bank Reconciliation?
The bank reconciliation serves a single audit purpose: proving that the cash balance in the general ledger agrees to an independent, external source. ISA 500.6 requires audit evidence that is sufficient and appropriate, and for cash balances, the bank statement is the primary external evidence. The auditor obtains the entity's reconciliation and agrees the book balance to the general ledger. Then the auditor agrees the bank balance to the bank statement (or the ISA 505 bank confirmation) and tests the reconciling items.
Reconciling items fall into two categories. Timing differences (outstanding cheques, deposits in transit) are legitimate if they clear shortly after the reporting date. The auditor verifies clearance by inspecting subsequent bank statements. Non-timing items (errors, unrecorded bank charges, fraudulent entries, or mispostings) require adjustment. ISA 240.32(a)(i) specifically identifies journal entry testing on cash accounts as a required fraud procedure, and the bank reconciliation is where unusual postings surface first.
The reconciliation also feeds the completeness assertion. If an entity holds bank accounts that do not appear in the ledger, the auditor will only detect them through the external confirmation process under ISA 505.7. Requesting confirmations from all banks the entity has dealt with during the period (not just those with year-end balances) closes this gap.
Worked example
Client: German engineering company, FY2025, revenue €28M, HGB reporter. Hoffmann holds two EUR operating accounts at Commerzbank and a USD export-receivables account at Deutsche Bank. A fourth account (a term deposit at Sparkasse) rounds out the cash portfolio. The engagement team performs the bank reconciliation at 31 December 2025.
Step 1 — Obtain reconciliations and source documents
Management provides reconciliations for all four accounts. The team agrees the book balance of €3.42M across the four accounts to the nominal ledger. The bank statement balances total €3.58M, producing a gross difference of €160K to be explained by reconciling items.
Documentation note: record each account number, the currency, the book balance, the bank statement balance, and the gross difference. Attach copies of the bank statements dated 31 December 2025. Reference ISA 500.6 for the evidence requirement.
Step 2 — Test reconciling items
The reconciling items comprise four outstanding cheques totalling €112K (issued 27–30 December) and two deposits in transit totalling €48K (recorded 30 December, credited by the bank on 2 January). These items net to €160K, accounting for the full difference.
Documentation note: list each reconciling item by date, reference, amount, and type. For outstanding cheques, record the cheque number, payee, amount, and date of clearance on the January bank statement. For deposits in transit, record the deposit slip reference and the bank credit date. Reference ISA 330.20 for the design of substantive procedures over cash.
Step 3 — Verify subsequent clearance
The team inspects the January 2026 bank statements. All four cheques cleared between 3 and 9 January. Both deposits were credited on 2 January. No item remained outstanding beyond 10 business days.
Documentation note: record the clearance date for each item. Flag any item that has not cleared within 15 business days of the reporting date for further investigation per ISA 240.32(a)(i).
Step 4 — Confirm completeness via external confirmation
The engagement team sent ISA 505 confirmation requests to all three banks. All responses confirmed the balances per the bank statements. Commerzbank also confirmed that no other accounts exist in Hoffmann's name, addressing the completeness assertion.
Documentation note: file the original confirmation responses. Record any discrepancies between the confirmed balance and the bank statement balance.
Conclusion: the reconciled cash balance of €3.42M is supported by bank statements and confirmed externally. All reconciling items cleared within 10 days of year-end. The evidence chain runs from the ledger through the reconciliation to an independent third-party source.
Why it matters in practice
Teams frequently accept management's bank reconciliation without testing individual reconciling items for subsequent clearance. ISA 330.20 requires substantive procedures responsive to the assessed risks, and for cash the standard expectation is that outstanding items are traced to post-year-end bank activity. Leaving a stale cheque untested means the completeness and existence assertions on cash are unsupported.
Foreign currency bank accounts are often reconciled at the book rate rather than the closing rate. IAS 21.23 requires monetary items in a foreign currency to be translated at the closing rate, and a reconciliation prepared at the transaction rate will not detect translation differences. On a USD account holding $2.4M, a two-cent rate movement produces a €40K–€50K variance that sits unrecorded until someone reperforms the reconciliation at the correct rate.
Bank reconciliation vs. bank confirmation
| Dimension | Bank reconciliation | Bank confirmation (ISA 505) |
|---|---|---|
| Purpose | Matches the entity's cash book to the bank statement, identifying and resolving differences | Obtains independent evidence directly from the bank about balances, loans, guarantees, and related liabilities |
| Source of evidence | Internal (entity-prepared reconciliation, bank statements) | External (direct response from the bank to the auditor) |
| What it proves | That the book balance is supported and reconciling items are valid | That the balance per the bank is accurate and complete, including undisclosed accounts or liabilities |
| Timing | Performed at the reporting date (or interim with roll-forward) | Requested close to the reporting date; responses may arrive during or after fieldwork |
| Limitation | Does not detect bank accounts or liabilities unknown to the entity's records | Does not explain reconciling items or prove that the entity's accounting for timing differences is correct |
A bank confirmation tells the auditor what the bank says. A bank reconciliation tells the auditor why the entity's number differs and whether that difference is legitimate. Neither replaces the other.
Related terms
Frequently asked questions
Do I always need to send a bank confirmation under ISA 505?
ISA 505 does not mandate confirmations for every engagement, but ISA 505.7 requires the auditor to consider external confirmations when the assessed risk justifies it. Most firms treat bank confirmations as a default procedure because the bank is an independent source. If the auditor decides not to confirm, ISA 505.8 requires documentation of the reasons and the alternative procedures performed.
How do I audit a bank reconciliation for fraud risk?
Focus on the reconciling items, not the confirmed balance. ISA 240.32(a)(i) requires procedures over journal entries, and cash is the account class most susceptible to manipulation. Trace reconciling items to supporting documents (cheque images, deposit slips) and verify subsequent clearance. Investigate any item that appears only on the reconciliation but has no matching entry on either the bank statement or the cash book.
Can I use a bank reconciliation from a date other than year-end?
Yes, if the risk assessment supports it. ISA 330.A53 permits the auditor to perform substantive procedures at an interim date and extend the evidence to period end through additional procedures. For a reconciliation performed at 30 September, the auditor would test all cash transactions from 1 October through 31 December and reperform the year-end reconciliation. A separate year-end bank confirmation closes the gap.