Methods of Reconciliation & Verification

Reconciliation compares two sets of records that should agree (e.g. the cash book and the bank statement) and explains any difference. Verification checks that recorded items actually exist and are accurate using evidence (e.g. counting inventory).

Internal: the cash book; the sales/purchases ledgers (or books of prime entry). External: the bank statement; a supplier's statement of account (or invoices received).

Reconciliation and verification help to ensure the records are accurate and complete before the financial statements are drawn up:

• They detect errors in the records (e.g. a control account not agreeing with the ledger reveals a mistake to investigate).
• They detect and deter fraud, especially when the person checking is different from the person recording (segregation of duties).
• Checking against independent external evidence (bank statements, suppliers' statements) confirms balances that the internal records alone could not.

As a result, the financial statements are more likely to give a true and fair view, and managers, owners and other users can have greater confidence in them.

Re-checking the same ledger only re-examines the same set of records, so the same error could be repeated and remain undetected.

Comparing against a different record — a control account built from the books of prime entry, or an independent bank statement prepared by the bank — provides a separate check. A difference between the two highlights an error or omission that re-checking one record alone would miss, making it a more reliable test.

1. They do not detect every error. Some errors leave the records still agreeing — for example, the trial balance does not reveal errors of principle, omission or commission, and a reconciliation only checks the items being compared.

2. They rely on the records being complete. If a transaction is wholly omitted from the books, there may be nothing to reconcile against, so the omission can go undetected.

3. They can be defeated by collusion (and are costly). If two or more employees work together, they can conceal a fraud despite the controls. The procedures are also time-consuming and costly to perform, which may limit how often they are done.

Bank reconciliation. Regularly reconciling the cash book/takings to the bank statement would reveal any takings that were recorded but not banked, exposing a shortfall that points to theft.

Segregation of duties. Having a different person record cash from the person who banks it and reconciles the account means an employee cannot both steal cash and conceal it — an independent check makes fraud harder to hide.

Physical verification. Counting cash in the till and comparing it to the recorded takings (a verification) would highlight any missing amounts quickly.

Deterrence. Simply knowing that reconciliations and checks are carried out deters employees from attempting theft in the first place.

Limitation. These controls reduce, but do not eliminate, the risk — they could be defeated by collusion — so they provide reasonable, not absolute, assurance.

What the trial balance does. It checks the arithmetical accuracy of the double entry — if total debits equal total credits, it suggests each transaction has been recorded with equal entries, and it is quick and simple.

Why it is not enough on its own.

• It does not detect errors of omission, commission, principle, original entry, reversal or compensating — these all leave the trial balance still balancing.
• It says nothing about whether recorded assets actually exist or whether balances agree with independent records.

Other procedures are needed.

• Control accounts check the accuracy of a whole ledger against its individual accounts.
• Bank reconciliation checks the cash book against an independent bank statement.
• Physical verification confirms that inventory and assets exist.

Conclusion. A business should not rely on the trial balance alone. Because each procedure has blind spots, the trial balance should be combined with control accounts, bank reconciliations and physical checks to give reasonable assurance that the records are accurate.

Segregation of duties means that different people perform the recording, the handling of assets and the checking/reconciling of transactions.

This strengthens control because no single person can both commit a fraud and conceal it — for example, the person who records cash does not also bank it and reconcile the account, so a theft would be spotted by an independent check. It also reduces the chance of undetected errors, since one person's work is reviewed by another.

Agreeing reconciliations are reassuring — they show that the records being compared are consistent (e.g. the cash book agrees with the bank, the control account agrees with the ledger), which detects many errors.

However, the statement is too strong:

• Reconciliations only check the items being compared; errors outside those records (e.g. errors of principle, or a transaction omitted from both records) can remain undetected.
• A balanced set of records can still contain compensating errors that cancel out.
• Controls can be defeated by collusion, so a fraud could be hidden even where reconciliations agree.

Conclusion. Agreeing reconciliations make errors less likely, but they provide reasonable, not absolute, assurance. The financial statements could still contain some errors, so the statement is not correct.

(a) Bank balance: the bank statement — an external source (prepared by the bank) — reconciled to the cash book.

(b) Amount owed to a supplier: the supplier's statement of account (or invoices received) — an external source — compared with the supplier's account in the purchases ledger.