Unit 10: Financial Accounting 2 In a series of 2 for this unit Learning outcome 3-4. Sample

Transcription

1 Unit 10: Financial Accounting 2 In a series of 2 for this unit Learning outcome 3-4

2 Types of Account Reconciliation Account reconciliation within the account Account reconciliation with an external account -Bank Accounts -Outstanding items -Items processed by the bank but not yet processed through the general ledger -Other external accounts With another account Control account. Read More:

3 Best Practices of Account Reconciliation It is essential to control the books by laying down an appropriate reconciliation and communication framework. The issues that usually lead to account reconciliation are mostly preventable.

4 Best Practices of Account Reconciliation cont.. 1. Prepare reconciliations on a timely basis. Account reconciliations which are due for over a month can risk misstatement of the financial results. Consider preparing certain key reconciliations prior to the month-end cut off date fix errors instead of document errors. The account reconciliations time frame needs to be staggered to address fraud, turnover, transaction volume, etc. thus reducing risk. On the basis of risk potential, the reconciliations need to be done either on daily or weekly or monthly or quarterly. 2. There should be a consistent methodology and terminology to be followed, in other words the process should be well defined. This is because in some cases the account owner might consider transactions to be reconciled if the differences are quantified, while in other instances account reconciliations primarily involve rolling forward of activity posted to the account without validating. Hence a standard definition should be established for reconciliation across the company.

5 Best Practices of Account Reconciliation cont 3. Account reconciliations should not be restricted to roll forward of activity or identification and isolation of differences. The account should be reconciled only after the differences are investigated, the right accounting treatment identified, and applicable correcting journal entries posted to the general ledger. 4. The account reconciliation should start by comparing the ending balance in the general ledger with the ending balance in the sub ledger or any connected documents, and it would be considered completed only with a matching adjusted balance in each of the ledgers 5. Usually the accounts in the company s books increase over a period due to new processes, new entities acquired or created, new transactions etc. This results in creation of large number of accounts which might become difficult to perform account reconciliation for. The company should perform account rationalization annually to merge accounts which are not required thus reducing accounts to be reconciled.

6 Best Practices of Account Reconciliation cont 6. Dispose of reconciling items on a timely basis so they do not accumulate into an intolerable error 7. A separate reconciliation needs to be performed for each balance sheet account. Accounts like retained earnings which are flow through from other activities need to have a separate reconciliation only in cases where there are differences between the ledger and sub ledger. 8. The practice of linking multiple bank accounts or multiple inter-company transactions to a single general account should not be followed. Separate accounts for separate transaction flows need to be maintained. 9. The management needs to be kept in loop on the status of the account reconciliation process with regular status meetings and reports. The status should include details on the number of accounts not reconciled, the age of the unreconciled items and dollar amount of the differences. The effectiveness of the reconciliation needs to be measured on a time to time basis.

7 Best Practices of Account Reconciliation cont 10. Companies should adopt continuous improvement processes for reconciling all accounts before the post closing adjustment review process. 11. Because the external auditor is no longer an internal control, the complete account reconciliations should be ideally done before SEC filings to avoid a possible material weakness 12. The documentation should be detailed, with complete account descriptions, controls, policies and applicable rules. The document repository should contain the complete account and reconciliation history with all the connected attachments too. The approval and the change management workflow should be clear and documented.

8 Best Practices of Account Reconciliation cont 13. Past dues need to be highlighted with adequate prompts to the managers about the issues. There should be complete audit trail capturing all the comments and the notes. The high risk accounts have to be continuously monitored to ensure no occurrence of errors or frauds. 14. The workflow for issue escalation and resolution needs to be documented clearly and followed. There should be adequate item aging and carry forward functions to lock down completed reconciliation reports