Reconciliation Tips

Every so often we attempt to make the world of account reconciliations a little bit better. We offer our tips on how to make your account reconciliations complete and accurate. This can greatly enhance the ability of your account reconciliation process to be a key internal control that is accepted by your auditors as being functional and complete.

Most of our tips are generic and deal with account reconciliations in general. Whether you use RecWizard or some other program, these basic steps will make your reconciliations better. We do, of course, sometimes offer tips about using our software, RecWizard, in a way to make you even more efficient and effective.

To sign up for our tips please fill in the information below and click Submit. If you want to see some of our past tips, scroll down past the sign up form.

Previous Reconciliation Tips

Here are the previous tips that have been emailed to our mailing list. If you have any thoughts about what our next subject should be, please email us at tips@recwizard.com. We hope these help you and your staff to become better accountants.

	Seven	Grading account reconciliations - how to objectively evaluate the quality of your reconciliations.
	Six	Amortization schedules - the art of presenting the future and the past.
	Five	Prepare early for the auditors - tips for RecWizard users to make year-end painless.
	Four	Policies are there for a purpose - where are yours?
	Three	Documenting the review process - do we really have to do all that?
	Two	Supporting documents - what are they and why are they important?
	One	Timing of reconciliation preparation - when should you do them?

- Click on the document icon to go to the reconciliation tip.

Coming in Mid-2010 - Account reconciliations - how to objectively evaluate the quality of your reconciliations.

This promises to be a very interesting edition of the Reconciliation Tips. We are putting together a panel of experts that will include internal auditing, external auditing, academia, multi-national corporations, smaller organizations and consultants. We'll discuss the elements that are important in creating good account reconciliations and offer suggestions about how to create an objective determination about the quality of your reconciliations.

NOTE: If you are interested in being part of this panel please contact Judy Weisser.

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Tip Six - Amortization schedules - the art of presenting the future and the past.

HERE IS WHAT'S COMING SOON - Amortizable items are just part of normal accounting. Preparing schedules that clearly show the past (what you have already amortized) and the future (what amounts will be written of in coming months) can be tricky. We'll even include an Excel workbook that you might find helpful in preparing your own reconciliations.

NOTE: If you have some workbooks that you're proud of and would like to share, please email them to us.

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Tip Five - Prepare early for the auditors - tips for RecWizard users to make year-end painless.

Whether you use RecWizard or not, when the auditors come to visit there are things everyone has to do that may be disruptive to your normal month end processes. The good news for RecWizard users is… you can greatly reduce the disruption factor and save time and aggravation in your year end audit because you use RecWizard!

Here are some of the things that will help smooth out the disruption of the year end audit. Remember, there are not any other programs like RecWizard on the market, so you might have to “teach” your auditors how to use this information.

ASSESSING INTERNAL CONTROLS – When your auditors determine how much audit work they need to perform, part of their assessment activities involves identifying and testing your internal controls. In any accounting system the major control that gives auditors a good feeling is the timely and accurate completion of account reconciliations. If you have good controls that usually means less validation work by the audit team.

This is how to show your auditors you have good account reconciliation controls:

If you are a RecWizard Professional user, run the General Ledger Reconciliation Summary Report (“GLRSR”) every accounting period end. This will show that you do actually complete the reconciliations for every month.
If you are a RecWizard On Demand or Enterprise user, run the Status Report by Entity report for every month. This will also demonstrate that your reconciliations are completed for all accounting periods.

Remember… you will have to tell your auditors about this. They won’t ask because they don’t know these reports exist!

If you have also told the auditors that you complete the reconciliations on a timely basis – and they want to test that fact – this is what you do:

For RecWizard On Demand or Enterprise run the Control Analysis report for every accounting period. This will show the auditors when the reconciliations were done in relation to their respective due dates.
For RecWizard Professional you would have to run the GLRSR every month on a timely basis and save those reports. They will be date stamped by the system and will be an easy way for the auditors to see that the reconciliations are prepared timely. The auditors can also do a test by looking at various reconciliations and noting the date of the electronic “signature”.

GETTING COPIES OF RECONCILIATIONS AND SUPPORTING DOCUMENTS – Your auditors will want to get copies of your reconciliations and the supporting documents that you have created during the year. In order to know the quality of your reconciliations they need to actually look at them! Many of your reconciliations are also the starting point for the auditor’s year end validation work.

With RecWizard Enterprise and RecWizard On Demand you can easily locate any reconciliations and supporting documents with a few mouse clicks. Just print the selected reconciliations and documents and make a folder titled “Auditor Copies”. That’s it. No hunting through file drawers and binders.

With RecWizard Professional you won’t be able to retrieve your supporting documents, but you can certainly quickly locate your reconciliations for any period and print them.

AUDITORS’ REVIEW CAN BE EXTENSIVE, YET CONTROLLED – yet another way to let your auditors test your controls and review reconciliations is to not make copies at all. Simply give your auditor a unique user name and password and let them sign on and review as they determine appropriate. (Separate user roles are available in RecWizard On Demand and RecWizard Enterprise). The auditors can print any reconciliations they feel are important and not require additional assistance by any of your staff. Of course, you would set a time limit for them to do their work and simply inactivate their user name when the deadline comes. If the auditor deems it necessary to perform additional reviews you would cooperate as appropriate.

At least with this level of control you can make sure your auditors are being focused and efficient – not just creating documents for document’s sake.

OVERALL AUDIT PREPARATION – as with any large project, you should plan ahead to avoid the disruption of “immediate need rush projects”. Whether you are using RecWizard, preparing manual reconciliations or using some other form of automated reconciliation tool, make sure your auditors identify what they want to review – then get it ready ahead of time. The audit effort is disruptive enough and you don’t need the additional distraction of finding reports and documents and then making copies. Plan ahead. Be prepared.

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Tip Four - Policies are there for a purpose - where are yours?

There are two questions you ask yourself when you reconcile an account.

The first question is – What makes up the balance in this account? This is what I call the “quantitative question”. You first have to determine what the amount is that is in the account and where it came from.

The second question is – Are these amounts appropriate? This is what I call the “qualitative question”. In order to perform this most crucial portion of the reconciliation process you must first know what your company’s accounting policies are. After all, how do you know if the amount is appropriate if you don’t know your company’s “rules”?

This second question – the qualitative question – relates specifically to this month’s tip.

To understand why the accounting policies are important, let’s first look at the auditor’s opinion that accompanies the financial statements. The key phrase that we find is: “In our opinion, the financial statements referred to above present fairly… the financial position… and the results of operations… in conformity with generally accepted accounting principles”.

Generally accepted accounting principles require that you adhere to your company policies and that you disclose those policies as part of your financial statements. Usually the first note in the Note to Financial Statements is the Summary of Significant Accounting Policies. This note explains how the company accounts for various items in its financial statements. Some of the items addressed by this footnote are:

Principles of Consolidation
Cash and Cash Equivalents
Revenue Recognition
Income Taxes
Depreciation and Amortization of Property, Plant and Equipment
Inventories
Pension Plans

Each company will determine which key policies should be disclosed as part of this footnote.

In addition to these policies that are a key element of your financial statements, your company will have many other policies related to the way it does business and conducts itself with customers, vendors, employees, investors and owners and its community. As part of your reconciliation process, you should make sure you adhere to these policies. If you find variances or exceptions to the way transactions are handled or procedures are followed, it is your responsibility as an accounting professional to bring these items to the attention of appropriate management personnel.

I can’t stress enough the importance of knowing what your accounting policies are when you are completing your reconciliations. If you don’t know your policies, then how can you possibly know that your accounting activity is in compliance with your polices?

Depending on the size of your company and its inclination to electronic storage, here are some of the places you might find your policies.

Large Companies – usually the company policies are located in a secure area of your intranet that is probably defined within your network as the “accounting” section. Your access to these policies are probably restricted by your network authority levels, so if you have trouble finding the policies, contact your supervisor or the IT department. Once you do get into the “accounting” section you’ll probably find an index of your policies so you can go to the area related to the account you are reconciling.

Medium Companies – because of the decrease in the costs of network technology over the past few years many medium size corporations will also have a network similar to the large corporations mentioned above. If your company has its own network, then you probably will be able to locate your policies as noted above for large companies. If they’re not in your intranet, or you don’t have your own intranet, then check with your supervisor to find out where the policies are stored. They are probably at least stored on your network and may be saved as a .pdf file or a .doc document that is not editable. Make sure you know where to find these policies and be familiar with them as you reconcile your accounts.

Small Companies – if your company likes to be on the cutting edge of information technology, then your policies could be on your intranet (like the large companies) or somewhere else in a secured portion of your network. Some small companies still have their policies documented in an actual book! Yes, the infamous Policy Manual. You should be able to find this in the controller’s office. Make sure you realize that very small companies may not have a formal document (like a policy manual) to refer to. That doesn’t mean you don’t have policies, it means you need to do a better job of documenting what they are. Maybe now is a good time to start creating that “big black book”. If you don’t have written policies then you should start asking questions about what your company policies are as they relate to the accounts you reconcile, and then document those policies yourself as part of your reconciliation.

Finding Policies Using RecWizard – no matter what version of RecWizard you are using, we provide the ability to store your company policies so they are available within the RecWizard program with a simple mouse click – WHILE YOU ARE PREPARING THE RECONCILIATION! No hunting for the policy manual or logging in to another web site. Not only is this important to the preparer who is making sure the accounting is in compliance with the procedures, but it’s important for anyone reviewing the account to have that information available as well.

No matter where your policies are stored, make sure you are familiar with them as they relate to the accounts that you reconcile. You can’t determine if an account balance is correct unless you know the policies that relate to the transactions that create the account balance.

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Tip Three - Documenting the review process - do we really have to do all that?

One of the major elements of any control system is that it is monitored. If you are performing those monitoring reviews, it is also important to document that the reviews are actually done. In my early days of auditing I learned that “somebody telling you they do something doesn’t mean they actually do it. You need proof”. So, how do you document that the reconciliations are prepared on a timely basis and that they have been reviewed?

For most companies to truly document the process you need to go back to basics… paper! Yep, you have to print your reconciliation on a piece of paper, attach your supporting documents, and then sign your name. Notice, I said “sign your name”. That means with a pen (so it can’t be erased) and to be truly complete, you should also add the date – again, in your own handwriting.

Now you may say, “why can’t I just include that information and print it from my Excel worksheet”? While that may look very clean and readable, all it shows is that “somebody” typed a name in the worksheet and somebody typed a date. That doesn’t mean that it actually happened on that date – nor that it was actually performed by that “somebody”. Your actual signature is a little bit harder for somebody to fake and yes, I know, you could still pre-date your signature to make it look like you completed it earlier, but you wouldn’t do that, would you?

OK – the reconciliation is complete and now it’s time to review. Now the paper comes to life. It actually takes a little trip… to the reviewer’s desk. All the reconciliations, along with appropriate supporting documents, must go to the reviewers so they can perform their functions.

This is what the reviewer should be doing:

Read every line and every description on the reconciliation. The reviewer is not supposed to "scan" or "glance" - they are supposed to REVIEW.
Double check any formulas that may exist in the reconciliation and make sure they are appropriate. (Have you ever prepared an Excel worksheet that had a total for a column of numbers that "missed" the first few amounts because the formula was wrong?)
Examine every supporting document and re-confirm that the appropriate amount on the supporting document matches the amount on the reconciliation.
Think about the content that you have just read and assure that the reconciliation clearly shows that amounts are appropriate, valid and correct and that explanations are clear and complete.
Sign (using a pen, of course) and date every reconciliation. Some people also think you should sign and date the supporting documents as well. Personally, I think signing the reconciliation is enough.
- NOTE: If I was an actually an external auditor I would be signing and dating every single document that I touch and clearly show where information references to in other schedules, but that's just some of the "auditor overkill". However, your company might want that detail of documentation, so don't rule it out.

Then the return trip begins. The reconciliations travel back to the original preparer for filing. Of course, if other members of your finance team want to see and approve them, then they continue on… or you make lots of copies. Whew… I’m tired just thinking of moving all that paper.

This completes the cycle for one month. But, it doesn’t create any kind of “overview” report to know that everything is done. Most of you probably have the familiar “checklist” that you have marked off to note for yourself that your reconciliations are done. Often these lists are then emailed to your supervisor or manager so they can see that everything has been completed.

Now you’re done. Reconciliations completed, reviewed, and clearly documented that the review process took place.

How can you somehow eliminate all the paper shuffling? RecWizard to the rescue!!! (This is the commercial part of the lesson).

Here is how RecWizard helps with the documentation of the review documentation process. Every user has defined roles assigned by an administrator. When a user signs in to complete their appropriate function, such as Prepare, Approve or Review, they will click on the “Certify” button once they have completed their respective functions. This information is saved electronically in the RecWizard database as a form of electronic signature.

This information can be accessed with various reports to verify the existence of the control process. Whether you are evaluating your own staff as a manager or supervisor, or acting as an internal or external auditor performing a verification test of the adequacy of the account reconciliation process as a key control, all appropriate documentation is just a mouse click away. Supporting documents are electronically attached and easily accessible, as are your accounting policies. No more papers to shuffle around.

In addition, you can see at any time the current status of all your reconciliations. Have a deadline coming up? Don’t know if everything is done? Are the most important accounts reconciled? You’ll know the answer to all those questions with RecWizard.

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Tip Two - Supporting documents - what are they and why are they important?

The first step in preparing an account reconciliation is to explain what the balance is. There can be many different reasons an account exists and it’s important to make sure the amount remaining in the account at the end of the month complies with your company policy and with the specific purpose of the account you are reconciling. If your account balance is properly explained, it is also important to supply appropriate supporting documents with your reconciliation.

This leads us to the two questions for this month’s tip.

First – What are supporting documents? Supporting documents will vary depending on the type of reconciliation you are preparing. While we will give you several examples of supporting documents in a minute, the important thing to remember is that these documents provide evidence that the amount you have included in your reconciliation is appropriate.

Supporting documents can be lengthy (a loan agreement) or very brief (a copy of a journal entry). They can be electronic (an Excel worksheet) or paper (copy of a vendor invoice). Make sure you review with your own supervisor or manager what level of documentation is expected.

Here are some examples of supporting documents. These should trigger your imagination to think about what you should be using to show support for the items that exist in your account balance at the end of the month.

Total Page from the Accounts Receivable Trial Balance – this would be used to show the total amount in Accounts Receivable that would be agreed to the general ledger balance. Notice that we are only including the Total Page. You should always have access to the detailed trial balance (whether in paper or electronic form) but for documenting the month end balance the Total Page is usually adequate.
Copy of a Vendor Invoice – this would be used to show that the amount in an account was actually billed by the vendor. The invoice would also have a description of what was purchased and this should also reflect that the account the invoice was recorded in is appropriate.
Excel worksheets – sometimes account balances are based on detailed calculations. Examples would be Allowance for Doubtful Accounts, Reserve for Obsolete Inventory, or Accrued Royalty Expense. These calculations might be very specific to your business and should be clearly stated on the Excel worksheet – and the worksheet attached to your reconciliation as a supporting document. There may also be items you should attach to your reconciliation to support your Excel worksheet. For example, the Accrued Royalty Expense calculation might include a copy of a sales report that shows the amount of the product or item sold that causes a royalty to be paid to a third party.
Bank Statements – the “king” of all supporting documents. This shows the bank’s position on what you have in your account. You must then document the differences between your general ledger account and the bank.
Loan Agreements – these are usually very lengthy and you might not want to copy the complete agreement and attach it to your reconciliation every month. Often the key pages of the agreement will be copied so they can be easily reviewed. This could include the loan amortization schedule, restrictive covenants and due dates. At a minimum the reconciliation should tell the reviewer where the loan agreement is filed in case it is necessary to review it in detail.

Second – Why are supporting documents important? The supporting documents make it possible for someone to review your work efficiently. For example, if you have obtained a copy of the bank statement to use in preparing your reconciliation it is important that the person reviewing your work can see that you have used the correct statement and the correct balance from the statement. There may also be other information on that bank statement that is part of the reconciliation – such as bank fees or NSF check charges. If this document (the bank statement) is attached to your reconciliation then the reviewer can very quickly assess that your work has been completed properly.

While making the review of your reconciliations more efficient for your supervisor or manager is an important goal, the existence of good supporting documents assists your auditors in making an evaluation of whether the balance in your account is correct.

One more benefit to having good supporting documents is that it makes it easy for you, or someone else, to repeat the reconciliation process in the future. This can help you do your job more efficiently, or it can help your replacement learn faster when you have been promoted.

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Tip One - Timing of reconciliation preparation - when should you do them?

We have dealt with many companies who have implemented RecWizard as part of their month end account reconciliation process. We are often asked when the best time to do reconciliations is. While the actual date you expect reconciliations to be completed will vary from company to company, the basic response from us is always the same: “Prepare them as soon as possible”.

If month end account reconciliations are prepared to make sure your accounting records are correct then it only makes sense that you really don’t know for sure that your financial statements are correct unless you have completed the reconciliation process.

From a practical standpoint we know it isn’t always possible to have all the reconciliations completed before financial statements are issued. Here are some ways to determine what works for you and your company.

Companies with fast close (4 work days or less) – the chances of actually preparing any of your reconciliations before the General Ledger is closed is probably very slim. However, you should still define your Key Control accounts and make sure those are completed as soon as possible after the close date. We recommend that these Key Control account reconciliations be prepared within 5 workdays of the end of the month. The non-Key Control accounts should be reconciled before the end of the month so you can make any corrections during the next period-end close.

Because most errors will not be able to be corrected in the recently closed accounting period you should establish a communication process to make sure everyone is aware of the cumulative effect of those errors. If the items accumulate to a significant amount it might still be possible to make an adjustment to the financial statements before they are sent out.

Companies with medium close (5 – 10 work days) – with a little more time to get things done it would be a good idea to make sure the Key Control accounts are reconciled BEFORE the General Ledger is closed. This way, adjustments can be made in the financial statements instead of being documented as problems in the reconciliations.

Non-Key Control accounts should be reconciled before the end of the month so you can make any corrections during the next period-end close.

Companies with long close (11 work days or more) – a long close schedule should allow you to make sure your accounting records and financial statements are more accurate than companies with a fast close. A longer close allows you to use fewer estimates because you have time to gather more actual information. You should also include preparing your Key Control account reconciliations as part of the tasks that are completed before the General Ledger is closed. Since you have more time to close the GL you might consider more of your accounts to be Key so they get reconciled before the last day of journal entries has come and gone.

All Non-Key Control accounts should be reconciled before the end of the month so you con make any corrections during the next period-end close.

The important thing here is to set target dates for completing reconciliations and then make sure they get done.

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