Audits and Bank Reconciliation

Yesterday: We discussed the different ways a business ensures the safety of their cash and inventory 1.Separation of Duties 2.Immediate Listing of Cash Receipts 3.Daily Cash Proof 4.Daily Deposit of Cash 5.Payment by Cheque 6.Petty Cash Procedures

Today: We will be discussing the last two ways a company keeps track of their books and cash and ensures for accuracy 1.Periodic Audits 2.Monthly Bank Reconciliation

Audit An audit is a periodic check on the accuracy of an accounting system As you have heard, Staff Accountants are hired out of university to do these audits as part of their hours to obtain a CA with a public accounting firm However, audits can also be done internally and are most effective when they are done unannounced Transactions are traced to their source documents

Bank Source Documents We have discussed a few of these already this year, but a little review wouldn’t hurt Bank Debit Memo – Indicates a decrease in a depositor’s account – Example: Bank Charges – Why is it called Bank Debit memo, when your account goes down? Bank Credit Memo – Indicates an increase to a depositor’s account – Example: Interest

Bank Reconciliation These are financial statements that bring the bank’s records into agreement with the depositor’s records Some things happen at the bank that the accountant is not aware of until a certain date On the other hand, things may happen within the cash account of the accountant that the bank doesn’t know about until a certain time Examples?

Bank Reconciliation CORRECTIING THE BANK BALANCE 1.Begin with your Bank Statement balance (often viewed online or from bank statements) 2.Compare bank deposits on your books compared to the bank statement – Add (to the bank balance) any deposits made to the bank, that have not made it onto your balance 3.Prepare a list of outstanding cheques – Cheques are often given and not cashed right away (think about Grama’s xmas money) – Subtract these from your bank balance

Bank Reconciliation CORRECTING YOUR CASH ACCOUNT 1.Start with the balance in your cash ledger 2.Examine your bank statements for any totals that are not present in your journal – These can include service charges, interest and NSF Cheques A cheque that cannot be paid because there are not sufficient funds in the account of the person who wrote the cheque – Add the interest and take away NSF cheques and charges

Bank Reconcilliation AFTER THE BANK RECONCILIATION If there are items that the business was unaware of (interest, charges, NSF, etc.) they need journal entries Interest – treated like a revenue – Entry? Bank Charges – treated like an expense – Entry?

Bank Reconciliation NSF Cheques – The cheque came to pay a bill that was previously an A/R. – We must put the money back to that customer’s account + any amoutn the Bank charged us for cashing an NSF Cheque – Why would they charge the person that cashed it? – Example: O. Dear gave us an NSF cheque for $150 and the bank charged us $20 for cashing an NSF cheque – Entry?

Bank Reconciliation There are different looks:

Bank Reconciliation

What we will use: Who (Mustang Market) What (Bank Reconciliation) When (July 31, 2013) Bank Statement Balance$ Add: Deposit in Transit$ Less: Outstanding Cheques No No No Correct Bank Balance Cash Ledger Account$ Add: Interest Revenue$1.34 Less: Service Charges$13.78 Less: NSF Cheque$20$(32.44) Correct Ledger balance$522.58

HOMEWORK Page 561 #11,13,15