Bank Reconciliation and the Clerk Who Says 'It Tallies'
During the audit of a Janpad Panchayat office for March 2025, the cash book shows a bank-column debit balance of ₹75,150 on 31 March, while the bank statement shows ₹1,02,300. The following are noticed: (a) Cheques for ₹18,000 issued on 28–30 March were not presented for payment till 31 March. (b) A cheque of ₹7,500 deposited on 30 March was credited by the bank on 3 April. (c) Bank charges of ₹350 debited by the bank appear nowhere in the cash book. (d) A refund of ₹12,000 from a supplier was directly credited by the bank; the office has not recorded it. (e) A cheque of ₹5,000 issued to a vendor was entered twice on the payments side of the cash book. The clerk who prepared the reconciliation remarks in his note: 'The statement tallies, therefore no further action is required.' The auditor also finds that reconciliations for the preceding five months were prepared only now, at the time of audit.
1. Prepare the bank reconciliation statement starting from the cash book balance and show that it arrives at the bank statement figure.
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| Particulars | ₹ |
|---|---|
| Balance as per cash book (Dr) | 75,150 |
| Add: Cheques issued but not yet presented (a) | 18,000 |
| Add: Cheque wrongly entered twice on the payments side (e) - payments overstated, so cash book balance understated | 5,000 |
| Add: Refund credited by bank, not entered in cash book (d) | 12,000 |
| Less: Cheque deposited but not yet credited by bank (b) | (7,500) |
| Less: Bank charges debited by bank, not entered in cash book (c) | (350) |
| Balance as per bank statement | 1,02,300 |
Check: 75,150 + 18,000 = 93,150; + 5,000 = 98,150; + 12,000 = 1,10,150; − 7,500 = 1,02,650; − 350 = 1,02,300. The figure agrees with the bank statement, so the recorded balances are explained.
Direction check, which is where marks are lost: the starting point is the cash book, so every item that the bank has already recorded but the cash book has not must be adjusted for. Cheques issued reduce the cash book but not yet the bank, so add back. Deposits increase the cash book but not yet the bank, so deduct. Expenses debited by the bank are not yet in the cash book, so deduct. Receipts credited by the bank are not yet in the cash book, so add.
2. Classify items (a) to (e) as timing differences or errors/omissions, and state which of them require a journal entry in the books.
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| Item | Nature | Journal entry required? |
|---|---|---|
| (a) Cheques issued, not presented | Timing difference | No - reverses by itself when the cheque is presented |
| (b) Cheque deposited, not credited | Timing difference | No - reverses on credit by the bank |
| (c) Bank charges ₹350 | Omission in cash book | Yes: Bank Charges A/c Dr 350, To Bank A/c 350 |
| (d) Refund ₹12,000 credited by bank | Omission in cash book | Yes: Bank A/c Dr 12,000, To Supplier (or Refund) A/c 12,000 |
| (e) Cheque entered twice, ₹5,000 | Error of duplication in cash book | Yes: Bank A/c Dr 5,000, To Vendor A/c 5,000 (cancels the extra payment) |
The distinction that matters: a timing difference exists because the same transaction is recorded by the two parties on different dates; the books are correct and only the dates differ. An omission or error means the books themselves are wrong, so reconciliation merely detects it - the correction has to be passed through the journal before the final accounts are drawn.
Items (c), (d) and (e) therefore affect the surplus/deficit of the office, not just the reconciliation statement. If they are left unadjusted, expenditure is understated by ₹350 and receipts by ₹12,000, and the reported closing balance of the fund will be misstated.
3. Evaluate the clerk's remark that 'the statement tallies, therefore no further action is required', and state the audit risk arising from preparing reconciliations only at the time of audit.
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The remark confuses arithmetical agreement with propriety. Reconciliation proves that the difference between two records is explained; it does not prove that the entries are correct, authorised or complete. In this very case the statement tallies while three genuine book errors remain uncorrected, and the ₹12,000 credit has not been verified at all.
Specific risks:
- Uncorrected books - the ₹350, ₹12,000 and ₹5,000 items stay out of the accounts and misstate the closing balance.
- Unexplained credit - a direct credit of ₹12,000 could be a genuine supplier refund, a misposted deposit, or a fictitious credit later withdrawn. It must be confirmed with the supplier and traced to the refund claim; if it belongs to government account it must be remitted.
- Duplicate entry - the clerk must confirm that the vendor was not actually paid twice; a duplicate entry sometimes conceals a duplicate payment.
- Delayed reconciliation - preparing five months' reconciliations at audit time destroys the control's value. Bank reconciliation is a detective control meant to operate monthly, so that an error or fraud is caught within weeks. Batching it makes detection late and the record easy to manipulate in the interval.
Audit action: treat the delay as a control deficiency rather than a mere procedural lapse, place it in the audit note with the DDO's responsibility for monthly review, and obtain the corrected cash book before certifying the accounts.