The main logic behind doing a BRS is to verify that the Bank Balance as per the clients Bank Book & that as per the Bank Statement is tallying.

There may be some cheques issued at the year end, which will be reflected in the clients Bank Book.  But the same wud not be reflecting in the Banks’ Statement as they might not have been sent to the Bank for clearing.  Similarly the client might have received cheques from its debtors, so it will appear in the clients Bank Book, but not in the statement.

So for this purpose you prepare a reconciliation, then Add/Deduct the cheques paid/ received from the balance & arrive at the  balance as appearing in the Bank’s Statement.  This is foolproof check for any errors that occur.

@ Giridhar S Karandikar

thxs for ur ans but i want to know that if cheques issued at the year end, then it will not reflect in bank statement.

But i think Cheques may clear and It may appear in subsequent period, whts the issue in this.

Is there any other consequences of issuing cheques at the year end..

Whether any fraud may involve in these cases, if yes then how...?  pls prove..

Please note that we ar required to match the balance between our books & the bank books as of 31St March. Since cheques issued would appear in the client#s books but not in the banks books, so the balance between the two books wud not tally as of 31 st march.  So to match these balances we are requried to add/deduct the cheques paid/received & match the balance as per the bank's books.  Also in case of cash the clinet is advised to deposit the cash as of 31st mar in the bank, & then again withdraw the ssame pn !st Apr, so that it can be proved that the cash appearing in the client's book is the real cash.

In this way while doing the reconciliation we can come to know if there are cheques/cash that are being done by way of fruad, & this can be foolproof check

VERIFICATION OF BANK BALANCES

• Advise the entity to send a letter to all its bankers to directly confirm the balances to the auditor. The request for confirmation should also cover dormant accounts as well as accounts closed during the year.

• Examine the bank reconciliation statement prepared as on the last day of the year.

• Examine the reconciliation statements as at other dates during the year. It should be examined whether (i) cheques issued by the entity but not presented for payment, and (ii) cheques deposited for collection by the entity but not credited in the bank account, have been duly debited/credited in the subsequent period. For this purpose, examine the bank statements of the relevant period. If the cheques issued before the end of the year have not been presented within a reasonable time, it is possible that the entity might have prepared the cheques before the end of the year but not delivered them to the parties concerned. In such a case, examine that the entity has reversed the relevant entries.

• If there are post dated cheques issued by the entity, verify that any cheques pertaining to the subsequent period have not been accounted for as payments during the period under audit.

• Pay special attention to those items in the reconciliation statements which are outstanding for an unduly long period. Ascertain the reasons for such outstanding items from the management. Examine whether any such items require an adjustment/write off.

• In case a large number of cheques have been issued/deposited in the last few days of the year, and a sizeable proportion of such cheques have subsequently remained unpaid/uncleared, it may be appropriate to obtain confirmations from the parties concerned, especially in respect of cheques involving large mounts. This may indicate an intention of understating creditors/debtors or understating/ overstating bank balances.

• Examine whether a reversal of the relevant entries would be appropriate under the circumstances.

• In relation to balances/deposits with specific charge on them, or those held under the requirements of any law, examine that suitable disclosures have been made in the financial statements.

• In respect of fixed deposits or any other type of deposits with banks, examine the relevant receipts/certificates, duly supported by bank advices.

• Remittances shown as being in transit should be examined with reference to their credit in the bank in the subsequent period.

• Examine that suitable adjustments are made in respect of cheques which have become stale as at the close of the year.

• Where material amounts are held in bank accounts which are blocked, e.g. in foreign banks with exchange control restrictions or any banks which are under moratorium or liquidation, examine whether the relevant facts have been suitably disclosed in the financial statements. Examine whether suitable adjustments on this account have been made in the financial statements, where required.

• If the number of bank accounts maintained by the entity is disproportionately large in relation to its size, exercise greater care about the genuineness of banking transactions and balances.

thanks u so much for such a grt explanation.

From ur second para last two sentences

"It is possible that the entity might have prepared the cheques before the end of the year but not delivered them to the parties concerned. In such a case, examine that the entity has reversed the relevant entries."

I want to know wht will happen if client passes such kind of reversal enrties, Is this can be regarded as fraud...?

Originally posted by : ABHINANDAN JAIN
	thanks u so much for such a grt explanation. From ur second para last two sentences "It is possible that the entity might have prepared the cheques before the end of the year but not delivered them to the parties concerned. In such a case, examine that the entity has reversed the relevant entries." I want to know wht will happen if client passes such kind of reversal enrties, Is this can be regarded as fraud...?

It will cause understatement of liabilities, financial statement may not exhibit the true and fair view, which is the major concern of statutory audit

Well explained Prabhakar Jha........

The main purpose of verifying the Bank reconciliation statements is that we are using the Bank balance as per books of accounts in the financial statements andnot the balance as per Bank statement which is a third party external evidence. An auditor relies on external third party confirmations. Bank statement can be a third party evidence, bu the difference in the balances between the books and the bank statements are obvious. An auditor relies on the bank balance as per books after verification of the Bank reconciliation statements. 

A bank reconciliation statement explains the differences between the balances as per books and the external evidence which is the bank statement. And merely having a copy of bank reconciliation prepared by the client does not make the auditor rely on it. We need to trace the reconciling items to the subsequent bank statements and ensure the genuinety of the reconciling items. 

And there are chances of frauds by issuing cheques for huge amounts during the close of the year and cancelling the cheque later on to reduce the bank balance and the corrosponding liability to window dress the financial statement.

@ Nithin

now crystal clear..

but if client issues chques before 31ist march and we go to client within ist week of april say 3rd..in that case checking  of reconcilitaion statement will become impossible as cheques will clear in due course of time..in such a situation we hv none other option except to  relying on it..and if they issue cheque of huge amt and placed it with themselves without hand over to issuee..phir fruad kaise detect ho payega..

thank u so much..it seems u hv grt knowledge of auditing...

pls accept my frnd request..

Abhinand, thanks first of all.. and bank reconiliation is not verified by the reconciliation prepared by the client. It needs further verification with the subsequent bank statements. All the reconciling items should be of temporry nature and should have been subsequently cleared in a week or so maximum. So we need to trace the items in reconciliation to the subsequent bank statement, thereby ensuring that those are genuine. If the items are not subsequently cleared, there arise a question and deeper investigation into it may give a possibility of fraud or error or mstake, which needs to be adjusted in the bank balance as per accounts in the current period itself.