Reconciliation is the process of comparing two sources or systems (e.g., comparing the general ledger with another source, typically a subsidiary ledger, statement, or other source system). Further, reconciliation involves resolving any discrepancies that may have been discovered, including recording necessary adjustments to either source being reconciled.
Purpose
The reconciliation process ensures the accuracy, completeness, and validity of financial information. Also, a proper reconciliation process helps ensure that unauthorized changes have not occurred to transactions during processing.
For more information, see the Reconciliation Guidelines on the Accounting website.
Key Concepts and Control Examples
Verify Accuracy and Completeness of Activities:
A good internal control system provides a mechanism to verify that transactions and activities are for the correct purpose and amount and that they are allowable.
Control Examples:
- To verify that transactions are valid and are for the correct purpose, for each type of activity, consider documenting what information from source documents must be compared to the appropriate report.
- Ensure that transactions have been properly authorized. Especially if the source documents are in paper form, review for potential changes to the document between the time the transactions were approved and processed.
- Ensure that all transactions are allowable.
Correct Errors Promptly:
Errors and discrepancies, intentional or unintentional, should be detected, investigated, and resolved in a timely fashion (e.g., within 30 to 60 days).
Control Examples:
- Promptly verify that transactions are recorded. Review source documents to verify that they have been processed and posted promptly by the processing department. If not, follow up with the appropriate DFA or processing department.
- For each type of transaction or activity, document a plan for researching and correcting errors or discrepancies, including setting thresholds for investigation. Communicate these processes and procedures with the appropriate staff members. Establish expectations for timely error correction.
Document the Process and Completeness of Reconciliations:
Reconciliation processes are most effective when they are consistent and thorough. Employees involved in the reconciliation process should know and clearly understand expectations and their responsibilities.
Documenting completed reconciliations is an essential part of effective internal controls. It should be clear to an external reviewer that a reconciliation has been completed.
Control Examples:
- Be consistent with reconciliation processes. Changing the reconciliation process often leads to undiscovered inaccuracies and potential fraud.
- Document reconciliations clearly to verify that a review has occurred, when it was done, and who was responsible for the review. The documented reconciliation process and procedures should be clearly communicated and include the following information:
- The steps in the process.
- The systems or sources of information being reconciled.
- Expectations for timeliness.
- A procedure for error correction.
- The role responsible for performing each step.
- A mechanism for providing proof that all activity has been reviewed and reconciled.
- A process for reviewing and verifying that the reconciliation has been completed properly, including proper resolution of reconciling items.
