This is a complete guide to testing outstanding checks.
The testing of outstanding checks ensures a bank reconciliation statement is accurate. For instance, an auditor usually performs tests on a bank reconciliation report to verify the figures. They will choose a sample and verify the truthfulness of each item from the sample. Also, the bookkeeper/accountant is bound to review the reconciling items in the report before submission to the internal and external auditors. Furthermore, the test enables the submission of high-quality reports to end-users. Thus, using the steps below could increase the reliability of a bank reconciliation statement through detailed testing.
1. Secure a copy of an electronic bank statement together with the accounting subsidiary ledger
One of the fastest ways to test outstanding checks is to secure an electronic copy of a bank statement. First of all, comparing the outstanding checks with the bank statement means it can be done through Excel or some kind of computer application. Microsoft Excel is a computer program in which verifying outstanding checks is simple and fast. However, if it is not possible to get the E-copy, just encode the bank statement in excel. Also, using Excel could increase the speed of the tests through Excel’s advanced functions. The VLOOKUP function is usually popular in this case. It is done by comparing the check numbers between the cash book and the bank statement. So, using an electronic bank statement increases the efficiency of the review of outstanding checks.
2.Count the number of outstanding checks
Reviewing outstanding checks does not mean that all outstanding checks are checked. For instance, the total number of items is determined for the decision of the number of items to include in the sample (see no. 3 below). It can be done by highlighting the outstanding checks in Excel, and they will be counted automatically. Also, the test is usually done to evaluate the accuracy of the outstanding checks. More details in no. 8 below. However, all or almost all outstanding checks could be verified when there are only a few of them. It is important because not detecting errors with only a few items is considered lackluster. Generally, all checks that are still in transit are not usually all tested.
3.Randomly select at least five (5%) of the total number of outstanding checks for sampling
At least five percent of the total number of outstanding checks is tested to evaluate the overall accuracy. Indeed, the review does not need to cover everything. It is not meant to redo the list of outstanding checks. Also, the reviewer only selects the samples to provide an objective opinion on the preciseness of the outstanding checks. In addition, a five (5) percent requirement is usually recommended. Most evaluators and auditors have written policies and procedures though. Hence, the test will focus only on the samples selected.
The samples should include all types of outstanding checks. For instance, it should include prior months’ and current month’s outstanding checks. Doing so would include more than one classification of the outstanding check. Also, the number of days outstanding is usually considered in the selection of the samples. Indeed, the items chosen should be random. The selection would consist of different checks in transit. Thus, the result of the test would be objective and reliable.
4.From the sample, segregate prior months’ outstanding checks from the current month’s outstanding checks
Segregating prior months’ and current months’ outstanding checks enables the identification of accounting errors. For instance, prior months’ outstanding checks could be recorded in another bank account. The errors are identified through monitoring of uncleared checks that are over a month or two. Also, uncleared checks from the previous months can be already stale. Checks that are over six (6) months are not supposed to be part of the outstanding checks. In addition, some checks could be lost by the payees. Thus, separating the prior month’s uncleared checks can help identify errors.
5.Verify if prior months’ outstanding checks in the sample are included in the preceding bank reconciliation statements
Prior months’ outstanding are verified if they are included in the prior month’s bank reconciliation. First of all, they should not appear in the current bank reconciliation statement when they are not covered in the last bank reconciliation report. It means that they are not part of the latest bank reconciliation statement. Also, this step verifies if the outstanding checks are valid. Checks that suddenly appear could jeopardize the reliability of the report. Furthermore, the test encompasses only the items from the sample and reviews thoroughly the accuracy of the outstanding checks list. Thus, the verification of previous months’ checks outstanding helps uncover invalid checks which are included in the current report.
6.Check if the current month’s outstanding checks are recorded in the current month’s cash books
Trace all current month’s outstanding checks from the sample with the cash book. First of all, it ensures that all checks are legitimate. Some checks could be included in the list but should have been deleted. Furthermore, it weeds out all checks that are erroneously inserted into the list of outstanding checks. All outstanding checks should appear also in the cash book. Also, comparing data from the cash records and outstanding checks gives assurance of the reliability of the check numbers and amounts. It is a review process that proves that the checks are recorded in the cash book. Hence, this step is about validating the list of the current month’s outstanding checks.
7.From the sample, verify if the outstanding checks did not clear in the bank
All outstanding checks in the sample are compared with the bank statement. Indeed, this is doable if an electronic bank statement is available. It is recommended to encode a bank statement in Excel to efficiently compare both records. Also, comparing both information reveals the cleared checks. Cleared checks are shown in the bank statement. Furthermore, this is the final test after tracing from the cash book. It starts from the cash book to the bank reconciliation statement and then to the bank statement. Thus, after this step, the accuracy of the outstanding check is readily determined.
8.Determine if the outstanding checks are accurate
When there are no or just fewer errors, the overall accuracy of outstanding checks is usually deemed satisfactory. For instance, an entity has already agreed on a policy on the maximum percentage of errors to measure the reliability of the outstanding checks. The policy should already be set before any test or review. However, some organizations are strict that they reject a bank reconciliation statement when there are errors. It is normal because the report is about cash. Accuracy must be achieved when accounting for cash. So, fewer errors with outstanding checks can be ground for resorting to minor revisions.
If the errors are significant or too many, increase the sample size and return the bank reconciliation report for major revision. For instance, an auditor can increase the sample size to verify the accuracy of the bank reconciliation report. This would establish proof for the opinion that will be rendered. Next, the approving officer should immediately return the report for revision. Also, several errors could mean that close supervision might be required.