Every month the accounts team prepared bank, vendor and customer reconciliations. The files were saved, the totals agreed and the checklist was ticked. Yet the numbers were not reliable. An internal audit review asked one question: who reviews the reconciliation? The answer was nobody. Differences were carried forward, the same old items appeared month after month and nobody owned their closure. This article explains what makes a reconciliation a real control, how to review and age reconciling items, which reconciliations matter most and how internal audit should test them.
A reconciliation becomes a control only when it is prepared on time, independently reviewed and every difference is investigated and closed. Good practice is to age reconciling items, set a limit on how long items may remain open, assign an owner to each, and have a senior person sign off with evidence. Internal audit tests the timeliness, review, ageing and closure, not just whether a reconciliation exists.
Why a completed reconciliation is not yet a control
A reconciliation explains the difference between two records that should agree: the bank book and the bank statement, the vendor ledger and the vendor's statement, the books and the GST portal. Preparing it shows that the difference has been listed. It does not show that the difference is correct, or that anyone has acted on it.
Three things turn the exercise into a control:
- Independent review. Someone other than the preparer checks the reconciliation, questions unusual items and signs off.
- Investigation. Each reconciling item is explained with evidence, not just labelled "timing difference".
- Closure. Items are cleared, corrected or written off with approval within a set time, rather than carried forward indefinitely.
Reconciliations are among the key controls considered when internal financial controls with reference to financial statements are assessed, so weak reconciliation practice can also surface in the statutory auditor's reporting under Section 143(3)(i) of the Companies Act, 2013, where applicable.
Which reconciliations matter most
| Reconciliation | Frequency | What it protects against |
|---|---|---|
| Bank reconciliation | Monthly, or weekly for high-volume accounts | Unrecorded receipts or payments, fraud, errors in cash balances |
| Vendor ledger vs vendor statements | Quarterly for key vendors | Duplicate or missing invoices, unrecorded debit notes, disputed balances |
| Customer ledger vs confirmations | Quarterly or half-yearly | Unapplied receipts, disputed invoices, fictitious debtors |
| GST input tax credit vs GSTR-2B | Monthly before filing returns | Credit claimed without supplier reporting, missed credits, interest exposure |
| TDS deducted vs TDS returns and tax credit statements | Quarterly | Short deduction, mismatches, disallowances |
| Inter-company and related party balances | Monthly or quarterly | Mismatched balances, unrecorded charges, consolidation errors |
| Sub-ledgers vs general ledger | Monthly | Fixed asset, inventory or payroll registers out of line with the books |
| Stock statements to banks vs books | Quarterly | Incorrect drawing power; CARO 2020 clause 3(ii)(b) reporting where limits above ₹5 crore are sanctioned on current assets |
On GST, input tax credit is generally available only where the supplier has reported the invoice and it is communicated to the recipient through the system (Section 16(2)(aa) of the CGST Act), which makes the books-to-GSTR-2B reconciliation a control with direct cash consequences.
Ageing reconciling items: the most useful single report
The quickest way to judge a reconciliation process is to age the open items. Genuine timing differences, such as cheques issued but not yet presented, clear within days or weeks. Items that remain open for months are rarely timing differences; they are errors, disputes or something worse.
- List every open item with the date it first appeared, not just the current month's date.
- Bucket by age: under 30 days, 31 to 90 days, 91 to 180 days and over 180 days.
- Set tolerance rules: for example, items over 90 days need a written explanation and a closure plan; items over 180 days go to the CFO.
- Assign an owner to each item with a target date.
- Approve write-offs of items that cannot be cleared, under the delegation of authority, with the tax effect considered.
Ask for the reconciliation from 12 months ago and today's reconciliation side by side. If the same items appear in both, the process is producing documents, not control.
What can go wrong: common reconciliation failures
Red flags for internal audit
- Suspense, clearing or "difference" accounts with growing balances.
- Reconciliations with no reviewer signature or system approval, or reviewed months later.
- Unidentified receipts in the bank reconciliation for more than a month.
- Cheques issued but not presented for several months, especially to the same parties.
- Vendor balances that differ from vendor statements, with the difference always in the vendor's favour.
- Input tax credit in the books consistently above GSTR-2B without a supplier follow-up list.
- Year-end entries that clear old reconciling items without documentation.
Stale cheques and unidentified items are a classic place to hide misappropriation, because they are rarely examined. Internal audit should trace a sample of long-outstanding items to their origin rather than accept the description.
Illustrative example: a bank reconciliation that balanced every month
A company's bank reconciliation at 30 September shows a bank balance of ₹89.90 lakh against a book balance of ₹80.10 lakh. The ₹9.80 lakh difference is explained by:
- Cheques issued but not presented: ₹6.10 lakh, of which ₹3.20 lakh is more than 180 days old.
- Receipts in bank not recorded in books: ₹3.70 lakh, of which ₹1.40 lakh is more than 90 days old.
Check: ₹80.10 lakh + ₹6.10 lakh + ₹3.70 lakh = ₹89.90 lakh, so the reconciliation balances. But ₹4.60 lakh of the items are more than 90 days old. On investigation, ₹2.10 lakh of the old "unpresented cheques" were duplicates of payments already made by transfer, and the ₹1.40 lakh of old receipts were customer payments never applied, so those customers were being chased for dues they had already paid.
The reconciliation was arithmetically correct every month. It simply was not reviewed, so the errors stayed hidden.
Reconciliation controls checklist
- List of required reconciliations with owner, reviewer, frequency and deadline.
- Bank statements obtained directly from the bank or banking portal.
- Each reconciliation prepared within the deadline, with supporting evidence for items.
- Independent reviewer signs off with date, in the system where possible.
- Reconciling items aged; items beyond tolerance escalated with explanation and plan.
- No balancing figures posted to suspense without approval and follow-up.
- Vendor statements obtained for key vendors at least quarterly.
- Customer balance confirmations or statements sent periodically and differences followed up.
- Books reconciled with GSTR-2B before claiming input tax credit, with supplier follow-up.
- TDS and inter-company balances reconciled quarterly.
- Stock statements to banks agreed with books before submission.
- Write-offs of old items approved under the delegation of authority.
Reconciliation gaps often travel with other control issues; see our article on internal audit and the Audit Committee for how findings should be tracked, and our note that a bank payment alone is not proof of a genuine transaction.
Frequently asked questions
Who should review a bank reconciliation?
Someone independent of the person who records cash transactions and prepares the reconciliation, typically a finance manager, CFO or owner. The reviewer should check unusual and old items against evidence and sign off with the date.
How long can reconciling items stay open?
There is no legal limit, but good practice is to clear genuine timing differences within a month and to escalate any item older than 60 to 90 days with a written explanation and closure plan. Very old items usually indicate errors or disputes.
What is a suspense account and why is it risky?
A suspense account temporarily holds amounts that cannot yet be classified. It becomes risky when unexplained differences are parked there to make reconciliations balance, because errors or misappropriation can be hidden inside it.
Why is GSTR-2B reconciliation important?
Under Section 16(2)(aa) of the CGST Act, input tax credit is generally available only where the supplier has reported the invoice and it appears in the recipient's auto-generated statement. Reconciling books with GSTR-2B before filing helps avoid excess claims, interest and missed credits.
How often should vendor reconciliations be done?
Quarterly for significant vendors is common practice, with monthly reconciliation for high-volume suppliers. Year-end vendor statements are also useful evidence for the statutory audit.
What does internal audit check in reconciliations?
It checks that required reconciliations exist and are prepared on time, are independently reviewed, use reliable source data, age and explain open items, and that old items are closed or written off with approval.
Conclusion
Reconciliation is one of the oldest controls in accounting, and one of the easiest to turn into a formality. A reconciliation that is prepared but not reviewed, and whose differences roll forward month after month, gives a false sense of security. Independent review, ageing of open items, clear ownership and timely closure turn it back into a control. A process completed is not a process controlled until someone has validated it.
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Talk to usThis article is for general information only and does not constitute professional advice or solicitation. Examples are illustrative. Provisions are summarised as of October 2026. Please refer to the relevant provisions and seek advice on your specific facts.