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Students and junior staff use reconciliation, verification, vouching and audit as if they meant the same thing, which leads to missing checks and confused working papers.
Reconciliation compares two independent records and explains differences. Verification checks one record against its document or the asset itself. An audit is an independent examination ending in an opinion that uses both as evidence.
A working paper that labels each check by type, names who prepared and reviewed it, and links each ticked figure to its source document or statement.
Each activity is done by the right person, reconciliations are ready before the audit starts, and auditors can rely on them as evidence instead of redoing them.
Reconciliation compares two records of the same thing and explains any difference. Verification checks one record against its supporting document or the physical asset. An audit is an independent examination of the accounts that ends in an opinion. Reconciliations are evidence an auditor uses; they are not a replacement for the audit, and the audit is not a replacement for them.
How do the three activities compare?
| Activity | Question it answers | What is compared | Who usually does it | Output |
|---|---|---|---|---|
| Reconciliation | Do two independent records of the same money agree, and if not, why? | Record A against record B, such as cash book vs bank statement | Accounts team, reviewed by a senior | A reconciliation statement with reconciling items |
| Verification | Is this entry or balance real and supported? | One entry against its invoice, approval, contract or the asset itself | Accounts team at posting; auditors on a sample | A ticked voucher, a confirmation or a count sheet |
| Audit | Do the financial statements give a true and fair view? | The whole set of accounts against evidence gathered | Independent chartered accountant firm or internal audit | An audit report or internal audit findings |
A simple way to remember it: verification looks at one record closely, reconciliation looks at two records side by side, and an audit looks at everything and gives an opinion.
What do articleship students mean by vouching, verification and tick-and-tie?
These three terms come up in the first weeks of articleship.
- Vouching means checking that a book entry is backed by a voucher: an invoice, a bill, a receipt or a payment approval. You start from the books and go to the document.
- Verification means confirming that an asset or liability exists, belongs to the company and is valued correctly. Examples are physically seeing a machine listed in the fixed asset register, or getting a balance confirmation from a lender.
- Tick-and-tie is the working-paper habit of ticking each figure as you agree it to another schedule or document, so every number on the sheet ties to evidence.
Reconciliation sits beside these. When an articleship student checks that the bank balance in the trial balance agrees with the bank reconciliation statement, and that the statement agrees with the bank’s closing balance, that is tick-and-tie applied to a reconciliation.
A worked example: one ₹1,80,000 vendor payment
A company pays a raw material supplier ₹1,80,000 by NEFT on 12 September. Here is how each activity touches the same payment.
| Step | What is checked | Result |
|---|---|---|
| Verification | The supplier’s invoice for ₹1,80,000, the purchase order and the approval by the purchase head | Invoice and approval match the amount |
| Reconciliation (bank) | The payment entry of ₹1,80,000 in the cash book against the bank statement debit of ₹1,80,000 | Same amount left the bank on 12 September |
| Reconciliation (vendor) | The vendor ledger against the supplier’s statement of account | Both show the invoice and payment, balance agrees |
| Audit | The auditor picks this payment in a sample of, say, 25 payments and checks both the verification and the reconciliation | No exception noted |
How might the auditor choose that sample? One common approach, shown here only as an illustration, is to test every payment above a chosen amount, say ₹5,00,000, and then pick a random set of smaller ones, for example payments between ₹50,000 and ₹5,00,000. Had the invoice been ₹1,52,542 plus 18 percent GST of ₹27,458, the verification step would also check that the ₹1,80,000 total and the tax split agree with the invoice.
If verification fails, the payment may be for something that was never ordered. If the reconciliation fails, the money may have gone somewhere other than the books say. The audit samples both because each catches a different kind of problem.
Can a company skip reconciliation because the auditor will check it anyway?
No, and this is a common misunderstanding in small companies. Preparing the books, and the reconciliations that prove them, is management’s responsibility. The auditor’s job is to test what management has prepared.
When reconciliations are missing or months out of date:
- The auditor has to do more work, so the audit takes longer and costs more.
- Errors that a monthly reconciliation would have caught in week one are found months later, when they are harder to trace.
- For companies covered by CARO 2020 with sanctioned working capital limits above ₹5 crore, the auditor reports on whether quarterly returns filed with banks agree with the books, which is itself a reconciliation the company should have done.
- Missing reconciliations can be reported as a weakness in internal financial controls.
A good test: if your auditor asks for the bank reconciliation for 31 March and you have to prepare it that day, the control did not exist during the year.
Where do auditors test reconciliations?
Auditors usually pick reconciliations for bank, debtors, creditors, TDS receivable and loans. They check that the reconciliation was prepared on time, that a second person reviewed it, that reconciling items are genuine and that old items were followed up. The next article in this series covers who should prepare and who should review.
What to read next
- Next in this series: Who should prepare a reconciliation and who should review it?
- Internal audit of reconciliations: what internal auditors test
- CARO 2020 and bank reconciliation: what the auditor reports
- For the full set of reconciliations a finance team runs, see reconciliation software for Indian finance teams
Content authored by practitioners with experience at Amazon India, Intuit QuickBooks, and the Tata Group. Meet the team →