Balance Sheet Substantiation and Reconciliation

By preparing Balance Sheet substantiation and reconciliation is to provide assurance that the balance sheet accounts constitute the financial statements have been substantiated and are neither under or overstated. 

Balance Sheet Substantiation is a process of ascertaining the reasonableness, propriety and integrity of the account balance and assessing any potential financial impact to Profit and Loss arises from their misstatement.

The process for substantiation checking may involve the activities as following:

  i.   Reconciliation of the account balance to a third party source

 ii.   Reconciliation to reliable internal source or system

iii.   Where there is no reliable source then alternative controls can be relied upon 

If the items in the Balance Sheet failed the substantiation checking, then it deemed as Unsubstantiated Balance. The Unsubstantiated Balance is a balance (or part of) is deemed uncorroborated when:

  i.   No reconciliation is performed or failed to perform

 ii.   A reconciliation has occurred but contains an unexplained balancing item

iii.   A reconciliation has occurred but reconciling items are not fully understood or supported

iv.   Evidence that either the controls over the activities of an account have not been performed satisfactorily or casts doubt over the accuracy of the account balance 

The Balance sheet reconciliation procedure and actions are involved:

a.   Responsibility and sign off

Responsible Account Owner is responsible to prepare the reconciliation and must be physically signed off. The actual preparation of the reconciliation is delegated to the staff but the responsibility cannot be delegated. 

The following actions must be taken place before sign off the reconciliation:

              i.   Reconciliation has been properly performed to the reviewer’s satisfaction

             ii.   Full analysis is performed and explanations of issues have been documented

            iii.   Ensure the issue items are escalated in accordance with stated procedures

b.   Account level reconciliation

The staff must reconcile the balance sheet items down to the most detailed level.

       i.    Reconciliations are to be performed at the lowest level of detail

      ii.    Ensure reconciliation is performed for every account with a balance at the month end 

c.   Frequency of reconciliations

       i.    All accounts are to be reconciled on monthly basis at least 

d.   Exposure and breaks

      i.        All exposure or breaks should be distinguished and aged in bands as following:

                 I.     0 – 30 days

                II.     31 – 60 days

               III.     61 – 90 days

              IV.     91 – 120 days

               V.     Greater than 120 days

      ii.    A full description and action of all exposures or breaks must be included on the reconciliation with an indication of the expected date of clearance. 

e.   Analysis

The ledger balance should be sufficiently support at transaction level with the appropriate ageing profile.  More detailed information must be provided for the accounts which are reconciled by reference to an internally produced schedule of assets or liabilities. In particular for this type of account, new items appearing for the first time on the report require full information been given.