All managers should have some monthly review system for key reports, quality control, and completeness measures. Remember that you are the first level of review and thus have the greatest opportunity to find and correct actual accounting errors. That is why I never begin reviewing a set of financial statements without first working through the following steps in the actual accounting system where the entries originate. If you move too quickly into the financial report, you could miss large mistakes that are masked in the financial statement presentation. This usually ends up costing you more time reviewing but also makes you lose confidence in the accuracy of the rest of the package.
First and foremost, the most basic principle to follow is that no financials should ever be exported unless all accounts have been reconciled. In QuickBooks, I determine that the actual bank reconciliation function was used, that any uncleared checks are reasonable, and that no journal entries appear in my check register. If the previous items were present, it would indicate that a mistake was made somewhere along the line and an attempt was made to cover it up or correct it improperly. This would require more research. Also verify that for cash outflows, the majority of transactions originate as a bill payment and not as checks. This will give confidence that we are maintaining accrual based accounting and should lessen the risk that accounts payable is overstated due to bills remaining open that were actually paid using the write checks function.
The month over month P&L in QuickBooks is one of the most valuable ways to quickly verify the completeness of reporting for a given month. It allows you to visually see large or unexpected fluctuations up or down in account balances month over month. Since, you’re already in the accounting file; it is then very easy to determine the cause of the fluctuation by double clicking into detail transactions that compose the balance. At this point, it’s a good idea to have the financial packet open so you can see if your Staff added a footnote to explain the abnormality. The month over month presentation is also helpful for verifying balances that should be consistently the same month over month such as rent or insurance expense. You can also determine if you are missing bills that should have been accrued.
Lastly, the month over month Balance Sheet in QuickBooks is a great report to give an overall check on account balance reasonableness. It’s a good idea to keep the month over month Income Statement up as the Balance Sheet transactions flow through to that report. When reviewing accounts receivable, use the AR Aging Detail report to review any significantly aged invoices. I also like to pick a couple invoices at random and do an “edit > find” on the exact invoice amount to determine if there happens to be any deposits in the same amount that actually should have been applied to the invoice. If there is a change in fixed assets, you can easily determine if the addition is truly a qualified capital purchase. This is also a good time to check that the addition has been added to your fixed asset schedule and make sure that it ties out. Also, if you noticed inconsistent insurance expense on the P&L, this is probably an indication that the prepaid insurance entries were not posted. As mentioned earlier, the accounts payable aging report should be reviewed for significantly aged bills as well as to check whether bills are incorrectly open when they were actually paid using the write checks function. Lastly, all other Balance Sheet accounts should be tied to their respective sub-schedules.
Now that you’ve done a thorough review of the accounting file, you are ready to review the exported financial packet. Because of the systematic approach taken to review the monthly transactions, you have a very good picture of what happened during the month. You’ve also significantly sped up the time to review the actual package which will allow you to focus more on what the numbers are telling you and analyze the businesses performance in order to add more value to the package and fully utilize it as a critical communication tool. Our TGG Accounting experts can help implement this kind of best practice in your business.Written by: Andrea Murray TGG Accounting