Manual Reconciliation Risks: How To Avoid Errors & Save Time

Reconciliation is a vital financial process that involves meticulously comparing and matching financial records to ensure accuracy and consistency. For many years, businesses have traditionally relied on manual reconciliation procedures to perform these tasks. Nevertheless, this strategy is not without drawbacks. In fact, manual reconciliation can be inefficient, error-prone, and resource-intensive.

That said, let’s explore the drawbacks of manual reconciliation and unveil strategies to sidestep these pitfalls. Let’s get started!

Prevalent Drawbacks of Manual Reconciliation

1. Manual Processes: A Time-Consuming Drain on Productivity

One major drawback of manual reconciliation is its time-consuming nature. Human operators often spend countless hours sifting through data, cross-referencing records, and identifying discrepancies. This not only hampers productivity but also increases the likelihood of problems due to fatigue and oversight.

2. Absence of real-time insights: hindered decision-making

Another drawback is the lack of real-time insights. Manual reconciliation processes are typically slow, especially when dealing with large datasets. This delay in identifying discrepancies can hinder a company’s ability to respond swiftly to financial challenges.

3. Scalability Challenges: Strain on Resources

Furthermore, manual reconciliation lacks scalability. As businesses grow and transaction volumes increase, manual processes become overwhelming and unsustainable. Handling a higher volume of data manually requires additional manpower and resources, escalating operational costs. This can strain the company’s finances and limit its ability to invest in more strategic initiatives.

4. Error-Prone Nature: Risks to Accuracy and Reliability

Manual reconciliation is inherently error-prone, posing risks to the accuracy and reliability of financial reporting. Data entry mistakes, misinterpretations of records, and outdated information can all contribute to discrepancies and inaccuracies in the reconciliation process. These errors not only undermine the integrity of financial data but also erode stakeholder trust and confidence.

5. Lack of Standardization: Subjectivity Breeds Confusion

Manual reconciliation processes lack standardization, making them susceptible to discrepancies caused by different interpretations. As each individual may perceive and interpret data differently, inconsistencies arise, further complicating the reconciliation process. This lack of standardization not only prolongs the reconciliation timeline but also introduces the risk of errors and miscommunication within the organization.
To avoid these drawbacks, businesses can adopt several strategies

Manual Reconciliation Best Practices

Manual

 

  • Establish Standardized Procedures: Combat non-standardization by creating clear guidelines and checklists for reconciliation tasks. Maintain a resource library for new or complex items, ensuring consistent interpretation and handling.
  • Request Standardized Data Formats: Minimize time spent deciphering third-party data by requesting vendors and customers to provide information in standardized formats. For example, encourage the use of standard Excel sheets for ledger or statement of accounts sharing, simplifying data interpretation and reconciliation.
  • Utilize Automation Tools in Excel: To achieve real-time insights, implement standardized reconciliation formats that are updated daily in a central dataset. Utilize Excel macros and other features to automate repetitive tasks, speeding up the reconciliation process and providing timely insights into financial data.
  • Regular Training and Communication: Ensure all team members involved in reconciliation tasks are trained on standardized procedures and communication channels. Regularly communicate updates or changes to reconciliation processes to maintain consistency and accuracy.
  • Implement Cross-Checking Mechanisms: Introduce cross-checking mechanisms within the reconciliation process to verify data accuracy and identify discrepancies promptly. This can include double-entry verification or peer review processes to enhance reliability.
  • Continuous Improvement and Feedback: Encourage a culture of continuous improvement by soliciting feedback from team members involved in the reconciliation process. Analyze feedback to identify bottlenecks or areas for optimization, implementing changes to enhance efficiency and accuracy over time.

Harnessing automation for streamlined Reconciliation processes

Automation plays a pivotal role in overcoming the challenges associated with manual reconciliation. By leveraging advanced reconciliation software and tools, businesses can significantly streamline their processes. Automation allows for real-time reconciliation, ensuring that financial data is always up-to-date and accurate. Automated systems can swiftly identify discrepancies, flagging them for further investigation, reducing the time and effort required for resolution.

Moreover, automation enhances scalability. Automated reconciliation tools can handle vast amounts of data efficiently, adapting to the growing needs of the business without the need for significant increases in manpower. This scalability ensures that businesses can manage their reconciliation tasks effectively, even as transaction volumes expand.

Additionally, automation reduces the risk of human errors. By automating routine and repetitive tasks, businesses can minimize the likelihood of data entry mistakes and misinterpretations of records. This results in more reliable financial reporting, empowering businesses to make better-informed decisions.In conclusion, the drawbacks of manual reconciliation, including its time-consuming nature, lack of real-time insights, and scalability challenges, can be effectively mitigated through time-tested strategies.

Further automation can also prove revolutionary. By integrating Firmway’s innovative AI-based algorithms and customizable logic capabilities, businesses can transform their reconciliation processes. With the ability to achieve up to 90-95% matches and seamlessly reconcile unstructured data, we effortlessly handle voluminous datasets from various formats and accounting software. Firmway offers a comprehensive solution for upgrading reconciliation tasks, ultimately optimizing financial operations and decision-making.

Balance Confirmation

Benefits Of Balance Confirmation in Finance: Peace of Mind Guaranteed

Unlock Financial Peace With Balance Confirmation In Finance

It is an irrefutable fact that accuracy and reliability are paramount in the finance and accounting domain. Businesses employ various auditing procedures to ensure the veracity of financial statements and strengthen the trust of stakeholders. One such crucial process is balance confirmation, which plays a vital role in validating the accuracy and completeness of recorded balances. Companies can obtain essential feedback on their financial transactions by exchanging information with external parties, such as customers, suppliers, or financial institutions.

This article shall act as a comprehensive guide that sheds light on the benefits and importance of balance confirmation in financial transactions. We will explore how this process enhances the integrity of financial statements, helps detect errors or discrepancies, and promotes transparency and accountability. Furthermore, we will understand the role of automating the balance confirmation process of your company to improve your overall accounting efficiency.

What do you mean by balance confirmation?

Balance confirmation denotes a process used in accounting to check the precision and completeness of the balances recorded in a company’s financial statements. It typically involves exchanging information between a company and its external stakeholders, such as customers, suppliers, or financial institutions.

During the balance confirmation process, a company will send out balance confirmation requests to its stakeholders, requesting them to confirm the balances they hold or owe to the company. These requests are typically sent in writing through a balance confirmation letter, email, or online platform. The balance confirmation process is commonly used across various industries, including manufacturing, retail, banking, and services. It is particularly essential in industries with significant accounts receivable or accounts payable balances, where confirmation helps validate the accuracy of these balances.

Benefits & Importance

Balance confirmation holds significant importance in finance for several reasons:

  • Upholding Accuracy: Account Confirmation helps verify the accuracy of financial records by reconciling them with the records of external parties. It allows businesses to validate the balances they hold or are owed and identify any discrepancies or errors that must be addressed. This process enhances the overall reliability and credibility of financial statements.
  • Detecting Errors and Fraud: Account Confirmation plays a crucial role in detecting errors, omissions, or even fraudulent activities. Companies can identify discrepancies by comparing their records with those of external stakeholders, such as incorrect postings, unauthorized transactions, or missing balances. This helps in promptly investigating and rectifying any anomalies.
  • Strengthening Auditing Procedures: Auditors heavily rely on balance confirmation as an essential tool during the auditing process. By obtaining confirmations from external parties, auditors gain independent verification of the balances, transactions, and obligations recorded in the financial statements. This enhances the accuracy and thoroughness of the audit, assuring stakeholders.
  • Enhancing Transparency and Accountability: Account Confirmation promotes transparency and accountability in financial transactions. It demonstrates a company’s commitment to open communication and fosters stakeholder trust. By obtaining confirmations, businesses can demonstrate that their financial information is accurate and reliable, enhancing the confidence of investors, lenders, and other stakeholders.
  • Resolving Discrepancies: Account Confirmation allows companies to address any discrepancies or disagreements with external parties promptly. If a stakeholder provides a different balance or raises a concern, it will enable both parties to investigate and resolve the issue on time. This helps maintain healthy business relationships and avoids potential disputes in the future.
  • Compliance with Regulations and Standards: Many regulatory bodies and accounting standards require using balance confirmation as a standard practice. By adhering to these requirements, companies ensure compliance with legal and regulatory frameworks, thereby avoiding penalties and maintaining their reputation.

In this digitized age, automation for balance confirmation tasks is necessary. By leveraging automated systems, businesses can streamline their confirmation procedures, reduce manual efforts, enhance data security, and improve their financial operations’ efficiency and effectiveness.

Firmway offers a one-of-its-kind balance confirmation solution. It is a user-friendly tool that constantly monitors your customers and vendors, protecting you from unforeseen surprises. With its intuitive interface, the software significantly increases third-party response rates without manual intervention. Experience the ease and effectiveness of Firmway’s balance confirmation solution now!

Outsourcing Account Reconciliation

Top 5 Benefits of Outsourcing Reconciliation Services for Your Business

In today’s dynamic business landscape, maximizing efficiency and focusing on core competencies are paramount for sustained success. One area where businesses can streamline operations and drive growth is through outsourcing reconciliation services. As businesses navigate complex financial landscapes, outsourcing reconciliation tasks can offer a multitude of benefits, ranging from cost savings to enhanced accuracy and scalability. Let’s delve into the top 5 advantages of embracing outsourcing for your reconciliation needs:

Introduction

Outsourcing has emerged as a ubiquitous phenomenon for business enterprises worldwide. Particularly, outsourcing in the finance and accounting segment has gained remarkable momentum. The approximate value of the global market for Finance and Accounting Outsourcing in 2022 was US$43.1 billion. This market is projected to expand and reach a revised size of US$68.8 billion by 2030, exhibiting a compound annual growth rate (CAGR) of 6%. One of the emerging sub-domains in the finance and accounting outsourcing sphere is outsourcing account reconciliation. Outsourcing can be the most reliable reconciliation solution business ventures can utilize to automate reconciliation processes.

Are you contemplating outsourcing business reconciliation activities such as receivable reconciliation, payable reconciliation, or bank reconciliation? We have some compelling reasons that outline the relevance of outsourcing your account reconciliation process.

1. Expertise and Accuracy

Account reconciliation processes like intercompany reconciliation, AP AR reconciliation, and payment reconciliation require meticulous attention to detail and elaborate knowledge of accounting principles. By outsourcing reconciliation services to professionals with expertise in this area, businesses can ensure accurate and precise reconciliation of financial data.

2. Time and Cost Savings

Reconciliation can be a time-consuming and resource-intensive process, diverting valuable internal resources away from core business activities. A report by Ventana Research found that organizations that rely heavily on manual reconciliation processes spend an average of 13 days on a monthly close, while those with higher levels of automation complete the process in just 5 days. Outsourcing reconciliation services allows businesses to free up their staff’s time, enabling them to focus on strategic initiatives and revenue-generating tasks. Additionally, outsourcing eliminates the need for investing in expensive financial reconciliation software, infrastructure, and training, resulting in cost savings for the business.

3. Scalability and Flexibility

Business operations often experience fluctuations in transaction volumes and reconciliation requirements. Outsourcing account reconciliation services offers scalability and flexibility, as service providers can quickly adapt to changing business needs. Whether it is handling increased reconciliation volumes during peak periods or adjusting the scope of services, outsourcing allows entities to scale up or down without the hassle of getting additional staff.

4. Access to Contemporary Technology

One of the benefits of outsourcing reconciliation services is gaining access to the latest technology and reconciliation tools. Reconciliation service providers invest in the best account reconciliation software and tools to streamline the reconciliation process, improve efficiency, and enhance accuracy. By leveraging the different transaction reconciliation software, businesses can benefit from automation, real-time reporting, data analytics, and other innovative features that may not be readily available in-house.

5. Focus on Core Competencies

According to a survey by Accounting Today, 64% of small businesses outsource their accounting functions, highlighting the popularity of outsourcing among small and mid-scale enterprises. Outsourcing reconciliation services allows companies to focus on their core competencies and strategic goals. By offloading the time-consuming task of reconciliation to experts, businesses can allocate their resources towards driving growth, improving customer service, and enhancing overall operational efficiency. Outsourcing the financial reconciliation process enables enterprises to leverage specialized skills and knowledge while streamlining their general operations.

Conclusion

By leveraging automated reconciliation strategies and outsourcing financial reconciliation services, organizations can achieve greater accuracy, improved productivity, and enhanced financial control, ultimately leading to better decision-making and operational efficiency. Bank upon the reconciliation software offerings by Firmway to manage your outsourcing requirements related to financial reconciliation. Our reconciliation solution in the form of ledger account reconciliation, GST reconciliations and Form 26AS reconciliation software can give an edge to your reconciliation outsourcing objectives.

Balance & Audit Confirmation

Balance & Audit Confirmations: What You Need to Know About

All About Digitized Balance & Audit Confirmation

A balance & audit confirmation letter is a crucial request sent to third parties in order to gather specific information regarding items that significantly impact the financial statement. Consequently, this process plays a pivotal role, as it aids in substantiating various assertions made in the financial statement, ultimately contributing to the formation of a well-informed opinion about its accuracy.

Importance of External Confirmation in Auditing

In the field of auditing, external confirmation, especially for financial elements like banks, loans, payables, receivables, and more, is a widely practiced method. To secure compliance and standardize the confirmation process, the Auditing and Assurance Standards Board (AASB) empowered by the Institute of Chartered Accountants of India (ICAI) issued SA 505: External confirmations. Further, to assist the professional accountants in implementing the confirmation process, ICAI issued the guidance notes that provide for obtaining confirmations for receivables, cash and bank balance, and liabilities.

Automating the Balance & Audit Confirmation Process

Conventionally, auditors use letters, posts, or emails to obtain confirmations from external parties. Click here for manual balance confirmation samples – negative or positive. However, it is not a sustainable solution for a high volume of accounts of large-scale businesses. Thus, there is a need for digital transformation. In this article, we will delve into the concept of digital balance confirmation letters. Additionally, digital transformation plays a crucial role in assisting auditors in automating tedious parts of audits. Furthermore, in the context of external confirmation, automation will not only lower clerical errors but also significantly enhance the efficacy of the audit evidence.

Streamlining Confirmation with Firmway

An affordable way to automate the external confirmation process involves the adoption of software such as Firmway. Furthermore, Firmway stands as India’s premier online software for balance confirmations. Leveraging cutting-edge technology, it streamlines and standardizes the process of obtaining external confirmations.

Effortless Responses

It allows auditors to efficiently process bulk requests and provides a comprehensive synopsis of reconciled and unreconciled balances. It allows debtors/creditors/banks to respond easily in the following ways:

1: Click on the unique link to respond & will be directed towards response sheet

2: Click on “amount is correct / incorrect” as per your deal (Only valid for positive & negative confirmation)

3: Incase of blank confirmation ask responding party to add the amount as per their books

4: Responses confirmed with auto-generated OTP verification shared on third party email id

5: Live Tracking of responses on dashboard for audit trail purpose

 

Balance & Audit Confirmation

Balance & Audit Confirmation

Balance & Audit Confirmation

Leveraging Audit Automation Tools

In this way, audit automation tools make confirmation easier for third parties and resolve the issue of manual follow-ups, fewer responses, tracking the data, collecting & accumulating the data. All leading accounting and auditing firms are automating the labor-intensive part of the audit to focus on analytical work. Thus, it is high time to leverage technology to smoothen the audit process.

Understanding Sec 194Q

Understanding Sec 194Q: How it impacts And Why It’s Important

Background

Business returns constitute less than 2% of overall Income Tax Returns filed in India for AY 2021-22, underscoring the pressing need for Step-by-Step Understanding  Sec 194Q. Furthermore, clearly indicating evasion of taxes. To combat tax evasions and non-filing of returns, the Indian government has expanded TDS and TCS provisions in the past two years.

The government is working towards bringing dividends, purchases, sales, e-commerce operators, etc., all under the scope of TDS and TCS as it makes tracking transactions easier. Specifically, the TDS/TCS provisions on purchases and sales are redefining steps for India’s taxation system.

Understanding Sec 194Q: Gaining Proficiency in Step-by-Step Mastery of Section 194Q and Understanding Its Impact

Section 194Q, introduced under the Finance Act, 2021, effective from 1st July 2021, aims to curb tax evasions and fraud. Additionally, it mandates that buyers with turnovers exceeding Rs 10 crores in the preceding financial year deduct tax on purchases over Rs 50 lakhs, given the seller’s Indian residency.

Moreover, with 194Q in effect, all high-volume sale/purchase transactions will come under record, thereby significantly reducing the chances of evasions. However, these provisions inevitably add to the concerns of the CFOs and tax heads of large-scale companies in terms of its implementation and reporting.

Challenges faced by large-scale companies are:

Since large-scale companies have a high volume of sales and purchases both, availing of accurate TDS credits as well as deducting vendor TDS get wearisome for tax and finance teams.

Year-on-year locking of tax credits is a common problem among large-scale enterprises. Errors in availing of TDS credits and deducting TDS affect working capital efficiencies and invite tax scrutiny.

The process of maintaining vendor records, obtaining low tax deduction certificates, tracking vendor payments, availing TDS/TCS credits, reconciling 26 AS, etc., is voluminous and time-consuming, especially when done manually.

Thus, finance and direct tax teams should find the automation and technology-enabled solutions. 

Understanding Sec 194Q

Understanding Sec 194Q: Streamlining Compliance through Step-by-Step Automation

Technology and automation make it easier to handle TDS/TCS deductions, availing credits, and reconciling Section 194Q step by step. To ensure complete TDS and TCS credits, it’s vital to reconcile 26 AS regularly and maintain accurate accounts. Instead of waiting until year-end, companies should aim to reconcile 26AS quarterly to avoid credit losses. Businesses have to try to complete this reconciliation every three months.

Automation enables companies to incorporate reconciliation into their regular assessments. This, in turn, helps in proactive communication with vendors and reduces the risk of working capital shortages and credit losses.

Firmway is one such software that assists with 26 AS reconciliations. It is a web-based SaaS product that automates time-consuming reconciliations. Many big firms in India rely on it to simplify the reconciliation procedure for massive 26 AS entries and books of accounts. It includes a PAN-TAN connection, automated reconciliation, and communication of differences. As a result, it simplifies the implementation of new tax regulations, such as 194Q.

Conclusion

The Indian government is taking steps to make the country more tax-compliant, and large businesses should assist. Businesses can quickly comply with new tax requirements thanks to technology. Automation helps highlight unresolved issues regarding 26 AS reconciliations and gives CFOs data-driven insights. Therefore, businesses should use automated technology and software to help create a tax-compliant economy.

Data Digging

Data Digging in Accounting: Insights for Improved Cash Flow

Transforming Accounting: From Data Digging to Enhancing Cash Flow

Accounting has traditionally played the role of the data keeper. However, recent developments have expanded the roles of account teams, changing this perception from mere data recording to actively enhancing cash flow. Businesses have regarded the accounting team as both a booster of cash flow and a cost center, with their main function being the maintenance of records of company activities. The 21st Century has realized the importance of data and its analysis. Moreover, data analysis is not just limited to operational activities; it has also made its presence felt in the accounting function. One such Data Digging exercise we will be focusing on today is boosting cash flow through ledger reconciliation.

The Impact of Ledger Reconciliation on Cash Flow

Our experience with clients has led to the following observations from ledger reconciliation activities:

  • We identified Rs 998 crore in vendor-unadjusted advances.
  • The company raised a Rs 3,761 crore debit note that vendors or customers did not book.
  • Vendors reversed a Rs 2,942 crore invoice, even though the company had claimed GST credit.
  • Vendors issued Rs 314 crore in credit notes that the company did not account for.
  • Customers deducted Rs 53 crore in TDS, which the company failed to record.

All the above can have a direct and/or indirect impact on the cash flow of the Company. If the account team is able to identify such a mismatch on a timely basis and deep dive into it, then it can convert itself from a cost center to a profit center.

Data Digging for Cash Flow Enhancement

Manual reconciliations, even with Excel – MATCH, HIGHLIGHT, or LOOKUP formulas, bear the risk of human errors. Any inefficiency or deficiency in reconciliation plagues the entire enterprise; it affects the credibility of financials, causes inefficient decision-making, and affects the goodwill of a company. Automated reconciliation is the solution to all the above issues.

Data Digging

The Power of Automated Reconciliation

Automation can simplify and streamline the tedious reconciliations process. With minimal human involvement, the entire process of vendor communication, follow-ups, tracking, gathering, and summarizing voluminous information works automatically in the background. The added leverage of real-time analytics makes companies proactive and efficient. 

Enhancing Data Digging with Technology

Using technology for reconciliation has led to the observations shared above. Thus, CFOs and account teams should continue to adopt technologies that allow them to analyze and interpret the vast amount of data at their disposal.

The Role of Technology in Accounting

A team of chartered accountants started Firmway, a cloud-based automation software, to simplify time-consuming reconciliations. Using the latest technology, such as AI, it performs reconciliations on par with industry standards and practices.

Technology makes reconciliations, be it vendor, bank, GST, or TDS, simple and efficient. It also simplifies the communication of reconciliation differences through a world-class online action tracker. Thus, adopting technology in accounting and reconciliations should be a priority for CFOs and account teams.

GSTR-2B Reconciliation: Protecting Your Bottom Line with ITC

GSTR-2B Reconciliation: Protecting Your Bottom Line with ITC

Background

In recent years, fraudulent practices have been prevalent in availing Input Tax Credit (ITC). In FY2021, more than Rs 35,000 crores of ITC was wrongly claimed. This misuse primarily stemmed from Rule 36 of the CGST Rules, 2017. This underscores the critical importance of GSTR-2B reconciliation.

Rule 36 amendment and its impact

The amendment introduces GSTR-2B as a benchmark for determining the amount of eligible ITC. From January 2022, businesses can avail of ITC only to the extent reflected in GSTR-2B. Earlier, Rule 36 allowed buyers to avail of provisional ITC (over and above the amount prevailing in GSTR-2B) up to 5% of the eligible ITC reflected in GSTR-2B, but not anymore. Restricting ITC to GSTR-2B impacts businesses negatively, especially large-scale companies with crores of ITC in the funnel. Thus, it has become increasingly vital to reconcile GSTR-2B and the purchase register.

GSTR-2B Reconciliation

The Importance of GSTR-2B Reconciliation

Imagine losing crores of ITC due to inefficient reconciliation of GSTR-2B and purchase register. It will impact working capital and may even lead to a financial crisis. According to Ernst & Young, industry trends depicting mismanagement of ITC may increase working capital requirements by 5–7% and negatively impact profit before tax by 1–2%.

The following illustrations explain how inefficient GSTR-2B Reconciliation and purchase register may lead to the loss of ITC:

  1. Say out of Rs 1,00,000/- of total purchases, the supplier furnishes details of Rs 70,000/- in GSTR-1. Therefore, GSTR-2B will depict eligible ITC as Rs 70,000/-, and ITC worth Rs 30,000/- will be lost until the supplier updates it.
  2. A failure to update purchase-related credit notes in GSTR-2B can also result in overclaiming ITC, which is subject to penalties. CGST law prohibits ITC claims for credit notes, even if they are not yet updated in GSTR-2B.

Thus, the onus of reconciling GSTR-2B and the purchase register to reduce the risk of ITC disallowance and penalties is more prevalent than ever.

Why automate GSTR-2B Reconciliation? 

Reconciliation of innumerable transactions in GSTR-2B and the purchase register is a tedious task, especially when done manually. Reconciliation is possible with Excel formulas like Lookup, Match, etc., but to some extent only. There is always a risk of corrupting Excel files with heavy GSTR reports and purchase registers. Moreover, manual intervention in applying formulas also exposes you to errors, thus marking the need for automation in reconciliation.
According to Deloitte’s GST@5 survey 2022, reconciling ITC with auto-generated reports (GSTR-2B) is the highest-ranked issue with GST, and automation is an ideal solution. Adopting technology and automation for GST is prevailing in all large, medium, and small-scale enterprises, as they are losing crores of funds in ITC mismanagement.

One such software that can help you save crores is Firmway. It is a SaaS-based software company specializing in multi-GSTIN and multi-month reconciliation of GSTR-2B and purchase registers. This innovative platform automatically carries unmatched items from the previous month and matches them with the data from the following months. Achieving up to 95% accuracy, it relies on a unique blend of technology and algorithms. Not only reconciliation, but technology also smooths the next steps: vendor communication and summarizing reports. Thus, opt for technology to simplify the voluminous task of ITC reconciliations and save yourself from litigation.

External Confirmations In Audits: Best Practices For Success

External Confirmations In Audits: Best Practices For Success

Consequences of Non-Compliance with SAs

Members of The Institute of Chartered Accountants of India (ICAI) must conduct financial audits following Standards on Auditing (SAs) when fulfilling their attestation function. These standards include procedures for external confirmations. These standards represent widely accepted audit procedures. Deviation from SAs, especially in matters related to external confirmations, necessitates a formal declaration by the member. Failure to do so may lead to disciplinary proceedings under The Chartered Accountants Act, 1949

One such standard is SA 505: External Confirmations. It discusses the use of external confirmations and procedures to obtain direct evidence from third parties as required in SA 330: The Auditor’s Responses to Assessed Risks and SA 500: Audit Evidence

External Confirmation is necessary to provide a true and fair view of a company’s financials. It serves as an extremely crucial piece of the puzzle when determining whether such financials are free from material misstatements or not.

External confirmations

External Confirmations is a substantive procedure used to obtain audit evidence as a direct written response from a third party (customer/ vendor/bank) to the auditor in a paper, electronic or any other form.  Generally, auditors use it to determine account balances, status, or terms of agreements. There are primarily three types of confirmation requests:

1. Positive Confirmation Request:

It requires the confirming party to directly respond to the auditor whether it agrees or disagrees with the information provided in the request. Positive confirmations provide reliable audit evidence.

2. Negative Confirmation Request:

It asks the confirming party to respond directly to the auditor only if the confirming party disagrees with the information provided in the request. They provide less persuasive audit evidence than positive confirmations.

3. Blank Confirmation Request:

It is a type of positive confirmation request where the third party (confirming party) is asked to fill in the amount or provide certain information. It provides persuasive audit evidence since the confirming party must verify the information before responding.

Why external confirmations is needed?

For instance, in Mahavir Jain vs. Disciplinary Committee (Appellate Authority), the auditor formed his opinion without obtaining and examining external confirmations of all bank balances as required by SA 505. Consequently, the Chartered Accountant Act of 1949 held him guilty under Part 1 of the Second Schedule. This was due to his failure to exercise the due diligence expected of him and not obtaining sufficient information to form an opinion.

Further, SA 505 is the 3rd most non-compliant standard as per Quality Review Board in Financial Year (FY) 2020-21.

Process of external confirmations

As we know, obtaining confirmations manually via letters or even e-mails is a cumbersome procedure. One needs to maintain records and follow up continuously. External confirmations involve repetition of the following steps for every audit:

  1. Determine the information to be confirmed;
  2. Choose the appropriate parties;
  3. Design the confirmation requests, properly addressed with a request to send responses directly to the auditor;
  4.  Send and follow-up requests.

To simplify and streamline this process, major firms are adopting automated confirmation procedures. This enables audit teams to concentrate on analyzing results and identifying exceptions rather than investing time in evidence collection.

A team of Chartered Accountants started Firmway, a web-based SaaS software company, to help auditors automate the confirmation process in compliance with auditing standards. They digitized the entire confirmation process. Auditors benefit from automating the time-consuming external confirmation process in the following way:

  • Save 90 % man-days by automating the process of sending, receiving, and tracking confirmations using our portal
  • Complete audit documentation as highlighted in peer review process 
  • Increase response rate by 2x
  • Send 1000+ confirmation requests in compliance with standards on auditing
Standardize Customer and Vendor Reconciliations-01

Streamlining Customer & Vendor Reconciliations with Firmway

Mastering Customer & Vendor Reconciliation: How Firmway Increases Reconciliation Efficiency?

Mastering customer and vendor reconciliation is a crucial account closure process that ensures the composition of an account balance matches with customer/ vendor reports. It substantiates that balances in financial statements are free from errors or misstatements. As a part of internal controls, it ensures the accuracy and completeness of certain ledger balances, such as banks, fixed assets, payables, receivables, etc.

The world is rapidly moving towards digitization, and this transformation is equally impacting the field of accounting. Automation, while a powerful tool, will not replace accountants but rather complement their roles. In fact, according to the 2021 EY Smart Closing & Reporting survey, where over 40% of company representatives were interviewed, there is a growing demand for higher levels of automation in various accounting processes, including accounts payable, receivable, and general accounting. Enter Firmway, a cutting-edge software solution that not only automates but also simplifies a wide range of reconciliation tasks, aligning perfectly with leading technology standards.

Out of all the ledger balances, reconciling customer and vendor accounts is the most tedious task due to countless transactions. Let’s understand customer and vendor reconciliation and how Firmway can increase and automate the reconciliation exercise.

Understanding Customer and Vendor Reconciliations

Customer Reconciliation 

Customer reconciliation is a critical activity for every business. It involves analyzing the receivables statements to identify any errors or irregularities. Customer reconciliation is a useful tool to get a clear idea of the actual position of receivables. In certain exceptional cases, it can be effective in identifying fraudulent activities pertaining to accounts receivable.

Advantages of Mastering Customer Reconciliation

  • Transactions with customers directly affect the revenue. Reconciling their accounts provides evidence supporting reported revenue. 
  • With regular reconciliations, you can keep track of aging accounts to ensure timely follow-ups. 
  • Helps facilitate internal and external audit and identify prospective bad-debts at an early stage.
  • Significantly reduce the likelihood of errors in receivable account management.

Vendor Reconciliation 

It involves comparing general ledger balances of vendors (suppliers) with statements from concerned vendors to identify and resolve differences.

Vendor reconciliation means reconciliation of a vendor’s account with the statement provided by the vendor.

Benefits of Mastering Vendor Reconciliation

  • Vendor balances are a result of credit purchases. Therefore, vendor reconciliation statements provide supporting evidence of purchases. 
  • Regular reconciliations help you resolve disputes and ensure the timely settlement of vendor accounts. 
  • Process checks the entity’s payables to vendor and vendors’ outstanding balances. This enables the company to identify duplicate invoice bookings.

Reconciling vendor and customer balances involve the study and analysis of countless transactions. KPMG’s Automation of financial reporting and technical accounting, September 2019 report, shows that more than 50% of businesses prepare financial records using MS Word and Excel. Furthermore, it is not a sustainable solution to accommodate the growing number of e-commerce transactions. Additionally, customer and vendor reconciliations provide corroborating evidence for two major account heads – revenue and purchases, of an Income statement. Moreover, the quality of these accounts is afflicted by manual intervention. As a result, inefficiency in the reconciliation process enhances the susceptibility of financial records to errors and misstatements.

Streamlining Reconciliation with Firmway’s Automation Software

To address these deficiencies effectively, it is essential to standardize and streamline the reconciliation process using automation software. With Firmway’s reconciliation software, data retrieval from customers and vendors is automated, ensuring a seamless experience. Moreover, using the embedded algorithm and smart AI tool, it can swiftly convert it to Excel format, organize it, and meticulously compare it with accounting records of respective companies to identify discrepancies. As a result, it saves accounting staff a considerable amount of time, allowing them to efficiently analyze the above-found differences.

Firmway: Your Solution for Seamless Customer and Vendor Reconciliation

Firmway is a web-based SaaS software providing automation in the space of confirmations & reconciliation. It offers multiple tools and services to automate all-round reconciliation and confirmation exercise whether it’s customer & vendor reconciliations, 26AS reconciliation, MSME confirmations or GST ITR reconciliations. It helps accountants and auditors utilize time and resources on analytical work rather than gathering and reconciling information. How are you dealing with reconciliations and confirmations? Time to do it with Firm-way!