Effortless Bank Statement Data Extraction: Mastering Financial Auditing

Bank statements serve as a primary source of information for businesses to track their finances accurately. They record the inflow and outflow of funds, and bank statement analysis provides transparency and accountability in financial transactions.

Bank statements are essential for financial auditing. They indicate an organization's financial health, and auditors can verify the accuracy of a company's financial records through them. They also identify any discrepancies or irregularities.

This article will discuss the importance and process of bank statement financial auditing. We will also discuss how automation helps simplify bank statement data extraction for auditing.

What is bank statement verification?

Bank statement verification involves cross-checking and reconciling transactions. The organization's books are matched with the corresponding bank records. It helps auditors ensure the following:

• Accuracy of bank accounts and balances
• Transactions recorded in the company's books match those in the bank statements
• Any discrepancies or fraud are identified and resolved

Bank statement verification allows auditors to evaluate the company’s financial integrity. The analytics protect against potential financial risks. The document can also be used as evidence in legal proceedings or tax audits. Bank statement analysis helps identify errors or fraudulent activities. It ensures the organization's financial stability.

A bank statement is also a vital verification document for the following purposes:-

1. Income source verification

Bank statements provide evidence of the company’s income sources, helping verify the accuracy of revenue reported in the financial statements. Auditors use bank statements to verify the amount and timing of deposits made into a company's bank account.

2. Loan and mortgage approvals

Banks, lenders, investors, and financial institutions require bank statements. It is a mandatory document for the debt or loan approval process. It verifies the company's creditworthiness and ability to repay the loan. Auditors analyze bank statements to confirm the accuracy of loan or mortgage payments.

3. Documenting and Managing Finances

Bank statements provide a detailed record of the company’s financial transactions. This includes details like interest earned, fees incurred, and charges paid. They help document and track finances for budgeting, forecasting, and tax reporting purposes.

What is bank reconciliation?

Bank reconciliation involves comparing an organization's financial records with the corresponding bank statement. It requires reviewing the details of deposits, withdrawals, and balances of all company bank accounts. All differences are investigated and reconciled. It maintains the accuracy of the company's financial statements.

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Bank reconciliation helps to identify incorrect entries, duplicate transactions, or missing payments. Regularly reconciling bank statements helps fix these errors. It ensures that the company's financial data is up-to-date and reliable. It simplifies detecting fraudulent activity, such as unauthorized withdrawals or transactions. Besides cash flow monitoring, it ensures financial reporting and record-keeping regulation compliance. Compliance is essential to avoid any penalties or legal issues.

What is a financial audit?

A financial audit is an independent yet systematic review of an organization's financial records. It involves verifying a company's financial data's accuracy, completeness, and reliability. Ensuring compliance with accounting standards, regulations, and laws is essential. 

Auditors are trained to look for red flags that may indicate fraudulent activity. Financial audits assess the organization’s financial standing.  They identify potential risks or improvement areas. They also assure stakeholders, shareholders, investors, and creditors about the company's financial health.

Stakeholders rely on financial audit reports for reliable financial information. It helps them make informed decisions. A financial audit verifies the company’s financial information. It provides an independent and objective record of all financial transactions. 

Why is bank statement verification important for financial audits?

Bank statements are considered reliable sources of the company’s financial transactions. A neutral third party issues the account balance. They offer an independent perspective on the company's financial standing. Verification reveals errors or fraudulent activity.

According to Kroll’s 2023 Fraud and Financial Crime Report, financial crime is rising. More than USD 800 billion is being laundered annually. Bank statement verification is essential during financial audits. It prevents fraudulent activity and helps identify mistakes in financial records. Bank statement verification ensures compliance with regulatory requirements.

Auditors can provide valuable insights and financial recommendations to the company's management. It helps them make informed decisions to improve their financial processes.

Key reasons why bank statement verification is vital for financial audits:

a. Fraud detection and prevention

Auditors can verify discrepancies or anomalies in the financial statements. They cross-check the information with the bank statement. It helps differentiate errors from fraudulent activities. They can flag embezzlement, misappropriation of funds, or unauthorized transactions.

Moreover, bank statement verification can reveal the use of any forged checks or altered cash receipts. Auditors can also identify fictitious vendors or employees who are being paid for services that were not rendered.

b. Validate business expenses

Auditors can verify legitimate business expenses from bank statements. This prevents manipulating costs or claims for personal purchases as business expenditures. The bank statement also shows duplicate payments or overpayments, which auditors can use to identify and correct errors.

Audits ensure that only approved expenses are paid by the company, helping to control costs. They also use bank statements to test transaction cutoffs and record them in the correct accounting period.

c. Compliance with regulations

Financial audits ensure that the organization complies with all relevant regulations and laws. Bank statement verification provides evidence of compliance. Companies must comply with Anti-Money Laundering (AML) and Know-Your-Customer (KYC) policies. Audits also help verify compliance with tax requirements. Auditors can ensure proper tax recording and payment.

Additionally, auditors can detect any violations of financial reporting standards. They detect misleading information on the company's financial statements. Auditors can also ensure all transactions are reported per applicable accounting standards. They evaluate the organization's internal controls.

d. Financial health analysis

Bank statements provide a snapshot of the company's financial health. By verifying bank statements, auditors can accurately assess the company's cash flow. They identify areas for improvement and make recommendations to improve financial management. 

Bank statement analysis helps companies make informed business decisions. It alerts management by identifying impending financial distress. They can evaluate their burn rate and expenses. It helps optimize their operations by cutting costs or adjusting payment cycles. It helps ensure the organization’s financial stability.

e. Establish creditworthiness

Bank statements provide an overview of the organization's financial history. They provide details like revenue streams and cash reserves. Bank statement financial auditing assesses the company's creditworthiness. Lenders or investors can make informed decisions when considering financing to the organization.

Companies can use the audit report to secure loans or investments. It is evidence of the company's financial stability and ability to repay debts. Strong creditworthiness reduces the perceived risk in providing financing. It can help lower the cost of borrowing.

How Auditing Teams Verify Bank Statements?

Financial auditing teams follow a systematic and detailed process to verify bank statements. They ensure the accuracy, completeness, and reliability of financial information. Auditors thoroughly examine bank deposits, withdrawals, and any fees or charges incurred.

Here's an overview of the bank statement financial auditing process:

a. Gathering bank statements 

Obtain the company’s current account bank statements for the audit period. Request for digital or physical copies of the bank statements.

b. Examining transactions

Compare each line item in the bank statement to the company's financial records. Check for discrepancies, such as missing transactions, incorrect amounts, or unapproved withdrawals.

c. Reconciling balances 

Match the balance on the bank statement with the balance in the company’s records. 

d. Identification of discrepancies

Pay close attention to any red flags that may indicate fraud. Spot duplicate transactions, unauthorized withdrawals, missing transactions, or payment errors.

e. Verify interest and fees

To ensure accuracy, the interest earned by the company or charged by the bank must be verified. Fee charges, such as overdraft or service fees, should also be examined.

f. Review supporting documents

Gather and review invoices, receipts, checks, deposit slips, and bank statements. It helps verify the authenticity of transactions.

g. Cutoff testing 

All transactions must be appropriately dated. They must be included in the financial statements for the correct reporting period.

h. Internal controls check 

Assess the internal controls established by the company. Evaluate their bank account management policy and account monitoring process. It includes procedures for authorizing transactions and segregation of accounting duties.

i. Documenting findings

All discrepancies and findings must be documented in detail. Seek explanations and additional information from management and stakeholders.

j. Report submission

Submit a report with the findings. Provide recommendations for necessary improvements or corrections.

Traditional bank statement data extraction

Verifying bank statements manually is a tedious and time-consuming process. Extracting data from paper-based bank statements requires expertise, and significant manual efforts are needed to input it into accounting systems. Even with electronic bank statements, manually reviewing and reconciling the data is tedious.

The traditional method involves reviewing each transaction line by line and matching it with the corresponding accounting system or spreadsheet record. The relevant information is then highlighted and used to identify discrepancies or make decisions.

The manual bank statement data extraction needs to be more accurate and reliable. It is not an efficient process for large organizations. They have multiple bank accounts and a high volume of financial transactions. It also leaves room for potential fraud. Numerous data entries provide much scope for manipulation.

Automated bank statement data extraction

With technological advancements, the traditional manual extraction method needs to be updated. Automated bank statement data extraction imports data from paper or electronic bank statements. Verification involves matching accounting system entries. The software uses advanced algorithms to identify discrepancies, making the verification process faster and more accurate.

Unlike manual extraction, the software can process large volumes of bank statements. It completes the process within minutes and with minimal errors. It uses Optical Character Recognition (OCR) technology to extract relevant data.  Intelligent Document Processing (IDP) facilitates automatic reconciliation of bank statements. It matches information with entries in the accounting system to identify discrepancies.

Eliminating manual intervention helps minimize data errors. This makes automated bank statement auditing more reliable. Other significant benefits of automated bank statement verification are time and cost savings. The software accelerates data processing and reduces the cost of hiring additional staff — financial auditing teams to focus on analyzing the data and making informed decisions.

Differences between Manual and Automated bank statement verification

Comparing manual and automated bank statement verification shows software is more efficient. Traditional auditing requires significant time and effort. Automation eliminates the risk of error and speeds up the process. 40% of business leaders agree that automating bank statement processing workflows improves efficiency. While 37% state it helps ensure compliance. 

Furthermore, with automation, financial auditing teams can access real-time data. Unlike manual verification, the insights enable them to identify discrepancies or fraudulent activities. Hitachi Payment Services saves over 200 hours per month with automation. They automated bank statement reconciliation using smart AI-based APIs from Docsumo. This makes processing unstructured bank statement data ten times faster, and the results are 99% accurate. 

How do you automate bank statement verification to improve auditing processes?

The bank statement verification process involves comparing the company's records with bank statements. The goal is to ensure that all transactions recorded in both sets of data match. Any discrepancies must be identified and resolved.
Automated bank statement verification involves using software specifically designed for this purpose. The software is programmed to extract data from both sources, compare the information, and identify discrepancies. It can also flag suspicious transactions for further investigation.

The automated Bank Statement Verification process involves the following steps:

a. Data input

The company's financial records and bank statements are uploaded into the software. This can be done manually by uploading electronic files, or the software can be authorized to retrieve data from the company's accounting system.

b. Data extraction

The software scans the uploaded documents in various formats, such as CSV, PDF, or Excel. It extracts the necessary information, such as transaction dates, amounts, and descriptions.

c. Data mapping

The software maps data from both sources to ensure they are aligned and comparable. It is crucial because different banks and organizations use different terminology or formats.

d. Data comparison

The extracted financial data is then compared using ML algorithms. It identifies discrepancies between the two sets of records.

e. Exception handling

The system flags data errors and discrepancies. It highlights missing transactions, incorrect amounts, or duplicate entries. These can be classified as legitimate errors or fraudulent activities upon further investigation.

f. Reporting

The software summarizes the results of the bank statement verification process. It generates a report including any discrepancies found and their resolution. The data is accurate and up-to-date to be used for financial auditing.

Further Reads: Docsumo Customer Stories

How can auditing teams automate bank statement extraction?

Auditing teams can leverage automated bank statement extraction software to streamline data extraction. It helps them achieve more accurate results. 

Auditing teams can automate bank statement extraction in the following ways:

a. Integrate with accounting systems

Auditors can integrate automated bank statement extraction software with the company's accounting system, allowing for seamless data transfer and analysis.

b. Customize workflows

Automated bank statement extraction software allows the auditing team to customize workflows. They can add and remove tasks to match their specific needs.

c. Improve data accuracy

Automation minimizes the risk of errors due to manual intervention. It provides auditors with more reliable data.

d. Save time and resources

Bank statement extraction software can process many documents in a shorter time.

Docsumo’s bank statement extraction software is valuable for auditing teams. It processes large amounts of bank statements with more than 99% accuracy. The software is a time saver for the audit team. It eliminates the need for manual data entry and double-checking, improving productivity by reducing the risk of human error.

Improve the efficiency of your audit processes. Try automating bank statement verification using Docsumo.

FAQs

1. What is auditing financial statements?

Auditing financial statements involves examining a company's financial records. This includes balance sheets, income statements, cash flow statements, and other relevant data. Audit reports reflect a company’s financial health. They assure stakeholders that their financial information is accurate.

2. Why do banks require audited financial statements?

Banks require audited financial statements to assess a company's creditworthiness and financial health. It drives their lending and investment decisions. Audited financial statements allow banks to ensure the company complies with regulatory requirements. It helps maintain transparency.