In internal control over cash, reconciling the bank statement monthly is an example of which control activity?

Introduction / Context:
Internal control systems in accounting are built around several standard principles, such as segregation of duties, documentation procedures, independent internal verification and physical controls. Bank reconciliation is one of the most important control activities for cash. Exams and interviews frequently ask which internal control principle monthly bank reconciliation illustrates, because it tests understanding of how different control elements work together to safeguard assets and ensure reliable records.

Given Data / Assumptions:

• A company maintains its own cash records in the general ledger and cash book.
• The bank maintains separate records of the same account and sends periodic statements.
• Bank reconciliation involves comparing company records with bank records and explaining any differences.
• The reconciliation is usually prepared by someone other than the person who records daily cash transactions.

Concept / Approach:
Independent internal verification means that an employee who does not perform the original transaction recording periodically reviews and compares records from independent sources. Bank reconciliation is a prime example of this principle. The reconciler compares the bank statement, an external document, with the internal cash records, identifies timing differences such as outstanding cheques and deposits in transit and corrects any errors. This verification helps detect fraud, omissions and mistakes. Therefore, the correct option must identify bank reconciliation as independent internal verification rather than documentation or segregation of duties alone.

Step-by-Step Solution:
Step 1: Recall the main internal control principles: establishment of responsibility, segregation of duties, documentation procedures, physical controls and independent internal verification. Step 2: Recognise that bank reconciliation is primarily about comparing two sets of records that originate from different sources. Step 3: Note that the person performing the reconciliation should ideally be independent of daily cash handling to provide an objective check. Step 4: Understand that this process detects errors such as omitted deposits, duplicate payments or unauthorised withdrawals. Step 5: Select the option that labels this process as independent internal verification, not just documentation or segregation of duties.

Verification / Alternative check:
To verify, imagine a company where one employee records receipts and payments in the cash book, while another employee each month receives the bank statement and prepares a reconciliation. The reconciler highlights differences such as bank charges not yet entered in the books, cheques not yet cleared and any items that appear suspicious. Management reviews the reconciliation and ensures adjustments are posted. This arrangement clearly fits the idea of an independent person verifying information from two sources, confirming that bank reconciliation is an example of independent internal verification.

Why Other Options Are Wrong:
Option A, establishment of responsibility, involves assigning tasks clearly but does not describe the verification process itself. Option C, documentation procedures, emphasises using prenumbered documents and proper record keeping, which support control but are not the main feature of bank reconciliation. Option D, segregation of duties, is related because different people handle different tasks, but the specific control illustrated by reconciliation is the review and comparison activity. Option E, physical controls, refers to locks, safes and restricted access, not to comparing records. These principles complement but do not replace independent internal verification.

Common Pitfalls:
A common pitfall is to think that any cash control automatically falls under segregation of duties, ignoring the distinct role of verification. Another mistake is assuming that bank reconciliation is optional, when in practice it is essential for detecting both accidental errors and intentional misappropriation. Students may also confuse documentation and verification because both involve papers and records. Focusing on the idea that verification means an independent check of records from different sources helps correctly classify bank reconciliation in exam questions.

Final Answer:
Independent internal verification, where someone compares records from different sources to detect errors or irregularities.