Unusual is a comparison, so you need something to compare against
No transaction is unusual on its own; it is unusual against a baseline, and the whole method is keeping three baselines warm. The first is expectation: this month against budget and against the same month last year, line by line, with a written reason for anything that moved more than you can explain from memory. The second is the outside world: every bank, credit card, loan and payroll account tied to a statement issued by someone who is not you. The third is process: a list of every entry that bypassed the normal flow, meaning manual journals, voided and reissued payments, credit notes and after-the-fact corrections, each with a reason attached.
This is why unusual transactions are found by businesses that run full-cycle accounting on a monthly cycle and missed by businesses that reconstruct their books once a year. A year-end-only review has no warm baseline: nobody remembers July by the following March, the vendor who was overpaid has long since cashed the cheque, and the pattern that would have jumped out across three consecutive months is invisible in a twelve-month heap. The comparison method is cheap; the calendar it runs on is the actual asset.
The stakes are wider than fraud. Unusual transactions are also how honest books drift into wrong filings: a miscoded asset purchase changes reported profit, a duplicated revenue entry inflates the instalment base you are paying tax on, and an unexplained difference left to age becomes the adjusting entry that makes year-end slow and expensive. When the CRA reviews a return, its questions land on exactly the items this method flags, entries without support, patterns that broke, balances that do not tie, and a business that can answer from its monthly file closes reviews quickly. The comparison habit is audit readiness bought in one-hour instalments.
The monthly routine that surfaces them
A workable review routine has six steps, runs after each month-end close, and does not require an accounting degree to follow. It requires the close to be finished first, because scanning unreconciled numbers is scanning noise.
- Reconcile everything, not just the bank. Cards, loans, payroll liabilities and any clearing accounts. A difference that persists after reconciliation is itself the finding; do not let it ride to next month.
- Read the variance report. Profit and loss against budget and prior year. Chase any line that moved sharply without an obvious operational cause, in either direction: an expense that fell can mean a bill sitting unrecorded, which is as unusual as a spike.
- Scan new payees and banking changes. A monthly listing of vendors added and deposit details changed, reviewed in minutes by the owner. Most payment fraud walks through this exact door.
- List the manual journal entries. Anything posted outside the normal purchase, sales and payroll flows, especially round amounts, entries dated near period ends, and reversals. Each needs a one-line reason from whoever posted it.
- Review the shareholder loan account. Every draw, personal expense and repayment running through it, so nothing lands there by default because a bookkeeper did not know where else to put it.
- Tie deposits to sales. For businesses taking card payments, cash or customer deposits, compare what the point-of-sale or invoicing system says was collected against what actually reached the bank. Gaps on this line are found fast or not at all.
- Tie HST to the returns. Tax collected and input tax credits reconciled to what was actually filed and paid, so a growing gap never becomes a year-end surprise or a CRA letter.
Done monthly, the whole routine is an hour of senior attention on top of the close. The variance reading belongs in your management reporting anyway, so a business with a real reporting package is already most of the way there.
Red flags worth a second look
Most anomalies have boring explanations, and the point of a red-flag list is to know which ones deserve the follow-up question anyway. These are the patterns we chase first when reviewing a client month.
| Pattern | Often innocent when | Worth digging when |
|---|---|---|
| Round-dollar payments to a new payee | A deposit, retainer or rent with a contract behind it | No contract on file, approved and released by the same person |
| Duplicate amounts or invoice numbers | Genuine recurring charges on a schedule | Same invoice paid from an emailed copy and a mailed copy in different weeks |
| An expense category spiking against budget | A known price increase or one-off project | The spike repeats, spreads across several vendors, or nobody can name the driver |
| Entries reversed or voided near month-end | Honest corrections with a stated reason | Reversals cluster around the same account or the same preparer, reasons are vague |
| Gross margin drifting while prices are flat | A supplier cost change you already knew about | No cost story fits, which can mean missing revenue, leakage or miscoding |
| Shareholder loan balance growing all year | Planned draws that year-end compensation will clear | Nobody is tracking it against the repayment window, or entries appear that the owner does not recognize |
| A reconciling difference that persists | A timing item that clears next statement | The same difference ages month after month with no owner and no explanation |
Notice that the escalation column is rarely about the amount. It is about missing explanations, missing separation and missing follow-through, which is why this review is really an internal control wearing a reporting badge. A useful habit: write the follow-up answer beside each flagged item the month you chase it. A red flag with a documented answer is a closed question; the same flag reappearing three months running, with the same vague answer, is a finding. The full case for controls at this scale is in why internal controls matter even in an owner-managed business.
Why before year-end matters: tax, cash and the T2
Catching unusual transactions inside the fiscal year keeps your options open; catching them after year-end mostly leaves you filing the consequences. Miscoded personal expenses found in October get reclassified to the shareholder loan account cleanly. Found during T2 preparation, they are a harder conversation, because a benefit the CRA later views as conferred on a shareholder can be taxed in the shareholder's hands without a matching deduction for the corporation. The shareholder loan balance itself has a repayment clock: leave a draw unrepaid past the allowed window after the corporation's year-end and it can be pulled into personal income. You want to see that balance in September, while pay, dividends or repayment can still fix it, not in the file the following spring.
The same logic runs through the rest of the year-end file. An HST gap reconciled monthly is an adjustment; discovered at year-end it can mean amended returns, interest and a review letter. Revenue recorded in the wrong period distorts the instalment base you are paying on. And every unusual item resolved during the year makes tax planning real: the pre-year-end planning conversation only works when the numbers it starts from are trustworthy, because compensation mix, purchase timing and instalment adjustments are all decisions taken against the ledger as it stands. Clean as you go, and year-end becomes assembly rather than archaeology.
There is also a cash discipline hiding here. Duplicate payments, unmanaged subscriptions and quiet price increases are rarely large individually, but they compound into a cash flow drag that monthly review keeps clawing back. The broader monthly sweep, receivables aging and concentration included, is laid out in the financial risks a growing business should review every month.
Who should run the review, and what changes the scrutiny level
The reviewer should not be the person who posted the transactions, full stop. Self-review finds typos and misses everything interesting, honest or otherwise, because the preparer reads what they meant rather than what happened. In a business too small for a second finance seat, the practical fix is structural: an outsourced finance and accounting department gives an established Ontario business a reviewer who is independent of everyone inside the building, as a by-product of running the books, the close and the management reporting. In our Ongoing Financial Partnership this review is not a separate service; it is what the variance commentary in the monthly package is, with the compliance calendar underneath so filings and remittances never join the list of surprises. The payment-side defences that stop many of these items from ever posting are covered in how to prevent payment and approval errors in a growing business.
How hard to look depends on a handful of facts about your business:
- Transaction volume and how many hands post entries. More preparers means more coding drift and more need for exception listings.
- Cash and card exposure. Businesses handling customer deposits, tips or physical cash need tighter, more frequent tie-outs than invoice-only firms.
- Margin thinness. At tight margins, small leakage is the difference between a profitable year and a flat one, so variance tolerance should be low.
- Entity count and intercompany activity. Balances moving between related companies are where miscodings breed, and each entity multiplies the reconciliations.
- History. If prior year-ends produced large adjusting entries, treat that as evidence the monthly baseline is weak, and fix the close before adding review steps.
- Turnover in the finance seat. Handover months breed miscoding and broken patterns, so the first few closes after any staffing change deserve double attention.
The final quarter of the fiscal year deserves a deliberately heavier pass than the other nine months. That is when the shareholder loan position needs a plan, when compensation decisions still have room to move, and when any pattern the year has produced, a margin slide, a category creeping upward, an aging reconciling item, should be resolved rather than carried into the file. We run that final-quarter sweep as a standing part of pre-year-end tax planning, because every question answered in November is a question the T2 preparation does not have to ask in April.
If your books are behind and year-end is close, the honest sequence is catch up, reconcile, then review, and it is worth doing even late: an hour of advisory time on the current ledger before the fiscal year closes preserves choices that disappear at midnight on the year-end date. A free 15-minute discovery call is enough to tell you whether your setup would surface the seven patterns in the table above, or quietly bury them.
