terjemahan

53
due that are paid later, such as for rent or utilities, this type of business is operating almost entirely on a cash basis. As organizations grow larger, their direct use of cash usually decreases. The larger version of the above-mentioned retail store may make many of its sales through the use of store-issued and bank credit cards. Although otherwise treated as cash sales, these charges are receivables due per the larger store's accounting records. In larger organizations, virtually all business transactions are based on recorded receivables and payables, rather than through the actual handling of cash. What the larger organization considers to be cash is represented by transaction balances in their various financial accounts. Only very special legitimate business—such as a bank accepting retail customer cash deposits, or a state government lottery authority—deals in substantial amounts of cash. However, most businesses have only limited cash processes to handle the relatively small amounts of cash needed for normal business purposes, such as petty cash funds where small amounts of cash are maintained at various locations to cover various small cash payments. V

description

terjemahan

Transcript of terjemahan

Page 1: terjemahan

due that are paid later, such as for rent or utilities, this type of business is operating

almost entirely on a cash basis.

As organizations grow larger, their direct use of cash usually decreases. The

larger version of the above-mentioned retail store may make many of its sales

through the use of store-issued and bank credit cards. Although otherwise treated

as cash sales, these charges are receivables due per the larger store's accounting

records.

In larger organizations, virtually all business transactions are based on

recorded receivables and payables, rather than through the actual handling of

cash. What the larger organization considers to be cash is represented by

transaction balances in their various financial accounts. Only very special

legitimate business—such as a bank accepting retail customer cash deposits, or a

state government lottery authority—deals in substantial amounts of cash.

However, most businesses have only limited cash processes to handle the

relatively small amounts of cash needed for normal business purposes, such as

petty cash funds where small amounts of cash are maintained at various locations

to cover various small cash payments.

Cash, of course, is essential to pay for expenses such as the payroll and other

business costs (such as taxes). A publicly held corporation needs cash to pay for

dividends on its stock, and banks and lending agencies will require certain levels

of cash balances. Because cash in the bank has such a strong relationship with

other transaction cycles such as receivables or payables, an internal auditor

should have a good understanding of cash- related internal controls and processes.

(a) ACCOUNTING CONTROLS

A discussion of cash processes starts most logically with an identification of where

and why cash is handled in particular organization situations. Often, this

identification may lead to questions of whether a cash process is necessary or if it

might be handled differently. For example, is it really necessary that a salesperson

accept cash from customers or that some account collections are in cash? While

cash might be best in terms of accelerating and maximizing collections, different

V

Page 2: terjemahan

procedures can often eliminate the handling of cash and the risk of its improper

diversion. Any activities involving cash should be critically appraised to

determine if control compromises are justified because of other operational

considerations.

Internal audit should develop an understanding of the type and nature of the

organization's cash accounts that often require special control considerations. As

a matter of clarification, this cash is usually not maintained in the form of

currency but as an account recording cash transactions. For many organizations,

cash is maintained in five basic account types, as follows.

1. General Cash Account. This is the central bank account through which most

receipts from sales and collections pass, as well as disbursements for

purchases and expenses. Even though an organization may have a variety of

specialized cash accounts, all deposits and disbursements would normally be

made through this central, general account, with cash notification transactions

directed to other systems.

2. Branch Cash Accounts. Organizations with multiple locations will typically

have separate accounts at each of their outside locations. These accounts will

have the same attributes as the general account but will serve local or branch

operations.

3. Imprest Payroll Accounts. Payroll represents the major cash expense

for many organizations. Aside from a minimal balance maintained in this

account, at the start of each payroll period the organization would

prepare a check from its general account to transfer the total amount of

the payroll to the imprest payroll account. This improves controls and

reduces the time necessary to reconcile payroll account balances.

4. Imprest Petty Cash Funds. These are normally not bank accounts but

fixed amounts of cash placed under the control of various persons in the

organization for special cash transactions. For example, an

administrative assistant may retain a small amount of cash to dispense

VI

Page 3: terjemahan

for such things as rolls and coffee for meetings. Petty cash funds are often

relatively small, and the person in charge replenishes them by submitting

receipts to cover the cash amounts disbursed.

5. Savings Accounts. Organizations typically place certain funds not

needed for day- to-day operations in longer-term cash or cash equivalent

accounts. These accounts earn interest but tie up the deposited money for

limited amounts of time. For example, an organization can place monies

in United States Treasury Bills that have a 90- day maturity and earn

interest over that period, or they can buy what is called commercial

paper, which pays interest based upon periods as short as overnight.

These deposits are considered to be the same as cash because they can be

easily sold with no market risk.

Cash for various purposes is usually maintained in accounts under one of

the above five general categories. Cash passes through these accounts

through the process of cash receipts, intermediary cash handling, and

custody activities, and leaves through the process of cash disbursements.

Internal audit should have a good understanding of the controls associated

with each of these general cash-handling areas.

(i) Receiving of Cash. Cash receipts may be in the form of checks mailed as

payments from billings, receipts from cash sales, or various types of bank

transfers. This cash is captured and deposited early in the cash receipts

processing cycle, and thereatter moves internally toward centralized cash

controls normally exercised by the organization. A key point to consider here

is that cash always has a time value. Customer checks as payments of bills

should always be deposited as soon as possible. Even if they are not deposited

in interest-bearing accounts, organizations may have agreed to maintain

certain average daily levels of balances and should deposit cash in those

accounts as soon as practicable.

Cash represents a major control risk to an organization. It can be

improperly diverted, and once diverted it is often difficult to trace because

VII

Page 4: terjemahan

the cash itself is not separately identifiable. Thus, an organization must

establish strong controls over its overall cash processes, focusing both on

organization outsiders, to be sure that the cash received is what should be

received, and on insiders, to be sure that cash received is not improperly

diverted. The sooner controls can be established over cash received, the

better. Some form of receipt, such as a serially numbered document with one

copy to the outside party or the entry of the transaction on a cash register

with a serially numbered ticket of some kind, should be issued for the cash

received.

Ideally, any receipt of the cash should be linked to the relief of a previously

existing account, such as the collection of an accounts receivable with a debit to

cash and a credit to the requisite receivables account. Another illustration would

be the sale of merchandise controlled on an item-by-item inventory basis, where

the organization must account for its inventory or cash

Controls should be instituted to insure collection for any services

provided. This might mean giving the customer a cash sales slip, without

which the customer could not receive a service. It might mean physical

protection over merchandise or restricted entry to areas where these services

are rendered, as in the case of a theater. Appropriate internal controls over

cash require a segregation of duties, and this segregation-of-duties control

applies to all types of cash receipt controls.

Outside parties may be utilized as a further cash receipts control. A

customer can serve as a check on the action of the employee in a retail

environment, providing assurance that the employee rings up a cash receipt

on a point-of-sale register.

Cash receipts must always be separated from cash disbursements. In

smaller organizations, there is frequently pressure to use portions of the cash

received to cover current expenditures of one kind or another. This practice

should always be resisted. More effective controls and cleaner

VIII

Page 5: terjemahan

accountabilities will result when cash receipts and disbursements processes

are completely separated.

Cash receipts should always be channeled intact and promptly to

established central cash depositories. A day's receipts should be deposited

iptact as soon as possible after the cutoff for the day. If high volumes of cash

are received, consideration might be given to depositing the cash at several

times during the day. This is important for several reasons. First, any delay

results in a greater risk of theft or improper diversion. Second, checks might

be good upon receipt but not later. Third, it is important to be able to

identify a particular deposit with a given period of time. Finally, and most

important, undeposited cash is idle cash and is not contributing to the best

use of organization resources.

When the cash received is transferred to another organization unit, the

accountability of the transferor should be properly relieved and a new

accountability for the transferee clearly established. This is normally

accomplished by some type of a cash receipt or transfer record. Records by

which the accountabilities for cash are established and controlled should be

maintained by persons independent of the persons charged with the direct

accountability. Checks should be made periodically by an independent

person to verify that cash has been properly handled and accounted.

(ii) Cash Handling and Custody. Cash handling is interwoven to some extent

with both cash receiving and disbursements. Many of the handling and

custody issues here deal with cash as it resides in the five account types

described previously. When an organization has actual cash in its possession

at some point during its operations, there may be other control aspects that

can best be considered under the category of cash handling and custody.

Large amounts of cash retained by the organization create a risk of theft

by outsiders or even by employees, and physical safeguards over the cash

held within the organization should always be strong. In certain cases locked

cabinets may be adequate; in others, small safes are needed; in still others,

IX

Page 6: terjemahan

elaborate vaults may be needed. These facilities, of course, must actually be

used. A safe is of little value if cash is often kept in an unlocked file and the

safe is used only on an exception basis.

Access to cash-storage facilities must be controlled through keys,

combination locks, and other physical protection mechanisms. If an

organization has a need to disburse a fairly large volume of cash or other

negotiable instruments during normal operations, a separate cashier function

should be established. During operational periods, the area used by such a

cashier needs to be adequately sealed off by cages or separately partitioned

portions of office quarters. Finally, when cash is transferred to or from a

banking facility, there must be suitable protection.

In past years, some organizations maintained large cashier facilities to

cash employee payroll or personal checks or even to pay employees in cash.

With the convenience of checking accounts and the ease with which pay can

be transferred to checking accounts and cash withdrawn through automatic

teller machines (ATMs), organizations today do not need to provide this level

of a cashier facility. A larger organization can arrange to directly deposit

employees' pay in their checking accounts and might even add an ATM,

supplied by a local bank, to allow employees to make cash withdrawals on

site. Travel advances can be handled in a similar manner. Employees can be

issued company credit cards and can use these cards both for charging their

expenses and for making cash withdrawals through an ATM. When these

types of procedures are established, the organization needs only to provide

very limited cashier facilities.

Since "cash" is a broad term that goes beyond physical cash on hand to

include all types of bank accounts and negotiable instruments, the earning

potential of that cash needs to be recognized, where practicable, through the

placement of funds in interest- bearing accounts or under other

arrangements where the time value of money will be realized. In some cases,

the maintenance of given bank balances may be the basis for credit lines or

X

Page 7: terjemahan

other services rendered by the banks involved, even though the given

account earns no interest. In other instances, funds can be placed in short-

term, interest-bearing commercial paper. The objective is to exploit these

potentials to the maximum extent possible.

(iii) Cash Disbursements. Once cash is received and available in its various

forms, it is ready for use for organization purposes such as the purchase of

operating facilities, the payment of expenses, and for other disbursements

such as paying dividends to investors. The general audit objective is that

cash disbursements should be for valid and proper purposes, that fair value

has been received, and that they are in the correct amounts.

Perhaps the most general control to always be considered here is that the

cash receipts and cash disbursement phases of the total cash process need to

be as separate as possible. Although the procedures to enforce this control

may vary, internal audit should always look for an appropriate separation of

responsibilities between cash receipts and disbursements.

In normal accounting operations, major expenditures are processed

through the creation of a payable that is then subsequently offset by the cash

disbursement. At the same time, the disbursement is normally reviewed in

terms of the validity of the underlying payable plus the propriety of the

timing of the liquidation of that payable. However, a number of situations

will arise when small cash expenditures must be made without delay and

when the amounts may be too small to justify the application of the formal

disbursement procedures. In these circumstances, cash may be advanced

using what is called a petty cash fund.

Normally, petty cash disbursements are best handled on an "imprest"

basis, as discussed earlier. Under this procedure, a designated fund amount

is established, cash payments are made from the fund as required, and then

reimbursements are made to the fund covering exactly the total amount of

expenditures, thus bringing the fund back to its original level. The size of the

fund should be large enough to sustain expenditures, with allowance for the

XI

Page 8: terjemahan

time required to process the previously described reimbursements, but no

larger than necessary since the level of the fund can be changed from time to

time in light of experience and new conditions.

Satisfactory evidence should always be obtained to support expenditures. If

such evidence is not directly available in the form of an invoice, cash register

receipt, or other documentation, a special receipt should be prepared and

signed, preferably by the recipient of the cash, but at least by the person

making the expenditure. These supporting documents should be canceled at

the time of reimbursement to prevent their reuse. Because petty cash

expenditure amounts are usually relatively small, there may be a temptation

to relax controls requiring adequate documentation. Documentation should

be reviewed at the time of reimbursement. Improper use, however, cannot

be detected except by an actual examination and count of the fund. Both of

these protective efforts need to be carried out by responsible management on

a continuing basis.

The cash-disbursement process highlights the desirability of breaking

down the various aspects of control activities and assigning them to different

individuals. Thus, one person might review the documentation for the

request, another prepare the check-process- ing voucher, and a third review

the propriety of the combined set of documents as well as review the output

from the automated accounts payable system. For larger disbursements or

those not covered by an automated accounts payable system, a fourth person

might provide the primary signature and another for secondary signatures

for larger checks. Each of these activities serves as a cross-check on another.

The organization should not overcontrol this process, however. Although

multiple persons may be involved for large disbursement requests, the

process should be reduced to a more cost-effective level for smaller

disbursements.

All checks issued should be made payable to the specific individual or

firm from which the products or services are obtained. The writing of checks

XII

Page 9: terjemahan

to "cash" or to "bearer" should be strictly prohibited, since cash can then

more easily be used for unauthorized purposes.

(iv) Otner Aspects of Cash Process. A number of other matters pertaining to

effective control over cash cut across the receiving, handling, and

disbursement aspects of this process. These include the need to bond

employees handling the organization's cash, to protect critical documents

such as checks, and to independently reconcile all checking and other cash

acsounts.

Normal business prudence requires that all employees participating in

any part of the cash processes be bonded—a company-paid insurance policy

against employee malfeasance. The benefits derived are twofold. First, there

is the actual protection to the organization in the case of any defalcation or

other improper diversion of organization funds. Second, the knowledge of

the bonding may motivate the individual employee to exercise a higher

standard of care and integrity. To accomplish the latter, the bonding action

should be properly publicized. The organization should also have strong,

well- publicized procedures in place to obtain restitution or to force

prosecution of any employee involved with any improper diversion of cash.

For all cash processes, records should be kept up-to-date as a basis for

both efficient current reference and prompt periodic reporting. Delays in

carrying out various parts of the cash processes can generate greater

physical risk and at the same time restrict the efficient utilization of cash

resources.

Although the use of paper check forms is declining due to electronic

transfers and other automated payment processes, the proper control of any

checks or other special forms is always important in terms of physical

protection and efficient usage. The problem is complicated because modern

computer printers generate the entire check document, using laser printers,

from blank paper form. Control of these computer programs is also very

important.

XIII

Page 10: terjemahan

An important part of the overall cash-management process is the

independent reconciliation of all bank accounts. Reconciliations should be

made by persons or computer systems who are independent of the regular

cash-receiving and -disbursing operations. Bank statements and canceled

checks should be obtained or received directly from the depositories

to,insure that they have not been tampered with in any manner by any

intermediary. A bank will often provide reports that help complete this

process. For accounts with a smaller number of transactions, bank

reconciliations also provide the opportunity to review how receipts and

disbursements are handled and to identify unusual actions.

In earlier days of internal auditing, the independent reconciliation of

checking accounts was once a regular internal audit task. While both

internal or external auditors may want to perform this exercise as part of

their annual financial audit, internal audit functions today have generally

moved away from this as a regular process. Internal audit resources are too

valuable, and other persons in the accounting organization can usually

perform this function subject to periodic internal audit review.

(b) CASH PROCESS INTERNAL CONTROLS

Many of the cash-related internal controls discussed in this book are covered

in subsequent chapters involving the receipt and disbursement of cash. This

section considers cash as it applies to overall accounting operations.

Cash presents a far greater internal control risk to an organization than

nearly any other operation. An organization may manufacture, for example,

a product called a "widget" that has wide consumer appeal. It might be

possible for dishonest employees to steal these widgets and use them or sell

them for their own personal gain. However, the dishonest employee can only

steal so many widgets before an astute management can see that widgets are

missing from the warehouse. Without proper reconciliation procedures in

place, it can be much harder to detect if cash from those widget sales is

missing. This is because of the numerous transactions associated with this

XIV

Page 11: terjemahan

cash, including customer credits for returned goods, outstanding receivable

balances, and payments in transit.

Cash is a dynamic commodity with its transaction balances in flux at any

moment. For this reason, external auditors take strong steps at year-end to

determine that the cash balances stated in financial statement balance sheets

represent cash on hand, cash in transit, and cash in various general accounts.

The external auditor should also be concerned that this cash has been

properly classified and that any committed funds have been identified.

Management has, or should have, a strong interest in establishing

adequate internal controls over its cash processes, including the following:

•Periodic reconciliation of checking accounts to recorded cash balances.

This includes a review of cash deposits and checks issued, with an

accounting for checks in transit.

•Examination of canceled checks on a test basis for appropriate

signatures, endorsements, dates, and amounts.

•Controls over the handling of cash at all levels to ensure that controls

include a proper segregation of duties.

•Physical controls over significant documents such as checks.

• Periodic follow-ups on special cash items such as checks

outstanding and stop- payment notices

• Cash is such an important element in organization operations

that strong internal controls are essential. These controls should be

in place for all cash accounts and at all levels.

4

(C) CASH-RELATED INTERNAL AUDIT CONSIDERATIONS

In the early years of auditing, a major emphasis of many reviews

was on the controls over cash. As the years went by, the sources of

actual cash in the modern organization were limited to petty cash

funds used for very small, miscellaneous purchases. With an overall

XV

Page 12: terjemahan

objective to review controls over cash, internal auditors all too often

made the reconciliation of a relatively minor petty cash fund a

major component of their reviews. Even worse, they often reported

a small difference in the petty cash fund as if it were a major control

issue. At the same time, they may have ignored more significant

control issues.

The modern internal auditor should have moved away from this

overemphasis on the controls over a relatively minor petty cash

account while ignoring more significant control issues. Internal

audit should not ignore such areas as petty cash funds because they

are viewed as too minor, but should understand where cash plays a

significant role in organization operations and should review for

appropriate controls.

(i) Financial Audit Considerations. Most cash-related financial

audit procedures are performed by external auditors as part of

their year-end procedures. Internal auditors often become involved

with these external audit procedures in their support of external

auditors. They also may have a need to reconcile account balances

as part of reviews of smaller units or other special audits.

Internal audit should understand how to perform a bank

reconciliation. In many respects, this is similar to the process an

auditor would use to reconcile a personal checking account. Internal

audit starts with a statement from the bank for each account as well

as internal records indicating receipts and deposits. In addition to

the bank's account statement, external auditors at year-end request

an independent confirmation of an organization's accounts at a

given bank, revealing such matters as restrictions on withdrawals

due to compensating balance requirements, liabilities to the bank

related to the account, and other matters. An internal auditor might

also request such a confirmation when performing a financial audit

XVI

Page 13: terjemahan

of cash at a smaller, remote unit not part of the external auditor's

scope.

Figure 22.9 is an example of a bank reconciliation worksheet to

test a bank account balance. This reconciliation process was once a

very labor-intensive task requiring the physical handling and

summation of checks. Computer systems both at the bank and

within the auditor's organization have made this much easier;

however, internal audit should not rely just on the printed summary

reports when making the reconciliation but should also look for

unusual items on a test basis. Some of these items should be

physically examined 4

in detail.

Reconciliations of petty cash funds are very similar to the

process for checking accounts. However, internal audit should look

for an internally prepared record of cash disbursements, including

appropriate documentation, as well as a record of all deposits into

the fund.

(ii) Cash-Related Operational Audit Procedures. In any operation

involving the handling of cash, internal audit should concentrate on

whether cash is properly protected from theft, that it is promptly

moved to appropriate accounts, and that it is managed to

XVII

Page 14: terjemahan

Balance per Bank

1. Obtain balance per bank statement. $5,236,000

2.Add deposits in transit and bank errors that understate the balance. $ 42,126

—Subtotal ' $5,278,126

3.________________________________________________________________Deduct

outstanding checks and bank errors that overstate the balance. $136,016

4.Calculate corrected cash balance. $5,142,110

Balance per Books

5.Obtain balance per books and financial records. $5,309,461

6.Add deposits credited by the bank but not yet recorded.$137,140

7.Deduct book errors that understate the balance per books (e.g. a

check for $10 that was recorded as $100 on the books).______$261,630

—Subtotal $5,184,971

8.Deduct bank charges not yet recorded by depositor (e.g. bank service

charges and NSF checks). $ 27,361

9.Deduct book errors that overstate the balance per books (e.g. the

depositor writes a check for $100 but records it as $10).______$ 15,500

10. Con-ect cash balance. $5,142,110

best serve the organization. Controls for proper protection over cash

include such simple matters as keeping petty cash funds in locked,

secure facilities, transporting all cash deposits in armored carriers,

and discouraging any temptation through strong separation-of- duties

controls. For the operational auditor, cash may include check forms,

credit vouchers, negotiable securities, retail gift certificates, or any

documents that could be easily converted to cash through improper

procedures. Internal audit should look for appropriate controls to

prevent misappropriation in any cash-related documents.

Cash always has a time value, and idle cash does not draw bank

account interest or satisfy bank minimum-balance requirements.

Internal audit should always look for situations where improved

Page 15: terjemahan

controls and procedures could move cash faster to appropriate bank-

ing accounts.

Figure 22.10 contains selected audit procedures for operational

reviews for controls over the protection and movement of cash. These

procedures cover cash or cash- equivalent functions used for

operations but not cash investments, as discussed in Chapter 30 on

financial management. Because actual cash processes may vary to a

great extent due to the nature of the organization, these operational

audit steps are very general. Internal audit should always develop an

understanding of the various sources where the organization receives

its cash and then concentrates on the controls over the more

significant. That is, there is often little need to do a formal cash count

of a petty cash fund unless that fund experiences a high volume of

transactions or there is some other perceived concern.

22-26 Ch. 22 Accounting Systems and Controls Figure 22.10 Cash-

Related Audit Procedures

22.10.1 Identify all repositories of cash or cash

equivalents located throughout the organization.

The surveys should include cashier functions,

cash value documents such as cash redeemable

documents, and securities.

22.10.2 On a surprise basis and accompanied by a

member of management, to act as a witness, visit

one or more repositories of cash and perform a

formal cash count; reconcile that count to formal

accounting records, investigating any differences.

22.10.3 Review all procedures regarding cash and

comment on the adequacy and attention to

controls, including separations of responsibility

throughout.

19

Page 16: terjemahan

22.10.4 Perform a walk-through inspection'of all

cash-handling areas, with an emphasis given to

security over the cash or cash equivalents.

22.10.5 Determine that procedures are in place to

record the receiving, depositing, or disbursement

of all cash transactions.

22.10.6 If terminals

are used for cash, determine that controls exist

over the sign in / sign out for those terminals and

that procedures require a periodic review of

terminal logs. t

22.10.7 Determine whether procedures require

supervisory or management personnel to review

and approval all journal entries, recording cash

transactions and balancing cash routines.

22.10.8 Determine that persons involved with

depositing and recording cash receipts are

covered by insurance and fidelity bonds in

appropriate amounts.

22.10.9 Review the adequacy of security controls

over cash functions, both monetary and cash

equivalents. On a selected basis, review security

procedures in detail, noting any potential

vulnerabilities.

22.10.10 Assess overall procedures in place for the

conservation of cash throughout the organizaiion,

including:

• Use of cash discounts for early payments

• Cash concentration accounts

• Effective use of EDI and electronic fund transfers

Page 17: terjemahan

• The use of zero-balance accounts for such matters as

payroll

• The issuance of employee credit cards for travel rather

than cash advances

(iii) Cash-Related Computer Audit Procedures. The typical

organization does not have many strictly cash-oriented

control systems. Cash-related transactions flow through

many processes, but internal audit is typically interested in

the other transactions related to that cash. That is, an

internal auditor might review controls over a sales system I

and would develop computer-assisted audit techniques

(CAATs) to measure various sales- related parameters.

Internal audit would have less occasion to develop CAATs

just for the cash side of that process

Banking or financial institutions deal with cash as their

primary product and have a large number of cash-related

processes such as checking accounts, home mortgages, and

other loans outstanding. These are supported by extensive

computer systems that internal audit should consider for

potential controls reviews and that lend themselves to

numerous types of CAATs. Specialized financial

professional organizations such as the Bank Admin-

istration Institute3 publish audit guides and other

materials for the computer audit-related reviews of

financial institution-related systems.

In a nonftnancial institution, internal audit can sometimes

develop very effective CAATs covering the organization's cash-

management procedures. For example, a sales organization with

remote branch offices may have instructed those locations to remit

all cash collected to a sweep type of account for processing in a

21

Page 18: terjemahan

central location. Those same branch organizations may not have

appropriate control disciplines to process these remittances on a

timely basis. Internal audit could possibly develop a CAAT to review

reported daily sales figures and match them with reported deposits to

determine if cash deposit rules are being followed. As another test,

internal audit could develop a CAAT to calculate the average cash

balances at these branch units. The results might reveal that

management was not taking proper stewardship control over their

cash management.

(Iv) Cash Process Sample Audit Report Findings

A: Excessive Cash Balances in Cashier Accounts. We did a count of

cash under the responsibility of the home office cashier that is used

for employee travel advances, expense reimbursements, and

miscellaneous expenses. We also reviewed average daily disburse-

ments from this account over a period of six months. With the

exception of two instances where there was significant employee

international travel, we found that the cashier total cash balance was

always greater than daily disbursements by a factor of about ten.

This large cashier cash balance ties up resources that might be

deposited in organization accounts.

Recommendation. The average daily balance of cash under the

control of the home office cashier should be reduced by about 80%.

This amount should be reevaluated periodically based on

organization activities and other needs. To allow for the occasional

circumstances when a large travel advance is needed, arrangements

should be made with the local bank to secure travelers checks on a

one-day notice.

B: Inactive Checking Accounts. The ABC and XYZ facilities were

both closed about one year ago. However, the local bank accounts for

each of these facilities remain open. Management advised us that the

accounts are open because certain refund checks issued before

Page 19: terjemahan

closure have never cleared. Although the balances in each of these

accounts is at a minimum level, the open accounts expose the

organization to potential fraudulent transactions.

Recommendation. A detailed reconciliation should be performed

to identify the number and nature of the outstanding checks issued

from each of these accounts. Remaining balances should be reduced

to the level of these outstanding checks. Consideration should be

given to contacting some of these check payee parties, informing

them that the accounts will be closed. In any event, the checking

accounts should be closed within six months.

22-4 RECEIVABLES PROCESSES

Receivables processes cover any action that generates claims of

amounts due against individuals or other organizations. These claims

are usually against parties outside the

organization but at times can also involve employees and officers. The

claims are brought into existence to allow the organization to recognize

them as a future liability to be resolved later. They can be considered an

intermediary phase pending their ultimate collection in the form of cash or

other types of consideration. Although these claims can originate in a

variety of ways, the major category has to do with the sale of products or

services rendered by the organization. This section first deals with this

sales-related category and then later touches on other receivable types.

The receivable processes that relate primarily to sales have a number of

important relationships. There is a need for policies covering the extent to

which credit is first granted and then subsequently administered. Who

should be extended credit? In what amounts? How aggressive should the

organization be ih pressing for subsequent collection? A second type of

consideration concerns customer satisfaction and continuing customer

goodwill. The organization should be interested in how customers react to

the modes of credit authorization, billing, and collection. The organization

23

Page 20: terjemahan

is also interested in learning about how the customers are reacting to

organization products and policies in a broader sense. Finally, there is the

specific interest of the organization in the efficiency of its various receivable

activities and the effectiveness of its controls.

The modern organization faces many potential risks related to its

receivables processes. If credit is granted without proper policies or

customer screening, the organization may be either limiting its sales

through too tight credit practices or booking sales that may be eventually

uncollectible. Once a receivable is booked, the organization should handle

billings in a prompt and accurate manner. Cash payments against

receivables need to be properly recorded and deposited. Finally, the

organization needs to establish policies to collect on late or overdue

receivable accounts.

Accounts receivable are often covered by external auditors who send

out independent confirmation letters asking customers with receivable

balances to acknowledge the existence of those recorded receivables. This is

an important step in a financial statement audit. However, there are a large

number of additional and related receivables-related operational and

accounting review areas that should be a key part of the internal auditor's

activities.

(a) TRANSACTION CYCLE

The processes or transactions relating to accounts receivables can be

grouped into three phases. The first phase has to do with the conditions

under which the receivable comes into existence, including both recording

the sale and determining that the customer has a proper credit history. The

second covers the administration of the receivables thus created, including

the processing of bills and statements as well as monitoring the overall

status . of all receivable accounts. The third phase consists of the means by

which the receivable is finally liquidated. This includes the collection of cash

to satisfy billings or the use of credit collection procedures for any overdue

Page 21: terjemahan

billings. The objective for each is to understand the general range of

matters involved and to identify major control problems.

Automation and competitive business practices have changed the

manner in which receivables are created and processed for many

organizations. Electronic data interchange (EDI) procedures, discussed

from a purchasing perspective in Chapter 24. are an example. A customer

may make a purchase through an electronic transmission to the

organization's order-entry system. The order is electronically

acknowledged, shipped, and electronically billed. The customer may then

pay through an automated electronic funds transfer (EFT)

process. Using EDI, much of the traditional paper trail frequently used by

auditors and others disappears. The accounts receivables process and its

related controls change extensively using these newer technologies.

(i) Recording Sales and Generating Receivables. Since an account

receivable normally arises out of the sale of the orgarlization's products or

services, internal audit is concerned with establishing a direct link between

the actual sale and the recording of the receivable. The recorded receivable

must be backed up by the shipment of the product or the performance of

the service according to preestablished sales terms. These objectives are

likely to be satisfied when the creation of the receivable can be directly

linked with the recording of the sale and the relief of an inventory account

or with a record of the performance of the service. This process usually

involves three basic automated systems in the organization: sales order

entry, inventory or shipping systems, and accounts receivable. The latter

also links to key accounting systems including the general ledger.

Generating an account receivable creates the need for the organization

to extend the required credit to the customer to cover the sale. This credit

decision depends upon the general credit policy of the organization and

how it is applied to a particular customer in* the light of his or her credit

standing and past payment experience. When credit acceptability has been

25

Page 22: terjemahan

determined, regular sales and billing procedures are initiated. As a part of

those procedures, an invoice is prepared and the account of the customer

charged.

A major control consideration applying to the generating of receivables

is an independent review and approval of the customer's credit. This

approval should be provided by an independent department or person

within the framework of established organization policy and should

consider appropriate credit-related information about the particular cus-

tomer's current credit balances, payment history, and the general credit

and financial standing. A credit approval by parties independent from the

sales department is important since that sales function is often more

interested in completing the sale rather than collecting on it in the future.

Prices and terms for the sale must be properly authorized. For billing

purposes, the applicable prices, discounts, and other tenns must be based

on established organization policy. Any special interpretations or deviations

must be approved by properly authorized individuals.

Cash discounts are usually part of standard billing terms, typically a

2% discount if the invoice is paid within 10 days with the net amount due if

paid in 30 days. A penalty will usually be assessed after 30 days. These

terms should be clearly stated on the invoice document using such terms as

"2%-Net."

For goods shipped, invoices need to be prepared for use in several

operational areas. One copy, generally with prices omitted, goes with the

shipment as a packing list. Another, properly priced, goes to the customer

as the official invoice. Others are used for the compilation of sales data and

for accounts receivable posting. Invoice shipment data will also impact

inventory and production records and may also form a basis for calculating

sales commissions.

Invoices were once mostly multicopy paper documents, and proper

serial number control and correct postings were critical controls. Where

Page 23: terjemahan

paper-based systems are still in place, these controls continue to be

important.

(ii) Administration of Accounts Receivables. The administration phase of

the receivables process starts when the receivable is recorded and continues

until the receivable

is paid or otherwise liquidated. This accounts receivable record

must be tied to control accounts that support individual customer

and other categories of billings.

Newly generated charges, credits from cash collections, and

all other miscellaneous charges and credits should be posted on a

daily basis so that up-to-date information is always available to

serve the various operational needs of the organization. At the

same time, accuracy must be maintained through checks on the

agreement of detailed accounts with the established control. This

check is normally handled by the typical automated accounts

receivable system. Figure 22.11 is a flow chart showing the

components of an automated accounts receivable system. Such a

system could be implemented as part of a larger computer system

Figure 22.11 Accounts Receivable Process27

Page 24: terjemahan

or could be resident on a desktop microcomputer. The controls

necessary for such an application were discussed in Chapter 17.

In addition to the accounts receivable information furnished

regularly through online retrieval screens or the like, there should

be periodic reports of current balances and an aging analysis. The

aging analysis shows the portions of the account balances that

have been unpaid for different time periods, including current,

one month overdue, two months overdue, three months overdue,

and so on. Figure 22.12 is an example of this type of aged i

receivables balance report. An analysis of this aging data is

important for the administration of the ongoing credit and

collection efforts. It will also allow the organization to adjust its

estimates of reserves for bad debts, as discussed below.

At the end of a month or accounting period, organizations

generally send statements summarizing all invoices issued during

that period. Even though payment terms require that individual

invoices be paid in advance of the period-end statement date, the

statement provides an account summary.

A basic control here is mailing statements directly to individual

customers with noopportunity for diversion or modification by others. This

makes it possible for the statements to serve as a reliable cross-check on the

accuracy of the individual accounts. It is also an important means of

disclosing any delayed reporting of collections.

Although regular organization sales activities provide the major

source of the accounts receivable, other organization activities and

developments may lead to some special types of receivables,

including:

•Advances to Employees. Sales of organization products or

services are normally included in the regular accounts

receivable. However, there may be advances of one kind or

another for travel, special business purposes, or possibly for

Page 25: terjemahan

personal reasons. Advances for travel would normally be

booked in a travel accounting system. Many other special

employee advances are controlled through the payroll system

and are settled over future pay periods. Advances for personal

purposes would require the approval of properly authorized

managers.

•Deposits with Outsiders. In many situations, deposits are

required in connection with the establishment of utility services

or for other reasons. These deposits may be of a temporary

nature or may be permanent as long as the service is being

utilized. The receivable record here is important so that the

deposit can be recovered when the original need no longer

exists. While these deposits would not be part of an accounts

receivable system, other records should be established to record

them.

•Claims. Relations with vendors, carriers, or outside service

groups can lead to claims for a variety of reasons. These become

a special type of receivable. Insurance claims are still another

source of special receivables. Effective control is

provided by recording of the claim as a receivable, rather than

recording the proceeds when received.

• Accruals of Income. A special type of receivable, in a very loose sense,

exists when earned income is accrued prior to being due and collectible.

The objective here is to recognize income in the periods it is actually

earned and thus provide a better evaluation of current operational

performance.

While the nature and scope of the transactions and activities that

generate these miscellaneous types of receivables can vary greatly, certain

29

Page 26: terjemahan

minimal controls are necessary for all of them. First, policy and procedure

conditions under which the particular type of receivable is created should be

clearly defined. Safeguards should exist to make sure that the receivable is

recorded at the earliest possible time and in the proper amount. Second,

procedures must be established for the periodic review of all miscellaneous

receivables, which are frequently overlooked or not given adequate attention

in a regular operational review. Specific precautions must be taken to

combat such tendencies.

(iii) Dispositions of Receivables and Credit Collections. Accounts receivables

represent an asset claim against the particular parties involved, and these

claims should be relieved only in a properly authorized manner. The four

normal modes of accounts receivable account relief are cash collections,

return allowances, account adjustments, or bad debt write-offs.

The most usual settlement mode is cash collections from customers to

liquidate the previously generated receivables. At the time of recording the

cash collections, the organization must verify that any cash or other

discounts deducted are properly earned and recorded. The customer account

should be properly credited and adjusted if the discount was improper.

When products sold are returned for one reason or another, the result is

the reverse process of the original sale. While retailers often allow returns if

a customer indicates dissatisfaction, most manufacturers, industrial

distributors, and other organizations will have a requirement to determine

that the shipment was somehow not in compliance with terms or was in error

before returns are allowed. There should be a requirement that the actual

return is authorized. A second retum-related requirement is that the

products returned are actually received in proper condition. Finally, the

credit for the return must be in the proper amount. These three control

points—proper authorization, receipt of goods, and proper amounts—

provide the basis for establishing a sales return credit.

Adjustments and allowances are harder to control when a customer is

granted a special credit for volume purchases, for the promotional sale of

Page 27: terjemahan

particular types of products, or to adjust for product deficiencies. Where an

allowance is pursuant to a specific arrangement, controls should be in place

to confirm compliance with the arrangement. In many cases, however, the

authenticity of the credit may be based on judgmental factors evaluated by

an executive who then approves the credit within the authorized limits.

There will always be customers who simply fail to pay. There may be

bankruptcy situations, disappearance of the debtor, or other causes that

leave no alternative but a write-off of the account as a bad debt. Provisions

should be made for such losses through the creation of reserves for doubtful

accounts. The actual bad debt write-off, properly authorized by a sufficiently

high-level organization manager, is then charged to that reserve account.

However, even after they are written off, these accounts written-off should

be given such further collection efforts as are practicable and reasonable.

(iv) Policy Aspects of Accounts Receivable. In addition to the

operational framework of the receivable process, several key policy areas

relating to the handling of receivables require consideration. First, the

economics of credit levels is a continuing policy question for many

organizations. Management must decide how liberal an organization should

be in extending credit. While it is clear that the tighter the credit granting,

the lower will be the ultimate bad debt losses, sales made pursuant to a more

liberal credit policy may be additional sales that otherwise would no: have

been made. Since these sales should yield extra profits, it may be in the

organization's interests to generate higher sales with less stringent credit

policies. It may be difficult to measure the incremental benefits accurately,

but it is important that the auditor recognize the several dimensions of the

problem when performing operational reviews in the accounts receivable

area.

A second related aspect of both the operation of the credit department

and the total receivable process is the impact that these activities have on

good customer relations. It is usually desirable to streamline procedures and

31

Page 28: terjemahan

reduce the degree of personal contacts, but credit and receivable processes

unavoidably involve customer contacts. These contacts must be handled in a

way that minimizes customer irritation and builds positive goodwill. Real

effectiveness here is to combine internal efficiency with courteous and

reasonably cooperative customer relationships. Very often customer

dissatisfaction, due to a cause quite independent of the receivable process,

may surface through account receivable contacts. The problem can become

magnified if both parties are dealing with automated billing systems that

appear recalcitrant or difficult to understand. The receivable personnel must

channel problems to organization personnel who will solve them and work to

build greater customer goodwill.

Through a formal contract or a deferred payment, it may be the practice

of an organization to make sales for its products and services on a deferred

payment basis. In such cases, contracts are usually executed that specify the

timing of the payments. In some cases, notes receivable may be obtained.

These notes receivable are often an outgrowth of collection problems with

regular accounts receivable, such as circumstances where a regular account

cannot be liquidated in accordance with its payment terms. In such a

situation, the organization may wish to obtain what it regards as a more

precise recognition of the receivable through the use of notes receivable. This

also allows an organization to define the interest that can now be charged. In

all these situations, circumstances under which any notes receivable come

into existence need to be defined and properly authorized. Subsequently,

there is the need for a regular monitoring of the collection of the notes on the

dates specified, including the collection of such interest as has been agreed

upon. Notes receivable also pose a problem of custody, since the notes exist

as separate documents, and there is the possibility that since the use of notes

receivable is an unusual type of transaction, regular and systematic attention

will not be given to them. Specific notes receivable procedures are needed for

periodic review and possible action.

Page 29: terjemahan

(b) INTERNAL CONTROLS

The monies due an organization through its accounts receivable often

represent a major asset to that organization. Accounts receivable must be

turned into cash collections, and because much of this process is dependent

upon the actions of outside parties, internal accounting controls are critical.

A major internal control issue here is that the receivables recorded as due

must be correct and collectible according to the terms of that receivable. The

receivables must meet several general internal control objectives.

•Overall Reasonableness. The recorded value of both the receivables and

any reserves must be consistent with actqal collection experiences.

Trade discounts and allowances should also be consistent across all

recorded receivables.

• Accounts Receivable Evidence. The receivables must represent

amounts actually due to the organization. This can be verified by the

auditor's direct confirmations or through the timely receipt of cash to

pay off the receivables.

•Valuation and Classification. The reteivables must be recorded as values

that are collectible. Receivables should also be properly classified as to

whether they are expected to be collected in a normal span of time or

are a potential bad debt. Appropriate reserves should be established for

amounts estimated as uncollectibie.

• Proper Receivables Cutoffs. Schedules need to be established to

properly record sales, sales returns, and allowances. This is tied to

strong controls over the proper shipping and billing of goods. Of course,

there should be a segregation of duties between the shipping and billing

functions in an organization.

Accounts receivable represent a major internal control issue in an

organization. They must be recorded in a prudent manner that reflects tiieir

potential collectability. When the conditions surrounding those receivable

accounts change, the receivable value must be adjusted through the

33

Page 30: terjemahan

establishment of a reserve account or through an actual write-off to reflect

the anticipated collectability of that receivable.

(c) INTERNAL AUDIT PROCEDURES

Internal auditors sometimes all but ignore their organization's accounts

receivable processes, often because this is one area that almost always

receives extensive attention from external auditors. The generally accepted

audidng standards (GAAS) developed by the AICPA contain very general

directions at most, suggesting areas that auditors should or may consider.

Specific procedures are usually not mentioned. However, GAAS requires

that independent auditors must externally confirm their client's accounts

receivable. This requirement dates back to a massive fraud of many years

ago when a then-prominent organization claimed that a large number of

fictitious accounts were valid and due to them. Had the auditors

independently confirmed these accounts with the claimed customers, they

would have found them to be invalid and would have encountered a massive

fraud. Since then, independent public accountants have been required to

confirm accounts receivable rather than rely upon the word of management.

In addition to their confirmations activities, external auditors review the

internal controls and other aspects of the organization's accounts receivable

process.

Internal auditors also should have an interest in their organization's

accounts receivable systems and procedures, and consider this a major risk

area in their audit planning. This is an area where internal audit cannot

easily separate financial, operational, and computer audit activities. Any

review here may involve audit procedures in all three areas, and the

following sections consider some of the separate internal audit activities in

each area.

(i) Accounts Receivable Financial Audit Procedures. An internal auditor

should start any review of an accounts receivable process by developing an

understanding of the organization's credit policies, its methods of billing

customers, the types of customers that are part of the accounts receivable,

Page 31: terjemahan

the types of transactions that would be recorded, and the procedures used

for collections. Each of these factors can have a major impact on how the

accounts receivable process operates and on the expected level of controls.

A good first step in developing an understanding of the accounts

receivable process might be to gather some statistics about the average size

of billing transactions, the frequency of adjustments, and other indicators.

Figure 22.13 is a questionnaire to help internal auditors gain this

understanding. There are no right or wrong answers here. Rather, an

internal auditor can use this information to identify potential problems with

the accounts receivable process. For example, a relatively high percentage of

overdue accounts may point to collection problems. A high number of

adjustment transactions during any billing period may suggest incorrect

billings. Internal audit may be able to gather this data through a discussion

with accounts receivable management or reviews of key reports, or it might

be possible to develop a computer-assisted procedure to survey the accounts

receivable file to gather performance statistics.

The major objective of any review of an accounts receivable process

should be to determine that all sales are billed promptly and correctly. In

addition, adequate controls should be in place to determine that any

adjustments to accounts are made only with

1.What is the average days outstanding for your overall accounts receivable?

2.How many accounts receivable open transactions are recorded in an

average month and how many are written off or otherwise adjusted?

3.How many customer accounts have been set up on billing records ar.d

how often is the overall file reviewed or purged for inactive customers?

4.How long do accounts remain open before they are written off and are

legal or other procedures used to encourage collection before write-off?

5.What is the average size of the account written-off?

35

Page 32: terjemahan

6.How often are accounts adjusted, how long do they remain open prior to

any adjustment, and are statistics available to describe the reasons for

adjustments?

7.When credit policies suggest that credit should not be granted, how often

do other levels of management override (he decision and grant credit?

What is the credit history of these doubtful credit accounts?

8.Are cash discounts offered and what percentage of payments take

advantage of the cash discount offered?

9.Are all recorded accounts receivable subject to normal billing temis or

are special, exception terms offered?

10. Are any accounts receivable goods considered to be "on loan,"

on consignment, or under other special billing terms?

11. Does the organization keep detailed records of all accounts

receivable adjustments, writeoffs, and other transactions?

12. Are accounts receivable records reconciled to the general ledger

on a regular, periodic basis?