Question

10-25 LOB The following are deficiencies in internal controls over cash. For each deficiency indicate what substantive audit procedure(s) should be performed to determine whether any material misstatements exist. Consider each deficiency independently of the others. While each defi- ciency poses potential problems, identify two that would heighten your professional skepticism the most and explain your rationale, a. The person who opens the mail prepares the deposit when the cashier is not available. b. If a customer does not submit a remittance advice with a payment, the mail clerk sometimes does not prepare one for the accounts receivable department. Occasionally, the treasurer's department does not cancel the sup- porting documents for cash disbursements. d. Customer correspondence concerning monthly statements is han- dled by the person who makes the bank deposits. Bank reconciliations are not prepared on a timely basis. When prepared, they are prepared by the person who handles incoming mail.

Answer 1

a. There is no segregation of duties in this case since the same person has control over multiple parts of the transaction. This can lead to collusion and fraud by way of the person depositing cash in to his own account rather than the account where the money is to be paid. Also, this will reduce the cash balance but the accounts payable will reflect intact. The person opening the mail must be different from preparing the deposit. Also, only authorized personnel in absence of the cashier must be given the tasks.

b. Remittance advices must be prepared by the clerk if it is not submitted by the customer. These advices help the accounts receivable department match the payments with the invoices in hand. In the absence of the advice, the cash receipts may not match the cash journal and there is a risk of embezzlement of funds.

c. In case of the supporting documents not being cancelled against cash disbursements, this can lead to paying the accounts payable twice the actual amount. If each document is not ticked off as examined, this can be attached to another invoice for payment and processed. Hence, it is necessary for the treasurer's department to cancel all supporting documents as and when disbursements are made.

d. Segregation of incompatible duties such as deposit of cash and handling of customer monthly correspondence statements must be kept separate. In this case the opportunity for frauds and errors is high when one person is incharge of multiple accounting functions. The employee may be tempted to deposit the cash in to his own account when he has the customer details with him. Hence, the two functions must be assigned to different people.

e. An employee who is responsible for opening the incoming mails, must compare the cash received with the remittance advice. As a control, the employee then stamps checks and money orders as for deposit only [ i.e. for deposit in the bank a/c]. If the same employee handles the incoming mail and prepares the bank reconciliation he could potentially steal cash and modify the accounting records in a bid to hide the theft. Hence, the duties must be separated and an employee opening incoming mail must not be responsible for preparing bank reconciliation.

Two items that heighten my professional skepticism are:

1.Occasionally, the treasurer’s department does not stop the supporting documents for cash disbursements.

2. Bank reconciliations are not done in a timely manner. When prepared, they are prepared by the person who handles incoming mail.

In these two cases, there is greater risk of fraud than the others since the audit trail ends after the preparation of the cash payments as well as the bank reconcialiation. This makes it difficult to unearth as well understand the nature of the fraud.