Part 2 of our blog series on Internal Controls explores the last two characteristics related to ensuring proper internal controls around the cash cycle.
In allowing employees to work from home an area that should be a concern to all employers is ensuring that you have implemented and communicated proper internal controls, especially around any transaction related to the receiving or payment of cash.
Internal controls are defined a set of processes that are used to ensure the following:
An organization's objective in completing operational effectiveness and efficiency,
An organizations ability to properly prepare reliable financial reporting, and
The need for an organization to maintain compliance around laws, regulations, and policies.
When implementing internal controls, specifically around any transaction that relate to the movement of cash, the controls should be defined utilizing one or more of the following five characteristics, which should ensure that the control is going to be efficient and effective. With the Corona Virus Pandemic forcing our accounting departments to Work From Home, “WFH”, it is hard to enforce such controls when you do not work within the same office environment. Provided under each of these characteristics is some examples of control objectives that should be focused on especially during a WFH environment in order to facilitate the design of the internal control: In today's blog we will look at the last two Characteristics of controlling cash:
Reconciliation
Monitoring
Reconciliations: It is important to reconcile all bank accounts timely, at least monthly, to ensure all transactions are being recorded accurately and completely. In addition to bank reconciliations, the organization should also reconcile the various sub-ledgers related to cash, such as accounts receivables and payables, to the general ledger accounting system to ensure all transactions are being recorded and accounted for properly.
Control Objectives
The bank should be immediately notified of all changes in authorized check signers.
WFH – this is of utmost importance when the accounting department is not in the office and all members of accounting may not be immediately aware of changes in authorized signatures.
All received checks are recorded first into the general ledger and then deposited at the bank and the deposit ticket should be verified to ensure it matches all cash being recorded.
WFH – again when the accounting department is forced to work from home you need to build in additional control processes to ensure that work that is being done around the cash receipt and payment cycle is being approved and authorized properly, including but not limited to the posting of all items to the general ledger.
All checks outstanding for over 90 days periodically should be investigated to determine why they are not being cashed.
This is a process that should be followed for both work from home and when you are working in the office.
Monitoring: The internal control process should be a considered a fluid process and requires review to ensure that the controls that are put in place and running effectively. Management should review and monitor regularly and investigate any unusual activity. This process will help determine if a control is not working properly or needs to be changed or updated. This becomes especially important during a Work From Home, WFH, environment as there maybe multiple individuals touching various parts of a single transaction.
Control Objective
There should be a process where only authorized and approved write-offs of customer invoices can be processed.
WFH – This is most important when cash receipts are being posted outside the office. The proper write off processes are essential to ensure that fictitious invoices are not being created and that cash receipts are not being diverted into employee accounts.
There should be a process where only authorized revisions to invoices are being sent to clients for payment.
WFH – this dovetails what was said above in ensuring that fictitious invoices are not being created and sent to customers.
Client communications should be monitored to ensure that if a client agrees to a payment it is received accordingly and once it is received the client should no longer contacted.
This is a process that should be followed for both work from home and when you are working in the office.
The check signer should review and initial documentation supporting checks indicating completeness and approval of the disbursement. In addition, the check signer should also review, on a random basis, check amounts to the disbursement lists.
WFH – it is important to ensure that as the accounting department is not in the office and all paperwork may not be readily available to them that check signers are properly reviewing the payments before they are made. This should include disbursement being made via a banks website.
A list of unpaid invoices should regularly be prepared and periodically reviewed to ensure they are being recorded and paid properly.
This is a process that should be followed for both work from home and when you are working in the office.
It is important to think through all the five characteristics of controls when building a proper internal control policy and to have these policies reviewed and tested on an annual basis.
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