What controls should be implemented to safeguard accounts receivable files?

Internal control is the process designed to ensure reliable financial reporting, effective and efficient operations, and compliance with applicable laws and regulations. Safeguarding assets against theft and unauthorized use, acquisition, or disposal is also part of internal control.

Control environment. The management style and the expectations of upper‐level managers, particularly their control policies, determine the control environment. An effective control environment helps ensure that established policies and procedures are followed. The control environment includes independent oversight provided by a board of directors and, in publicly held companies, by an audit committee; management's integrity, ethical values, and philosophy; a defined organizational structure with competent and trustworthy employees; and the assignment of authority and responsibility.

Control activities. Control activities are the specific policies and procedures management uses to achieve its objectives. The most important control activities involve segregation of duties, proper authorization of transactions and activities, adequate documents and records, physical control over assets and records, and independent checks on performance. A short description of each of these control activities appears below. 

  • Segregation of duties requires that different individuals be assigned responsibility for different elements of related activities, particularly those involving authorization, custody, or recordkeeping. For example, the same person who is responsible for an asset's recordkeeping should not be respon sible for physical control of that asset Having different indi viduals perform these functions creates a system of checks and balances. 
  • Proper authorization of transactions and activities helps ensure that all company activities adhere to established guide lines unless responsible managers authorize another course of action. For example, a fixed price list may serve as an official authorization of price for a large sales staff. In addition, there may be a control to allow a sales manager to authorize reason able deviations from the price list. 
  • Adequate documents and records provide evidence that financial statements are accurate. Controls designed to ensure adequate recordkeeping include the creation of invoices and other documents that are easy to use and sufficiently informa tive; the use of prenumbered, consecutive documents; and the timely preparation of documents. 
  • Physical control over assets and records helps protect the company's assets. These control activities may include elec tronic or mechanical controls (such as a safe, employee ID cards, fences, cash registers, fireproof files, and locks) or computer-related controls dealing with access privileges or established backup and recovery procedures. 
  • Independent checks on performance, which are carried out by employees who did not do the work being checked, help ensure the reliability of accounting information and the efficiency of operations. For example, a supervisor verifies the accuracy of a retail clerk's cash drawer at the end of the day. Internal auditors may also verity that the supervisor performed the check of the cash drawer. 

In order to identify and establish effective controls, management must continually assess the risk, monitor control implementation, and modify controls as needed. Top managers of publicly held companies must sign a statement of responsibility for internal controls and include this statement in their annual report to stockholders.

What controls should be implemented to safeguard accounts receivable files?

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Segregation of duties is a key internal control intended to minimize the occurrence of errors or fraud by ensuring that no employee has the ability to both perpetrate and conceal errors or fraud in the normal course of their duties. Generally, the primary incompatible duties that need to be segregated are:

  • Authorization or approval
  • Custody of assets
  • Recording transactions
  • Reconciliation/Control Activity

Some examples of incompatible duties are:

  • Authorizing a transaction, receiving and maintaining custody of the asset that resulted from the transaction
  • Receiving funds (checks or cash) and approving write-off of receivables
  • Reconciling bank statements/accounts and booking entries to general ledger
  • Depositing cash and reconciling bank statements
  • Approving time cards and having custody of pay checks

If internal control is to be effective, there needs to be an adequate division of responsibilities among those who perform accounting procedures or control activities and those who handle assets. Ideally, separate employees will perform each of the four major duties. In general, the flow of transaction processing and related activities should be designed so that the work of one individual is either independent of, or serves to check on, the work of another. Such arrangements reduce the risk of undetected error and limit opportunities to misappropriate assets or conceal intentional misstatements in the financial statements.

When duties cannot be sufficiently segregated due to the small size of a unit, it is important that mitigating controls, such as a detailed supervisory review of the activities, be put in place to reduce risks.

Delegation of Authority

In today’s busy and dynamic environment it is impossible for one individual to perform all the duties and tasks that are required to achieve the University’s objectives. To meet the needs of their customers, managers delegate authority to staff so that decisions and related actions can occur in a timely manner. Delegation of Authority (DOA) is the formal process in which one person delegates the authority and responsibility to another person to carry out specific activities. Typically a manager will delegate to a subordinate a certain authority for a specific transaction (e.g. approve reimbursements up to $500). However the person who delegated the work remains accountable for the outcome of the delegated work. If DOA is done properly the University can save time and money while building the skills of its workforce. Managers should develop a framework in which they document the types of transactions and related dollar thresholds in which they delegate their authority to another individual. This documentation needs to be maintained as personnel change within their unit. It should include at a minimum: specified time period not greater than one year, name of the individual and title, type of transactions and related dollar limits, and scope of authority. Managers need to ensure that individuals who received delegated authority have been properly trained and are well versed in University policies that govern the authority delegated. At least annually, the DOA framework needs to be reviewed for appropriateness to ensure University objectives are being achieved while limiting risk to an acceptable level.

Purchasing Card Monitoring

The key control to ensuring the effectiveness of your unit’s Purchasing Card Program is a strong supervisory review and approval process. Purchasing Card Roles & Responsibilities require that transaction approvers confirm cardholder transactions for legitimacy and compliance with University policies. This is most readily achieved through a monthly supervisory review of cardholders’ Statement of Account and supporting documentation and evidenced by the reviewer’s signature.

Perform the monthly supervisory review to:

  • Ensure that adequate receipts are present and match all purchases shown on the cardholders’ monthly statement.
    • If supporting documentation is not provided, request the cardholder to provide it or obtain a copy from the vendor.
  • Validate the business appropriateness of items purchased.
    • If questionable transactions are identified, contact the cardholder for an explanation of the transaction.
    • Validate the explanation with other departmental personnel, if possible (e.g. the explanation provided was that the item was purchased at the request of Dr. Smith).
    • If the cardholder is not able to appropriately support or explain a questionable transaction, contact the Senior Business Officer (or their designee) and the Purchasing Card Administrator.
  • Ensure that Purchasing policies are being followed:
    • Transactions are not split to avoid single transaction limits
    • Items purchased do not include restricted commodities or were not acquired through restricted suppliers.
    • The Purchasing Card was the appropriate buying method for the transaction (refer to the  BEN Financial Commodity Matrix).
  • Sign and date the monthly statement to document that the review has taken place.

Cash Controls

Any unit collecting or maintaining cash needs to ensure that collections are sufficiently safeguarded. “Cash” for purposes of controls discussion includes currency, coins, checks, money orders, and gift certificates/cards. Types of cash typically on hand include cash receipts, petty cash accounts, and change funds. The following principles of good cash handling will be discussed in greater detail: Segregation of duties, Security, Reconciliation, Management Review, Documentation.

Segregation of Duties: Cash handling duties can be divided into four stages: receiving, depositing, recording, and reconciling. Ideally, all four stages would be performed by different individuals. The purpose of this segregation of duties is to minimize the opportunity for an employee to misappropriate funds and avoid detection. In a smaller department, it may not be feasible to fully segregate all of the cash-related duties. In these circumstances, the department may rely on compensating controls to mitigate the risk that cash is misappropriated (e.g., increased monitoring).

Security: Keep all cash in a safe until it is deposited. For areas with regular cash receipts, a drop safe is recommended to limit access to the contents of the safe. Regardless of the type of safe used, limit access to supervisory and authorized personnel only. Locate the safe where it is continually visible by departmental employees but out of public sight. Change the combination of the safe on a regular basis (e.g. annually) and when an employee who knows the combination to the safe leaves the unit. If cash boxes are used ensure that they can be locked, are fire resistant, are not easily movable or concealable, and access is limited to the person collecting the cash. Cash boxes cannot be shared amongst employees as accountability for the cash will be diminished and management will not be able to readily assign responsibility for shortages to the appropriate employee. If large sums of money are being collected and/or cash is collected in a high traffic area, consider installing a camera and alarm system.

Reconciliation & Documentation: Cash collections must be reconciled on a daily basis to the cash register/point of sale system to ensure the completeness of receipts. On a monthly basis, an employee who does not collect funds must reconcile deposit tickets to general ledger accounts to ensure that all amounts were properly deposited and reconcile general ledger balances to bank records to ensure that deposits were appropriately credited by the bank. See below for additional information on documenting reconciliations.

Record keeping requirements exist throughout the cash collections process. A record of cash collected must be maintained by the employee responsible for accepting the cash. This could be in the form of a cash register tape, a revenue log, a pre-numbered receipts book, etc. This record will be compared to the actual cash on hand during the daily balancing of the register or cash box. Records of deposits made must be documented and retained to assist in the performance of reconciliations. Reconciliations between book and bank balances must be performed on a monthly basis and documentation that the reconciliation was performed, that reconciling items were investigated and resolved must be retained.

Management Review: Supervisors should initial and date all reconciliations to demonstrate that they were reviewed and approved.

Policies and Procedures

In accordance with University Policy 2701 – Internal Control Policy management is responsible for establishing, maintaining and promoting effective business practices and effective internal controls. The development of written departmental policies and procedures are an effective way to maintain a strong system of internal controls. Use documented policies and procedures to clearly delineate the control activities performed throughout the unit’s various business processes. These will aid in the orientation of new employees, help ensure business continuity in the event of turnover, and help ensure compliance with applicable laws and regulations.

Business Purpose Documentation

All expenditures are expected to be made for ordinary, reasonable, and actual business-related activities in furtherance of University and Health System missions. Additionally, Penn receives significant funding from federal sponsors and other sources that carry substantial fiduciary responsibilities. Failure to require supporting documentation evidencing business purpose to internal reviewers can result in inappropriate expenditures going undetected. Failure to provide supporting documentation with business purposes to external reviewers could result in disallowances, fines, penalties which have financial and reputational impacts for the University.

An adequate business purpose should describe the reason why the transaction occurred as opposed to only restating the item purchased. For example, “Freezer” would not be a sufficient business purpose explanation. An appropriate explanation could be: “Freezer for storage of research samples in Dr. Smith’s lab.” Business purpose explanations should be sufficiently detailed to allow the reviewer, whether s/he be an internal supervisor, a federal auditor, an IRS agent, etc., to establish that the transaction was for the sole benefit and use of the University in accordance with its non-taxable mission.

Approval of Time Cards

In order to ensure the propriety of submitted hours, employee time cards/records are to be approved by their supervisor as certification that the hours/work were actually performed as reported. If feasible, overtime should be approved in advance. Supervisors should sign or initial and date the timecards to document their review and approval. Do no return approved timecards to employees for delivery to the timekeeper for input. This provides individuals with the opportunity to alter an already approved timecard and receive inappropriate additional pay.

Performing Annual Performance Evaluations

Performance evaluations are valuable tools that provide staff members with feedback on their performance and accomplishments for the previous year. They also assist staff members in understanding their job responsibilities and supervisor’s performance expectations. Evaluations are expected to be fair, representative of actual performance, written, and performed on an annual basis. Failure to provide documented evaluations could complicate later disciplinary processes.

Petty Cash Accounts

Petty Cash is easily misappropriated if business processes and internal controls are not established and enforced. The following controls and concepts will help you ensure that your petty cash accounts are appropriately used and safeguarded:

What are the system of controls on receivables?

Careful internal control over receivables includes these sales journal steps, including: Using an invoice copy to quickly post to the sales journal for each transaction; Reviewing journal entries against invoices to ensure accuracy; Filing invoice copies by invoice number; and.
Primary Risks for Accounts Receivable and Revenues The company intentionally overstates accounts receivable and revenue. Company employees steal collections. Without proper cutoff, an overstatement of accounts receivables and revenue occurs. Allowances are understated.

What are the 7 internal controls?

What are the 7 internal controls procedures?.
Separation of duties..
Access controls..
Physical audits..
Standardised financial documents..
Periodic trial balances..
Periodic reconciliations..
Approval authority..

What are some internal control processes that could be used to safeguard the payments until they are deposited at the bank?

Safeguarding Cash.
Restrictively endorse checks immediately upon receipt stating “For Deposit Only – Syracuse University”.
Keep cash/checks in a locked and secure area until they can be deposited. Access to the area should be restricted to only designated individuals. ... .
Make timely deposits..