Collection and Cash Receipt Controls (#12)

In this episode, we discuss the controls associated with collections, cash receipts, and petty cash. The main concept is to avoid cash-related controls by keeping cash off the premises, usually by encouraging the use of ACH payments or payments into a bank lockbox. Key points made in the podcast are:

Collection controls:

  • The collections staff is not allowed to handle cash receipts, since this presents a temptation to steal the cash and use credit memos to cover up the theft

  • The collections staff can only create credit memos without approvals that are relatively small; all others require management approval

  • Management approval is required to assign invoices to a collection agency, because of the significant collection fees charged

Cash receipts controls:

  • Two people open the mail, to reduce cash and check pilferage

  • The mailroom staff creates a list of all cash and checks received, of which it retains a copy

  • The mailroom staff endorses all received checks as being for deposit only

  • The cash receipts clerk matches all checks entered into the accounting system to the list provided by the mailroom, to look for anomalies

  • Compare the bank deposit slip to the cash receipts journal, to see if the courier removed any cash or checks

  • Force the cash receipts clerk to take vacations, which may uncover instances of lapping fraud

  • The cash register clerk gives a receipt to every paying customer, so the customer can compare the receipt to the amount paid

Petty cash controls:

  • Don’t use petty cash at all

  • Assign responsibility for the petty cash box

  • Document all disbursements from the petty cash box

  • Audit the petty cash box

  • Place a contact switch under the petty cash box, so that an alarm will sound if the box is taken

Related Courses

Accounting Controls Guidebook
Accounting Information Systems
Credit and Collection Guidebook
Optimal Accounting for Cash

Controls for Billing (#11)

In this episode, we discuss the controls associated with billing. The key points made in the podcast are divided into three parts, which are for manual systems, computerized systems, and general controls.

The controls related to a manual billing system are:

  • Verify prices being billed against a standard price list

  • Proofread larger invoices prior to mailing, to minimize errors

  • Have the originating salesperson verify invoices, to spot errors

  • Verify any unusual payment terms

  • Verify the applicable sales taxes being charged

  • Stamp each envelope with “address correction requested”

The controls related to a computerized billing system are:

  • Print and review the invoice preview report to ensure that all items to be billed are accurate

  • Reduce access to the billing software, to minimize the risk of fraudulent billings

The controls relating to all types of billing systems are:

  • Segregate the billing and collection duties, to keep anyone from falsely issuing a billing and then collecting the related funds

  • Compare contract prices to what is being used for the prices on the most recent invoices

  • Monitor customer complaints regarding invoices

  • Issue month-end statements to customers, to see if they can spot any errors

  • Compare the quantities shipped to the quantities invoiced

  • Clean up the invoice format to make it easier for customers to read

  • When entering an invoice into a customer’s online payment system, print the confirmation page to verify that it was entered

  • Segregate credit memo creation from the cash receipts function

  • Require approvals for the creation of larger credit memos

  • Charge credit memos against salesperson commissions, so that they have an incentive to investigate the memos

  • Audit a selection of credit memos

Related Courses

Accounting Controls Guidebook
Accounting Information Systems
Credit and Collections Guidebook

Controls for Shipping (#10)

In this episode, we discuss the controls associated with shipping. This process begins with a verification that customer credit has been approved, proceeds to picking from stock, and ends with packages being prepared for delivery to customers. Key points made in the podcast are:

  • Verify that all sales orders are approved in advance by the credit manager, to ensure that shipments are only made to creditworthy customers

  • Audit sales orders for a credit approval stamp, to verify that the shipping manager is looking for the authorization stamp before mailing packages to customers

  • Compare picked items to sales orders to ensure that picks are correct

  • Investigate the reasons for product returns, to see if any goods were incorrectly shipped to customers

  • Prepare a bill of lading for issuance to the accounting department, which triggers the preparation of an invoice

  • Prepare the daily shipping log, which is useful for verifying that all shipments have been invoiced

  • Investigate old open customer orders that have not been shipped, to see if additional sales can be generated from these stray items

  • Verify the accuracy of any labels being attached to shipments going to customers that use an evaluated receipts system, since these labels are triggering payments back to the company

It is best for the shipping department to have a fully integrated system, so that the shipping manager can verify credit approvals, print labels, and prepare billings of lading and shipping logs from the system.

Related Courses

Accounting Controls Guidebook
Accounting Information Systems

Controls for Production (#9)

In this episode, we discuss the controls associated with production. A major concern in this area is that the production staff is in the business of manufacturing goods, so any controls imposed on them will reduce their production efficiency. Consequently, controls generally need to be built into the production system, with little user interaction, or require the services of a separate group of people from those engaged in production. Key points made in the podcast are:

  • Issue work orders based on a production schedule, to control the flow of inventory and the assignment of labor

  • Have materials handlers compare what they pick up from the warehouse to what is stated on the pick list, to ensure that only required items are moved

  • Lock down access to the bill of materials file, to avoid unauthorized access

  • Audit the bills of material and fix all problems found

  • Investigate excessive parts issuances from the warehouse, as well as requests for additional parts; usually implies that there are errors in the bills of material

  • Audit the labor routing records and fix all problems found

  • Lock down access to the labor routing file, to avoid unauthorized access

  • Fill out forms to document scrap levels, in order to improve inventory tracking

  • Track scrap forms with prenumbered forms, so that all completed forms are entered into the system

  • Use a just-in-time pull system to reduce data management issues and minimize scrap levels

  • Precertify suppliers, so that goods can be delivered straight to the production line

  • Institute a supplier report card system, to monitor supplier quality levels

Related Courses

Accounting Controls Guidebook
Accounting Information Systems
Inventory Management

Controls for Inventory (#8)

In this episode, we discuss the controls associated with inventory. This is a massive area that encompasses many controls, so we split them up in the episode into controls for inventory storage, inventory costing, and inventory handling. The point is made that inventory is really a liability, since it puts the company at risk of inventory obsolescence, requires significant resources to track, and involves a large working capital investment.

Key points in the podcast relating to inventory storage are:

  • Fence in the warehouse and lock the gate in order to minimize pilferage

  • Restrict warehouse access to authorized personnel

  • Tie the pay of the warehouse staff to inventory record accuracy

  • Be orderly in regard to how inventory is bagged, boxed, and stored

  • Implement cycle counting, including investigations of any errors found

  • Conduct a weekly audit of inventory record accuracy, post the results in the warehouse, and pay bonuses based on it

Key points in the podcast relating to inventory costing are:

  • Schedule a periodic obsolete inventory review

  • Run the “where used” report to see if any on-hand inventory is not being used on products

  • Conduct a quarterly lower of cost or market review, to spot valuation problems early

  • Lock down access to the bill of materials and labor routing records, to keep them accurate

  • Track the identifications of anyone who alters inventory records

  • Monitor the period-end cutoff of inventory counts, using an on-site person

  • Compare monthly overhead charges on a trend line to spot anomalies

  • Conduct a periodic detailed analysis of the cost of goods sold to search for unusual entries

  • Run a report that shows any inventory items with negative unit balances

  • Run an extended inventory valuation report and look for unusually high or low values

  • Compare per-unit costs on a trend line to spot anomalies

Key points in the podcast relating to inventory handling are:

  • Enforce rapid data entry for inventory moves

  • Update the bill of material records as soon as changes are made to product designs

  • Always pick from inventory using a copy of the original customer order, to ensure that picks match what was actually ordered

Related Courses

Accounting Controls Guidebook
Accounting for Inventory
Inventory Management

Controls for Receiving (#7)

In this episode, we discuss the controls associated with the receiving function. This is a key area, since received goods need to be logged into the system properly in order to notify everyone that they are available for use. In addition, proper receiving assists the payables department in processing payments to suppliers. Key points in the podcast are:

  • Segregate the purchasing and receiving functions to reduce the possibility of fraud

  • Match receipts to authorizing purchase orders, to minimize the receipt of unauthorized goods

  • Use a checklist to examine all incoming goods, to keep from missing any review steps

  • Charge the buying department an internal fee when they go around the purchasing department to buy goods, to enforce procedural compliance

  • Tag and log all received goods immediately upon receipt, so that they are visible in the inventory database

  • Use bar codes to enhance the speed and accuracy of data entry

  • Use a data entry clerk to log in all receipts; this may increase efficiency

  • Maintain a receiving log, which is used for several accounting and auditing activities

  • Tag customer-owned goods as such, so that they are not counted as being company-owned

  • Use formal authorizations for the return of goods to the company

  • Use advance shipping notices to automatically enter entire truckloads into the inventory database

  • Certify suppliers in advance for direct deliveries to the production line, thereby avoiding the receiving department entirely

  • Create a supplier report card, to monitor their performance

Related Courses

Accounting Controls Guidebook
Accounting Information Systems

Controls for Expense Reports (#6)

In this episode, we discuss the controls associated with expense reports. These reports have historically been reviewed by the accounting staff in detail, even though few errors are ever found. There are more streamlined ways to deal with expense reports, as discussed in this episode. Key points in the podcast are:

  • Audit just a sampling of all expense reports, with full reviews whenever an employee is found to be making ongoing mistakes on his or her reports

  • Tell everyone that spot checks are being conducted, to keep them honest

  • Route travel arrangements through a booking person, thereby paying for them directly and removing them from individual expense reports

  • Use an automated expense reporting system with built-in travel rules (though this approach is expensive)

  • Use a travel policy that precisely defines which expenses cannot be charged through to the company

Related Courses

Accounting Controls Guidebook
Accounting Information Systems
Payables Management

Controls for Purchase Orders (#5)

In this episode, we discuss the controls associated with purchase orders. Purchase orders are an excellent control over purchases, though they are time-consuming to produce, and so are usually confined to more-expensive purchases. Key points in the podcast are:

  • Purchase order authorizations are one of the strongest controls over purchases

  • Procurement cards should be used for less-expensive purchases, to streamline the buying process

  • Master purchase orders can be used to streamline ongoing purchases of the same items

  • The managers who will be charged with purchases should approve those purchases in advance

  • Deliveries to the company should be rejected if there is no accompanying purchase order

  • Match supplier invoices to authorizing purchase orders to ensure that the quantities and prices billed are correct

  • Charge an internal fee to any employee who goes around the authorized purchasing process to make a purchase, to enforce use of the system

  • Prenumber and lock up blank purchase orders, since they can be used to authorize purchases

  • Use password control over the purchase order software, to eliminate unauthorized access

  • Review all open purchase orders for residual unshipped items, to see if they should be cancelled

  • Have the internal audit department periodically review the purchasing process for irregularities

  • Review a selection of all automatically-generated purchase orders (probably for cost of goods sold purchases) to ensure that they are correct

Related Courses

Accounting Controls Guidebook
Accounting Information Systems
Purchasing Guidebook

Controls for Procurement Cards (#4)

In this episode, we discuss the controls associated with procurement cards (also known as credit cards). These cards are a great way to minimize the use of purchase orders, so it is useful to not impose too many controls on them; a reduced volume of controls will tend to encourage their use. Nonetheless, some controls are required, including the following:

  • Enter all card purchases into a transaction log

  • Reconcile the monthly card statement to the transaction log

  • Use a missing receipt form to document purchases for which no receipts exist

  • Use a line item rejection form to specify which card purchases are being rejected

  • Use a standard card reconciliation checklist

  • Use a procurement card orientation meeting to inform users about policies and procedures

  • Restrict card usage based on dollars per day or by card

  • Only the program manager is allowed to increase each card’s spending limit

  • Prohibit cash advances on procurement cards

  • Require a card user agreement that states the responsibilities of each card user

  • Track card spending on a trend line to search for anomalies

  • Highlight any cost of goods sold card purchases

  • Conduct a background check on anyone requesting a card

  • Assign a separate person to receive new cards, other than the program manager

  • Impose various policies that put boundaries around card usage

Related Courses

Accounting Controls Guidebook
Accounting Information Systems
Purchasing Guidebook

Controls for the Credit Department (#3)

In this episode, we discuss the controls associated with both a manual and computerized credit department. The main control points and related topics noted in the episode are:

  • How the entire credit department acts as a giant control over credit

  • The use of a credit application form for larger credit requests

  • The review process for credit requests

  • The use of an approval stamp on sales orders to indicate department approval

  • Why sales orders should be locked up in the credit department, to prevent the unauthorized stamping of sales orders as having been approved

  • The use of a policy for the warehouse not to ship orders unless an approval stamp is present

  • The need for a formalized credit policy, with collections goals and credit granting rules

  • The need for ongoing staff training in how to grant credit to customers

  • Why the credit staff should investigate unanswered questions on the credit application

  • The use of the credit limit field in the accounting software

  • The need for a periodic review of credit limits, which may also be triggered by certain events

  • The need to access third party credit reports

  • The use of an online credit application on the company website

  • The use of automated decision tables to grant credit to customers

Related Courses

Accounting Controls Guidebook
Accounting Information Systems
Credit and Collection Guidebook

Controls for Order Entry, Part 2 (#2)

In this episode, we cover the full range of controls associated with a computerized order entry function, mostly dealing with controls for electronic customer orders. The main control areas noted in the episode are:

  • Verification of the approved buyer, especially for larger order sizes

  • Data validation controls to reduce the number of data entry errors

  • Automatic matching by the system of ordered quantities to on-hand amounts, to ensure that ordered quantities can be shipped

  • Automatic linking of customer orders to an online price book, to ensure that the correct prices are billed

  • Automated confirmations back to customers, showing the details of orders in the company’s systems

  • Special oversight controls for unusually large orders received from customers

  • The use of evaluated receipts systems to avoid having to issue an invoice to a customer

  • The use of password access to limit user access to the order entry system

Related Courses

Accounting Controls Guidebook
Accounting Information Systems

Controls for Order Entry, Part 1 (#1)

In this episode, we cover the full range of controls associated with a manually-operated order entry function, dealing with controls for both verbal and written customer orders. The main control areas noted in the episode are:

  • Verifying that the customer actually placed an order

  • Verifying that the pricing, sales tax, and freight rate are correct

  • Reviewing the customer credit limit

  • Verifying that the ordered items are in stock or will be available shortly

  • Identifying the uses of all five copies of the sales order

  • Restricting access to blank sales orders

  • Tracking the consecutive numbering of sales orders

  • Investigating product returns

  • Tracking unshipped residual units

Related Courses

Accounting Controls Guidebook
Accounting Information Systems