Cash Receipts and Cash Management Internal Audit

Companies that lack adequate cash receipts systems, policies and procedures can cost themselves thousands, if not tens of thousands, of dollars. Ineffective cash management, including billing and collection, affects cash flows and can impact a company’s overall productivity. The late billing of customers and slow pays will extend interest free loans to customers. Poor procedures to reconcile aging accounts and overdue collection allow bad debts to increase. Poor internal control of check receipts and check cashing may lead to schemes such as a kiting, lapping of accounts, and various types of check fraud. After all, it is cash receipts that pay for the products and services needed to keep your company in business.

Accounts Receivable – We noticed client concerns usually include some of these questions:  Are all sales being recorded and collected? Do you have proper segregation of duties for sales, recording, collections and deposit functions? Do you use a collection agency, and if so, is there a reconciliation process of accounts out for collection and amounts that been collected and returned?   Are all invoices accurate and billed on a timely basis?  Does the AR sub ledger agree to the general ledger and is someone reviewing the aging of the sub ledger?  These concerns initiated requests for an internal audit to investigate and to recommend solutions to tighten controls in these areas.    

Examples of Cash Receipt Findings

• Lack of aging and managing accounts receivable prevented the company from identifying slow pays, enforcing customers’ credit limits and identifying customers to be contacted by the collection department.  Not only did it hurt cash flow by providing interest free loans, but it was preventing the client from investing cash elsewhere or obtaining discounts from early payment to vendors.  In addition, this lack of record keeping can also hide an employee kiting accounts, which entails borrowing between accounts to cover up embezzlement.
• Client did not write off uncollectible accounts receivable as bad debt. As a result, the client overpaid income taxes, sales bonuses and commissions.
• Client turned over accounts to the collection agency a year after they were written off and lost track of what was in for collection. We created a reconciliation process between the agency and the client, which increased accountability and collections. Accounts were turned over to the agency sooner with a control list being created with each batch. The agency was given time limits on collection activity and required to include the batch number to receive their commission.  By turning the accounts over for collection sooner, the collection agency was able to track down customers before they moved or changed contact information.
• IA created several red flag systems and dashboards to help the client monitor sales analytically to determine when sales fell outside certain parameters and when potential problems were present. This system also initiated audits of certain locations. The red flag system was broadened to incorporate other key performance indicators such as receipts and account aging.  

Cash Management - The Treasury department is usually faced with not only controls such as receipts on all sales but also cash controls for deposits, timely bank reconciliations and approval on check writing procedures. In addition, the Board normally has an investment policy to instruct the Treasurer how to invest; this must be tested for compliance and internal controls.

Some questions to ask to ascertain if there should be concern in this area are as follows:  Who is on the bank account as an authorized signer? Are two person signature checks used? Are signature plates and electronic signature methods safeguarded from unauthorized access?  Are checks numerically sequenced to account for all checks?  Have old signature plates been disposed of properly? Are there an excessive number of bank accounts due to the lack of closing procedures?  Is there a use of EDI, wire transfers and a sweeping process for efficiency?

Examples of Our Cash Management Findings

• Excess cash was found in a non-interest-bearing checking account. The company needed assistance in projecting income, expenses and cash needs. We analyzed their historical cash funds to show what amount of excess cash could be invested.
• Checks were found to have been written and recorded, but not mailed.  As a result, various accounts were misstated (cash, expenses, net income, assets bought by checks, accounts payable, etc).
• Determined manual bank account reconciliation process took many hours to prepare. Company had over 900 bank accounts and employed 10 reconciling clerks.  Replaced with automated technology and as a result decreased staff.
• Cash was kept by stores on site and deposited weekly, instead of daily. Sometimes the money was not kept in a safe, but was in an unlocked drawer or lying on a desk in an envelope marked “deposit.” This increased the risk of loss due to theft from robbery or employees.  In addition, the company lost interest income as the cash was not in the bank.
• Signature plates were not destroyed after the past president retired. We found signature plates that were still in place 10 years after the president's retirement. Electronic signature plates need to be secured and a proper segregation of duties established between check preparer and printer.

We Can Help

When you need to review your company's cash receipts and cash management areas to ensure efficiency and with appropriate checks and balances, contact Decosimo's internal audit team, and ask us how we can help. Decosimo has the experience and credentials to assist you with establishing controls to monitor and manage your company’s cash   

Decosimo’s internal audit team has provided internal audit advisory services to existing internal audit departments of financial institutions, utility and manufacturing companies. Our internal audit team consists of Certified Public Accountants and Certified Fraud Examiners. Our internal audit services management team has over 30 years of experience creating and managing internal audit departments for public and private clients in industries including, manufacturing, retail, energy, healthcare, and the restaurant and entertainment fields. 

To get started, ask about our half day, no charge, “Walk and Talk.”