Business processes – (Part 2)

Cash and Bank System

Businesses that take in significant amounts of cash are vulnerable to theft, robbery and fraud.
Companies establish systems of internal controls to minimize the risk of such incidents. The in-
herent vulnerability of cash and negotiable instruments such as checks and credit cards require
healthy internal controls.
Controls over treasury system focus on;
1. Cash receipts
2. Cash payments
The main purpose of having these controls is to prevent frauds or theft.

The audit of cash is considered an important part of an audit mainly due to two reasons: Almost
all business transactions will be ultimately settled through the cash accounts, the audit of cash
accounts also assists in the verification of other asset and liability accounts as well as revenue
and expenses.

Also, investors want to know the accuracy when looking at the company's financial condition.
They look at the current assets which the cash is part of when finding out the condition of the
company.

We will learn the control objectives, controls and possible tests of controls over cash payments
and receipts separately.

Control objectives, controls and tests of controls for cash payments

1. What are the objectives of designing controls over cash payments?

2. What are the audit assertions that are going to cover by those control objectives?

3. What are the controls that can be implemented by the entity in order to achieve those ob-
jectives?
4. Discuss the tests that can be performed by the audit team to check the efficiency and effec-
tiveness of those controls.

Assertion Control Objectives Controls Tests of controls

Occurrence To ensure that only valid Separate responsibilities for Observe the processing
cash payments are made. the recording, payment and of cash and review the
reconciliation of cash. entity's policies to eval-
uate whether proper
segregation of duties is
operating.

Supplier statements inde-

Review procedures for
pendently reconciling supplier
reviewed and reconciled to statements.
trade payable records.

Monthly bank reconcilia- Review reconciliations

tions prepared and re- to confirm whether un-
viewed.
dertaken and reviewed.

Review delegated list

Only authorised staff can of authority for cash
make electronic cash pay- payments.
ments and issue cheques.

Electronic cash payments

and cheques prepared only Inspect relevant docu-
after all source documents mentation for evidence
have been independently of approval by senior
approved. personnel.
Assertion Control Objectives Controls Tests of controls
Completeness To ensure that all cash Separate responsibilities for Observe the processing
payments that occurred the recording, handling and of cash and review the
are recorded. reconciliation of cash. entity's policies to eval-
uate whether proper
segregation of duties is
operating.

Supplier statements inde- Review procedures for

pendently reviewed and reconciling supplier
reconciled to trade payable statements.
records.

Review reconciliations
Monthly bank reconcilia- to confirm whether un-
tions prepared and re- dertaken and inde-
viewed. pendently reviewed.

Review of cash payments Inspect sample of list-

by manager before release. ings for evidence of
senior review.

Daily cash payments recon-

ciled to posting to payable Review a sample of
accounts. reconciliations for evi-
dence that they have
been done.

Use of pre-numbered Examine evidence of

cheques. use of pre-
numbered cheques.
Assertion Control Objectives
Accuracy, To ensure that cash pay-
Validation and ments are recorded cor-
Classification rectly in the ledger.
Controls
Reconciliation of daily pay-
ments report to electronic
cash payment transfers and
cheques issued.
Tests of controls
Review reconciliation,
to ensure performed, re-
viewed and any dis-
crepancies followed up
on a timely basis.

Supplier statements recon-

ciled to payable accounts Review reconciliations
regularly. for a sample of ac-
counts.

Prepare monthly bank rec-

onciliations of bank state- Review bank reconcili-
ments to ledger account. ation for evidence it
was done and inde-
pendently reviewed.

Reperform a sample of
bank reconciliations

To ensure that cash pay- Supplier statements recon- Review reconciliations

ments are posted to the ciled to payable accounts for a sample of ac-
correct payable accounts regularly. counts.
and to the general ledger.

Agreement of monthly cash

payments journal to general Review postings from
journal to general
ledger posting.
ledger.

Review reconciliation,
Payable accounts recon- to ensure performed, re-
ciled to general ledger con- viewed and any dis-
trol account. crepancies followed up
on a timely basis.
Assertion Control Objectives Controls Tests of controls
Cut-off To ensure that cash pay- Reconciliation of electronic Review reconciliation
ments are recorded in the funds transfers and cheques and check it is carried
correct accounting pe- issued with postings to cash out regularly.
riod. payments journal and paya-
ble accounts.

Presentation To ensure that cash pay- Chart of accounts. Review cash payments
ments are charged to the journal to assess rea-
correct accounts. sonableness of charging
of accounts.

Review assignment of
Independent approval and
general ledger account.
review of general ledger ac-
count assignment.
The following flowchart depicts a process in which customer payments arrive by mail. The
source documents include cheques and remittance advices.

Each day, the process begins with mailroom clerks opening the mail. Immediately, the clerks en-
dorse all checks. They assemble enclosed statements (remittance advices that come in the form of
billing statement detachments from the customer invoice i.e., turnaround documents) in batches
and prepare batch totals for control purposes. The receipts data batch total and remittance details
from the customer billing statements are then entered into the computer system via a scanning
process and use of optical character recognition technology in the mailroom. The computer edits
the data as they are entered and computes batch totals. Once the data are verified, details are written
to the cash receipts event data. The batched statements are sent to the accounts receivable depart-
ment for filing, and the checks are transferred to the cashier.
(Source: http://www.opentextbooks.org.hk/ditatopic/25561)

The following table sets out the control objectives, controls and possible tests of con-
trols over cash receipts.

Assertion Control Objectives Controls Test of controls

Occurrence To ensure that all valid Separate responsibili- Observe the processing
cash receipts are re- ties for the recording, of cash and review the
ceived and deposited. receipt and reconcilia- entity's policies to
tion of cash. evaluate whether
proper segregation of
duties is operating.

Use of electronic cash Examine application

receipts transfer not re- controls for
ceived or deposited. electronic cash receipts
transfer.

Monthly bank recon-

ciliations performed Review monthly bank
and independently re- reconciliations to con-
viewed. firm performed and re-
viewed.

Use of cash registers

or point-of-sale de- Observe cash sales
vices. procedures.
Assertion Control Objectives Controls Test of controls

Periodic inspections of Enquire of managers

cash sales procedures. about results of inspec-
tions.

Restrictive endorse- Observe mail opening,

ment of cheques im- including endorsement
mediately on receipt. of cheques.

Mail opened by two Observe mail opening

staff members. procedures.

Immediate preparation
of cash book or list of
mail receipts. Observe preparation of
cash receipts' records.

Independent check of
agreement of Review documentation
cash/cheques to be de- for evidence of inde-
posited at bank with pendent check.
register totals and re-
ceipts listing.

Review documentation
Independent check of
for evidence of inde-
agreement of bank de-
pendent check.
posit slip with daily
cash summary.
 Assertion Control Objectives Controls Test of controls
Completeness To ensure that all cash Separate responsibili- Observe the processing
receipts are recorded. ties for the recording, of cash and review the
receipt and reconcilia- entity's policies to
tion of cash. evaluate whether
proper segregation of
duties is operating.

Use of electronic cash Examine application

receipts transfer not re- controls for
ceived or deposited. electronic cash receipts
transfer.

Review monthly bank

Monthly bank recon- reconciliations to con-
ciliations performed
firm performed and re-
and independently re-
viewed.
viewed.
Reperform a sample of
the reconciliations.

Daily cash receipts

listing reconciled with
posting to customer ac-
Review reconciliation.
counts.

Customer statements
Enquire of manage-
prepared and sent out
ment about handling of
on a regular basis.
customer statements.

Examine a sample of
customers and note
frequency of state-
ments.
 Assertion Control Objectives Controls Test of controls
Accuracy, Valuation To ensure that cash re- Daily remittance report Review reconcilia-
and Classification ceipts are recorded at reconciled to control tions.
correct amounts. listing of remittance
advices.

Monthly bank state-

Review reconciliations
ment performed and
for evidence they were
reviewed inde-
performed and inde-
pendently.
pendently reviewed.

To ensure that cash re- Daily remittance report Review reconcilia-

ceipts are posted to reconciled daily with tions.
correct receivables ac- postings to cash re-
counts and to the gen- ceipts journal and cus-
eral ledger. tomer accounts.

Monthly customer
Review entity's proce-
statements sent out.
dures for sending out
statements.

Monthly cash receipts Review journal and

journal agreed to gen- posting to general
eral ledger posting. ledger.

Receivables' ledger Review reconciliations

reconciled to control
account.

Cut off To ensure that cash re- Bank reconciliation at Review and test recon-
ceipts are recorded in period end. ciliation.
the correct accounting
period
 Assertion Control Objectives Controls Test of controls
Presentation To ensure that cash re- Chart of accounts Inspect any documen-
ceipts are charged to (COA) in place and is tary
the correct accounts. regularly reviewed for evidence of review
appropriateness and (such as emails re-
updated where neces- questing update to
sary. COA as a result of re-
view).

Codes in place for dif- Test application con-

ferent types of receipt. trols for proper codes.

Test your Knowledge:

Having controls over its business processes is important for an entity. But having controls over
cash is essential. Discuss giving examples of such controls that are required for the smooth func-
tioning of an entity.

The payroll system

Payroll processing refers to the task of managing the payment of wages by a company to its em-
ployees. The steps involved in payroll processing typically include gathering employee time in-
formation for a selected time period, managing benefits & deductions, and distributing employee
pay for that time period.
Key controls over payroll cover:

1. Documentation and authorisation of staff changes

2. Calculation of wages and salaries

3. Payment of wages

4. Authorisation of deductions
(Source: https://www.conceptdraw.com/examples/payroll-process-flowchart-example)
Control objectives, controls and tests of controls for pay-
roll system
The following table depicts the Control objectives, controls and tests of controls of a payroll sys-
tem.

Occurrence and exist- To ensure that pay- Segregation of duties Review payroll and
ence ment is made only to between HR and pay- HR job descriptions
roll functions. and company policies
the employees of the on payroll process, to
entity. evaluate whether
proper segregation of
duties is in place.

Personnel files held

for all employees. Review a sample of
starters and leavers in
the year to ensure
correct documenta-
tion is in place.
Authorisation proce-
dures for hiring, ter-
minating, time Review and test au-
worked, wage rates, thorisation
overtime, benefits procedures in place.
etc.

Any changes in em-

ployment status of Review policies and
employees (eg mater- procedures in place
nity, special leave) for changing status
informed to HR de- and consider whether
partment. adequate.

Review personnel
files for a sample of
employees whose sta-
tus changed in the
year.
 Use of time clocks to Observe employees'
record time worked. use of time clocks.

Clock cards approved Inspect a sample of

by supervisor. clock cards for evi-
dence of approval by
appropriate level of
management.

Employee numbers Review and test pro-

assigned to each em- cedures for
ployee in the payroll entering and remov-
master file. Only em- ing employee num-
ployees with valid bers from the payroll
employee numbers master file.
are paid.

Payroll budgets in
Review budgeting
place and reviewed by
procedures.
management.

Completeness To ensure that all pay- Pre-numbered clock Review numerical se-
roll costs are recorded cards in use. quence of clock
cards.
for work done by em-
ployees. Regular reconcilia- Review a sample of
tions carried out of reconciliations to en-
payroll records and sure they are properly
employee costs rec- carried out. Reper-
orded in the general form a sample of rec-
ledger. onciliations.

Enquire whether
Comparison of comparisons are be-
cheques and bank ing made between
transfer list with pay- payment records and
roll to ensure all em- payroll and inspect
ployees paid have
 been recorded via any documentary evi-
payroll. dence of the review.

Preparation and au- Examine paid

cheques or a certified
thorisation of cheques
copy of the bank list
and bank transfer for employees paid
by cheque or bank
lists.
transfer to ensure
proper authorisation.

Accuracy, Valuation To ensure that all ben- Reperformance of a Review documentary

and Claasfication efits and deductions sample of payroll evidence that
benefit and deduction recalculation oc-
(tax, pension etc) are calculations. curred (eg spread-
computed correctly. sheet printout).

Payroll budgets in
place and reviewed Review budgeting
by management. procedures.

Agreement of gross Inspect documenta-

earnings and total tax tion for evidence of
deducted with taxa- management's review.
tion returns.

To ensure that payroll Changes to master Review reconciliation

transactions are cor- payroll file verified 'before and after' re-
through 'before and ports to payroll mas-
rectly recorded in the after' reports. ter file.
accounting system.

Review reconciliation
payroll master file to
 Payroll master file general ledger. Con-
reconciled to general firm whether discrep-
ledger. ancies are followed up
promptly and re-
solved.

Cut-off To ensure that payroll All starters, leavers, Review entity's pro-
cedures for reporting
transactions are rec- changes to salaries
and deductions are changes to the payroll
orded in the correct reported promptly to department.
accounting period. payroll department
Verify sample of
and changes are up-
starters and leavers.
dated in the payroll
master file promptly.

Presentation To ensure that payroll Chart of accounts. Review chart of ac-

transactions are counts.

properly classified in
the financial state- Independent approval Review procedures
for classifying
ments. and review of ac- payroll costs.
counts charged to
payroll.

Payroll budgets in Review budgeting

place and reviewed procedures.
by management.

Test Your Knowledge

A good understanding of internal controls is essential to auditors. This helps them to understand
the business and allows them to effectively plan and execute tests of controls together with an
appropriate level of substantive procedures.

A small manufacturing company, Westfield, pays its staff in cash and by bank transfer, and the
payroll department consists of a payroll clerk who maintains its payroll on a stand-alone laptop
computer. The payroll clerk is supervised by the chief accountant, who in turn reports to the
managing director. You are Westfield's auditor.

Required

(a) For the payroll department at Westfield, describe the internal control objectives that should
be in place.

(b) Describe the internal control environment and internal control activities that should be in
place to achieve the internal control objectives in (a).

(c) Using your answer above, suggest a control the auditor may seek to rely on when obtaining
evidence over occurrence and existence in relation to payroll, and explain why. State one test of
control the auditor might carry out to test the operating effectiveness of that control.