Question

An AR lapping was detected in the last audit. You told the audit committee of the company that the company needs to improve its internal controls. The audit committee asked you what they should do to prevent AR lapping. You asked your assistant for input. He made four proposals:

(1)Write-offs of uncollectible accounts need to be approved by a supervisor independent of credit approval; (2) different people handle receiving cash and posting the accounts receivable ledger; (3) an independent supervisor should check and compare the daily cash summary with the sum of cash receipts journal entries; (4) an independent supervisor should verify dates of entry in the cash receipts journal with dates of cash prelist.

What would you say to him for each of these proposals?

Answer 1

The proposal to improve the internal comtrol to prevent AR lapping do make sense. We can see through each of the proposals;

1. Write-off of uncollectibles need to be approved by a supervisor independent of Credit approval. This is a measure to strenghthen the control so that any chance of cash stolen from invoice settlement can not be passed off as uncollectible write off. An independent approver other that credit approver will ensure tampering with the customer data and fraudulent write off.

2. From the point of segregation of duties , the person receiving cash must not post the AR ledger. This ensures that no nexus or collusion is there to steal money and adjust AR to cover up.

3. Another segreagation of duties better be implemented to have a separate  supervisor validating the cash balance and the balance in Cash journal . It ensures that the entered cash in present physically. Independent validation will avoid any fraud. in cash receipt process.

4. An independent validation of the datewise entry in Cash journal and the date wise cash prelist will ensure that all cash receipts have been correctly booked in the system.

All the above measure are exceelent steps to enhance the AR internal control process that helps in plugging loopholes in collection process and prevent cash emvezzlements and fraudulently pass off that as AR adjustments and write offs.