Internal Control Weaknesses In Cash Receipt And Billing Function

Background

Question:

What Internal Control Weakness in Cash Receipt?

Finance function is regarded as the back bone of the proper working of each and every organization. If the finance function does not perform well or does not operate in the manner as required by the organization according to the nature and size and type of the business, then the organization will end up with the closure or winding up. The finance function starts from the procurement of raw materials or goods and ends with the collection from the customer to whom processed goods or goods have been sold.

Through this report the working of the finance function has been analysed for Everyday Supplies Pty Limited. Although all the functions are the part of study but in this report the cash receipt and billing function of the company have been discussed in detail. The internal control weaknesses that is prevailing in the cash receipt and billing function of the company is observed and listed and after that it is analyzed as to why listed factors are defined as the weaknesses of the internal control system. After listing out each weakness the proper remedies that are required are mentioned. The report has then ended up with the proper conclusion and the recommendation.       

In accordance with the function defined for each and every stage, following are the weaknesses that have been observed in relation to the internal control system that has been adopted by the company:

Approval of Credit limit without checking the creditworthiness of the customer – In this, the customer according to the case study is the contractor who purchase merchandise from the company retail store. The first and foremost internal control weakness that has been observed is the approval of credit limit. This function is performed by the credit manager of the company. As per the current situation, the credit manager extends the credit to the contract on the basis of its own discretion and on the basis of the familiarity that he has gained over the passing of time with the contractor. The weaknesses have been noticed in the said extension of the credit. As per the normal practice of the business, the extension of credit shall be granted only after obtaining the prior approval of the higher authorities first and also the credit manager shall identify the credit worthiness of the contractor as to whether the contractor will be able to pay the amount due in future or not (Darrough, 2012). It is regarded as the weakness in the internal control system because of the fact that in case the credit so approved by the company exceeds the maximum amount which the contractor can pay, then there will be the high risk of having the amount from the contractor with easy means and most of the times these are considered as the bad debts which cannot be recovered and will be treated as an expense of the company rather than the income.

Internal Control Weaknesses in Cash Receipt and Billing Function

Improper Billing System – The responsibility of issuing the invoice to the customer is of the accounts receivable supervisor. The weakness that has been observed in the system is of the process that the accounts receivable supervisor has adopted to issue the invoice to the customer. The accounts receivable supervisor got the information of the bill details from the sale associate who gives the pre numbered charge form obtained from the credit manager. The accounts receivable supervisor verifies the pricing that the charge form contains with the pre defined price list that the company has already put in place for each and every item that the company sale to their customers. Here are the more chances of manipulation in getting the invoices prepared with different and vague amounts. He can correct the price and alters the bill and there are chances that the accounts receivable supervisor may alter the bill as per his own discretion. It has been regarded as the weakness because of the fact that the account receivable supervisor discretion and his work is not be crossed checked by the company in any manner. There is no system where the amount mentioned in the pre numbered charge form can be tallied with the invoice amount that has been issued to the customer on the daily basis or any periodical basis depending upon the nature and type of the business (Hammersley, Myers and Zhou, 2012).

Improper Authorization of Write Offs – The responsibility to authorize to write off the balances of the customers depends upon the book keeper. Book keeper is the person who is engaged in the preparation of books of accounting by recording each and every transaction of the business and is liable if any damage is caused to the books of accounts or any manipulation is done in the books of accounts. Books of accounts plays very important role for the users of the financial statements of the company as the financial statement is prepared through the books of accounts only. The weakness that has been observed in this is that the book keeper has the power to authorize the accounts receivable supervisor to write off the balances of the customers if the amount outstanding is more than six months. The authorization is improper because of the fact that the book keeper does not goes into the details as to why the amount is outstanding and does not even follow up with the customers as reminder to make the payment. He on his own discretion allows the accounts receivable to write off the balances. It has been regarded as the weakness due to the fact that if the same system will be followed then there will be the high chances of misrepresenting the affairs of the company to its stakeholders and shareholders (Ji, 2016).

Inflexibility in Stopping Approval of Extra Credit to the Customers – The responsibility to extend the credit to the customers and increase their credit limit is of the credit manager. The weakness that has been observed lies on the part of the book keeper who issues guidance to the credit manager to not to extend additional credit facilities to the customers who have not paid their outstanding due for more than the six months. The policy that is being followed by the book keeper is totally rigid and inflexible and is not according to the nature and type of every business operating in the industry. It is because there is high possibility that the credit manager would have extended the credit of that customer before one day of completion of the six months. It is happened because of the fact that no system has been put in place by the company where the monthly or daily reports can be sent and shared between the different segments of the finance function of the company rather they have developed the system where one segment informs the other segment on the day when the wrong has happened and ask other segment to act quickly and perform the function in the manner specified. This has been regarded as the weakness because of the fact that the current system if prevails for long can result in loss of faith of the customers and worst can happen with the no customers and thereby closure of the company.

Improper Cash Handling practices – The responsibility to handle and manage the cash lies on the cashier. In the general practice, the cashier shall collect the cash first and then records the same in the books of accounts and thereafter deposits the same in the bank account of the company. But in the given situation, the cashier is collecting the cash first from the customers and instead of recording the same in the books of accounts, get the cash deposited in the bank account and then made the entries in the books of accounts as per the cash deposit slip received from the bank. Further the cashier sends the bank statement along with the cash deposit slip to the book keeper to reconcile the same. The said reconciliation is of no use as the amount of deposition will always tallied with the deposit slip. There was no check at the time of receiving the cash and depositing the same in bank. Further reconciling the same with bank is vague. In the cash being deposited in the bank, there are the chances of getting it manipulated. This deficiency is regarded as weakness because it can have chances of embezzlement of cash and frauds can be happened easily (Lenard, Petruska, Alam and Yu, 2016).

The weakness in the internal control system of the company can be reduced by applying the proper corrective actions. The following actions have to be taken by the management of the company to correct the weakness in the internal controls relating to cash receipts and billing functions:

• There shall be defined system for approving the credit limit of the contractor customer. It shall not be done on the basis of the familiarity gained with the customer rather shall be purely done on the basis of the creditworthiness of the customer. The creditworthiness is judged by the external rating agencies and the company shall put a system in place for getting the rating done for each customer before approving the credit limit (Biegelman and Bartow, 2012).
• The company shall have proper billing and invoicing system where the sale price shall be tallied with the pre numbered charge form given by the sale associate to the accounts receivable supervisor. This tallying of figures shall be done for each and every sales invoice and the monthly report shall be shared within all the segments of the finance function.
• The policy of writing off the account balances of the customers shall be done on flexible basis. The current period of six months is too short and is also not as per the provisions of the relevant accounting standards and the corporations act, 2001. The period shall be increased and write off shall be done when there is high probability of non recovery of the amount.
• The stopping of the credit approval shall be done on the basis of the monthly report received from the book keeper and as per the defined policy of the company. This monthly report shall contain the name of the customers along with the detail of amounts which are outstanding from the very long period. Policy of the company shall be flexible in relation to the amount and period of outstanding.
• Cashier shall be given clear cut instructions to not to deposit the cash directly, first it shall be entered in the books of accounts and the cash collection shall be reconciled with the particular sale invoice. This reconciliation shall be given to all the segments of the finance function so that the policy regarding the write off, credit approval, etc can be reframed clearly (Ritt, 2006).  

Conclusion

Finance Function is the important function upon which whole working of the company depends. In the given case study, it is identified that there are internal control weaknesses related to each part of the function whether it relates to the invoice generation to the customers or cash collection from the customers. The report has provided the appropriate reasons of its presence and defining as the weaknesses and proper remedies has been given for each weaknesses.  

It is recommended that the company shall install such a system which can remove all the weaknesses that has been mentioned above and also will help the company in looking into other weaknesses which has not been formed as part of this report.

References

Biegelman M T and Bartow J T, (2012) “Executive roadmap to fraud prevention and internal control: Creating a culture of compliance- John Wiley & Sons, pp 13-16

Darrough M, (2012), “Inetrnal Control Weakness in the Market for Corporate Control” available at https://www.unavarra.es/digitalAssets/163/163254_Internal-control-weaknesses.pdf accessed on 19/05/2017

Hammersley J S, Myers L A and Zhou J, (2012) “The failure to remediate previously disclosed material weaknesses in internal controls Auditing: A Journal of Practice & Theory”, 31(2), pp.73-111.

Ji X, (2016) “Internal control weakness and accounting conservatism in China Managerial Auditing Journal”, 31(6/7), pp.688-726

Lenard M J, Petruska K A, Alam P and Yu B, (2016) “Internal control weaknesses and evidence of real activities manipulation Advances in Accounting”, 33, pp.47-58

Ritt D, (2006), “Inetrnal Controls over Cash MAngement & Banking Activities” available at https://www.si.edu/Content/OIG/Audits/2006/M-06-01.pdf accessed on 19/05