One of the key cash oversight controls we are learning this week is independent
ID: 2491330 • Letter: O
Question
One of the key cash oversight controls we are learning this week is independent performance of bank reconciliations from those who record the transactions. When doing account recs, one of the key items to review is aged reconciling items. I see this time and time again where reconciling items (between book and bank balances) remain open month after month. If you were auditing a company and saw reconciling items outstanding for so long, what would you do to improve controls here ? What is the risk of aged reconciling items. When it comes to outstanding checks, there are additional risks of not addressing reconciling items timely ? Does anyone know what these additional risks are (think state laws)
Explanation / Answer
The risk associated with aged reconciling items :
The risk associated with reconciling items outstanding for so long are:
1. There might be some manupulation on the part of the management.
2. There might be any fraud on the employee part.
3. There might be an error on the part of the bank.
4. Accountant could have escaped to make the adjustment entry.
Being the auditor of such company who is having aged reconciling items outstanding, we have to take following controls to improve the Reconciliation Statement:
a. First of all, all time barred checks should be reversed to the Cash Book.
b. All the uncleared deposits must be reversed after having confirmation from the clients that the deposits cheques have not debited to their banks.
c. Any other ommission or bank charges or understatement or overstatement of any entry, the adjustment entry must be made immediately.
When it comes to Outstanding Checks drawn by the company to their supplies, there is an additional risk because it might be possible (i) cash payment has been made to the supplier (ii) the supplier might be a fictatious one and the outstanding checks is only a dummy entry. (iii) Manupulation on the part of Accountant could be there to hide his short of cash. (iv) the management might be knowingly keeping the cash short in the books by issuing fictatious checks.
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