Finding Text
Criteria: Segregation of duties is one the most important elements of internal control. It contemplates that no one individual handles a transaction from beginning to end. It also contemplates that a single individual does not perform incompatible duties such as both maintaining the custody of assets and also perform the recording and recordkeeping functions for these assets. In connection with segregation of duties, certain reconciliation and review controls should be designed and implemented to help further reduce the risk of undetected and unprevented errors in financial reporting. Condition: Lack of proper segregation of duties were noted as follows:
• Cash receipts, revenue and receivables - A single individual has custody of checks and other cash receipts, is responsible for preparing bank deposits, creates invoices and reimbursement reports, submits invoices and reimbursement reports to customers, posts cash receipts to the accounting system, has the ability to edit the accounts receivable and customer master file, maintains the chart of accounts and has review responsibilities for the bank reconciliation.
• Cash disbursements, expenses and accrued liabilities - A single individual approves check requests, has custody of checks after signature, has the ability to edit the vendor master file, maintains the chart of accounts and has review responsibilities for the bank reconciliation.
• Cash disbursements, expenses and accrued liabilities - A separate individual (different from the individual above) prepares checks for disbursement, enters invoices and cash disbursements into the accounting software, and reconciles the bank accounts.
• Payroll expenses and payroll liabilities - A single individual enters employees, payroll deductions and bi-monthly payroll information into the third-party payroll system, prepares payroll checks, resolves employee payroll inquiries, has the ability to edit the payroll master file, and has review and reconciliation responsibilities for payroll. Lack of proper reconciliation and review controls were noted as follows:
• The review of the monthly bank reconciliations is not clearly documented in writing or otherwise.
• Bank reconciliations for two different bank accounts were not initially prepared properly and did not agree to the general ledger account balances by significant amounts. When the auditor brought this to the attention of management and the third-party accountant, the bank reconciliations were revised and completed by hand.
• In connection with the above bank reconciliations, it was noted that check stock is not being used in numerical sequence. Using check stock in numerical order helps to provide internal control over the cutoff and completeness of cash and is also a useful fraud deterrent.
• Although it appears that a pre-processing and post-processing review of payroll is conducted, there is not a process in place to periodically review the payroll master file change log to ensure that all changes made to payroll information are approved and appropriate.
• The review of journal entries is not clearly documented in writing or otherwise.
• Certain significant account coding and keying errors were noted. The fact that these items were not prevented or detected prior to the start of the audit is indicative of a significant weakness in the review and reconciliation procedures and internal controls. These account coding and keying errors were likely inadvertent, however, certain reclassification adjustments were required related to the following:
o Depreciation expense in the amount of $1,200 was improperly entered at $12,000 and this error was not identified by the or corrected by the financial statement review or by the property and equipment reconciliation process prior to the start of the audit.
o Removal of accumulated depreciation for a disposed asset was improperly recorded to depreciation expense rather than as a debit to accumulated depreciation. Again, this error was not identified by the or corrected by the financial statement review or by the property and equipment reconciliation process prior to the start of the audit.
o Payroll paid for bonuses and payroll service fees were improperly recorded and comingled in the same account and employer payroll taxes. This error was not identified or corrected by the financial statement review or the payroll and payroll tax review and reconciliation processes prior to the start of the audit. Cause: AIRS has not properly designed or implemented adequate segregation of duties or appropriate reconciliation and review controls in certain circumstances.
Effect: Certain significant, but not material, audit adjustments were required during the financial statement audit. These adjustments appear to be a direct result of the lack of appropriate segregation of duties and lack of certain reconciliation and review controls. Questioned Costs: None reported Repeat Finding from Prior Year: Yes Recommendation: Given the limited number of staff currently available, adequate segregation of duties may be difficult, if not impossible, to achieve at present. However, senior management and the board should review and analyze the current duties assigned and segregate duties, to the extent possible and to further segregate duties, to the extent possible, when and if conditions change. Management and the board should also assess weaknesses related to segregation of duties and assess the related risks and benefits associated with improving segregation of duties and other related internal controls. Management might also want to consider instituting additional preventative and automated controls that could help to mitigate the internal control deficiencies caused by the lack of adequate segregation of duties. Views of Responsible Officials: Management concurs with this audit finding.