Use this form to document your understanding of small business internal controls related to the accounts payable/expense...
ACCOUNTS PAYABLE/EXPENSE DOCUMENTATION General Understanding If Accounts Payable/Expense is deemed to be a significant transaction cycle, then perform the following. Please document the following: 1. Who signs and issues purchase orders (if applicable)? 2. If there is a receiving function (where materials are received), then note persons who count materials received and whether those counts are recorded in the computer system. 3. Who authorizes payment of invoices and how (e.g. initials on invoice)? 4. Who is authorized to sign checks? 5. How many signatures are required on checks? 6. If signature stamps exist, who is responsible for custody of the stamp? How often is the stamp used? 7. What type of check stock do they use (preprinted or computer generated)? If the checks are pre-numbered, is the sequence accounted for regularly, and unissued checks are controlled and kept in a secure location? How are voided checks tracked and accounted for? 8. Who keys the invoices into the computer system?
9. Who can add vendors to the accounts payable system? 10. Who is authorized to add vendors to the system? 11.
Who reconciles the A/P detail to the G/L? Is the reconciliation performed at least monthly?
12.
Do they match the P.O., the invoice and delivery ticket (if applicable) for quantity and price?
13.
Who opens the bank statements?
14.
Who reconciles the bank statement?
Walk-Through 1. Observe the segregation of duties. Are the following segregated? a. Custody of assets (e.g. signed checks) b. Reconciliation procedures (e.g. person who reconciles bank account, person who reconciles A/ P to G/L) c. Authorization (e.g. signer of checks) d. Accounting (e.g. person who keys in invoices and adds vendors to system) Note – If signature stamp exists and is available to person other than the authorized signer, then treat person who has access to the stamp as one who can authorize payment. Function Custody of Assets Reconciliation Authorization Accounting
Person
If they are not segregated, are there any mitigating controls (e.g. monitoring performed by board or owners)?
2. Inspect the following for one transaction: a. Issuance of a P.O. b. Authorization for payment (e.g. initials on invoice and appropriate signatures on checks) c. Posting of invoice to G/L with appropriate account number d. Match of invoice quantity and price to the PO e. Reconciliation of bank statement for that month P.O. # Examined: Check # Examined: G/L Acct. # Examined: Quantity
Price
Per Purchase Order Per Invoice Bank reconciliation examined for the month of: Name of person who performed the bank reconciliation: 3. Inquire about: a. Who performs the above when persons are out sick or on vacation? b. Has the system changed during the year? c. Have personnel been asked to override controls? d. Are accounts payable functions being performed on a timely basis?
Deficiencies Noted Does it appear that there are any control deficiencies (see definitions below)? ___Yes
____No
If yes, then note control weaknesses on the Control Deficiency Comment and Management Point Development form (for potential inclusion in the internal control communication to the client).
Control Deficiency. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. The communication of control deficiencies that are not considered significant deficiencies or material weaknesses can be either written or oral.
Significant Deficiency. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
Material Weakness. A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. [As used in the SAS, a reasonable possibility exists when the likelihood of the event is either reasonably possible or probable as those terms are used in Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (FASB ASC 450).]
If there are significant deficiencies in controls, then consider the weakness in developing your audit program for this area.
Disclaimer – This document has not been peer reviewed; user assumes all risks related to its use.
Created by Charles B. Hall, CPA, CFE, MAcc
[email protected]
