C-SOX Cash Receipts Testing

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Within the Revenue, Receivables and Receipts processes, the Cash Receipts is the final process, wherein all the hard work throughout the organization comes to fruition – the organization collects cash for goods and services that is has provided. One of the key tests in this process should be to sample a selection of customer invoices, and trace the various transactions through the entire cycle including cash receipts – to ensure that every transaction has been performed accurately and timely. For example, the Sales invoice should be supported by an approved Purchase Order or other approved Sales authorization. If the transaction pertains to the products delivered, the delivery should be supported by a bill of lading indicating that legal title has transferred to the customer. (Most often this is the key control to support revenue recognition however there are a multitude of accounting practices that need to be considered, all of which must be supported by the organization’s accounting policy. Click here for further information). And finally, has the customer remitted settlement in support of the shipment and sales invoice? Is there evidence that is has been deposited to the organization’s bank account, and have the proper general ledger accounts been credited? (Typically the credit is to the customer’s account receivable). The sample selection and results of the review are excellent ways to ensure that the organization’s controls are operating effectively. It will provide assurance that the RRR processes are working as planned, including cash receipts and settlement, which at the end of the day is really what is of upmost importance.

The design of key controls within the RRR processes is critical. Testing will determine if the controls are working, but if the controls are not designed properly, the organization will have significant issues. For example, it is very important to have segregation of duties – the organization will want to ensure that different people are involved with recording revenues and recording cash receipts. If the organization is small there must be mitigating controls, usually in the form of management review. Whenever cash is involved, there is opportunity for fraud – please make sure the organizations’ RRR internal controls have been designed effectively.

Please contact Edelkoort Smethurst Schein CPA’s LLP if you have any questions or comments.