CHAPTER 7: ACCOUNTING, RECORDS, AND ASSOCIATED REGULATIONS
MANAGEMENT LETTER A management letter is a document comprising the external auditors’ findings on certain audit issues. It can be broad in scope and address issues including cost savings, revenue enhancement, tax law and account principle changes, budgeting issues, internal controls, and human resource management. It is normally issued in conjunction with the annual outside audit. Management responds to the audit comments in the management letter. It is typically a productive letter that details the positive changes that will be implemented. A good management letter reaffirms confidence in management and looks forward, not backward. AR’s responsibility is to use the management letter as a tool to understand what issues and internal control weaknesses may exist in the current process. AR should respond with a process that will satisfy those comments.
Typical audit comments include the following:
Lack of adequate segregation of duties. Lack of the proper segregation is at the top of the list of issues the auditor looks for. Example: It is preferable that the person directly involved with the handling of cash is not responsible for maintaining the customer file or for billing. Outstanding invoices are not authentic. The external auditor will do a statistical sampling of outstanding invoices to verify their authenticity. Usually, the auditor will ask the company to prepare letters to their customers requesting them to validate and confirm their open invoices as of a certain date. The letter to the customer will contain a list of open invoice numbers, the invoice date, and the amount due. If the customer agrees, they sign the letter and return to the audit firm. If the customer disagrees with the balance, the auditor investigates to see if it is a timing issue or if there is a problem. A common example is the customer will mark an open invoice “paid” where the payment was received after the letter was sent, or the payment was misapplied. Invoices not recorded in the proper period. Auditors will review payments and deductions along with any documentation to ensure that they are recorded in the proper period. Allowance for doubtful accounts. The auditor will review past-due invoices – in particular if they are substantial, inspect credit files, review customer correspondence, and discuss the status of collection with the client. If the outstanding accounts receivable are deemed not to be collectible, the auditor may recommend a journal entry to increase the allowance for doubtful accounts and decrease the revenue.
7.8 Record Retention/Destruction
In the wake of business scandals at the start of this century, most governments have increased and tightened regulations around paper and digital record storage and retention at both local and national levels. It is imperative to align your policy and procedures with the proper legal and regulatory requirements regarding what documents need to be kept, for how long, and in what format. Most countries require various types of documents to be stored either permanently or for specific periods, such as two, three, seven, or 10 years, depending on record type.
136
THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
Made with FlippingBook - Online catalogs