Managing Accounts Payable: Cash Disbursement Controls - Part 5

By Doug Potter

CASH DISBURSEMENT CONTROLS

Cash disbursement controls consist of both built-in system features and manual procedures that help ensure the accuracy and integrity of cash disbursements.  Much of these controls relate to the printing and distribution of checks, including important procedures for restricting physical access to unprinted check stock. 

Physical Controls.  Because checks are negotiable documents, restricting their physical access is important.  Often the safest way to accomplish this is by storing unprinted check stock in a locked filing cabinet under dual control.  This means that two locks are on the cabinet and two different people hold one of the keys.  Smaller business often choose not to use dual control procedures because of the overhead involved.  At a minimum, any organization should lock the check stock in a cabinet under the custody of a responsible accounts payable supervisor.

Check signature plates may be similarly controlled.  Large organizations separate the custody of signature plates from custody of the check stock creating dual control over the items required to produce a completed check.  The idea here is that the checks are not valid without the signature plates and that keeping the plates under separate custody constitutes dual control.  But, of course, locked signature plates do not justify keeping the check stock unlocked.

The check turnover log (Figure 8-8) records the turnover of check stock between the accounts payable department and computer operations.  It records check numbers and dates for each check run, verifying via the two signatures that the physical check handling did indeed occur as recorded in the log.

The check turnover log cannot be used with unnumbered check stock, but other compensating controls may be used instead.  Bank reconciliation must be prompt and thorough.  This reconciliation will identify any unauthorized checks that may have been drawn on the bank account.  Also, the organization may preauthorize payment of any and all checks via computer file of check numbers presented to the bank.  As explained in the previous chapter, this preauthorization also plays a role in bank reconciliation.

Controlling Boxes of Unopened Check Stock.  Most often when a business orders check stock, they order many boxes of these forms.  The control and safekeeping of unopened boxes is as equally important as control over the checks in use.  A recent audit of a medium-sized distributor revealed that the company had excellent control over unprinted check stock in use, but left unopened boxes in unsecured storage along with other computer forms.  In fact, during an audit they discovered that two boxes were no longer unopened!

Unopened check stock may be secured in a manner similar to check stock in use—locked and under dual control or at least under the control of a responsible accounts payable manager.  In addition, it may be wise to keep a separate record of the various boxes and their respective check numbers.  This can assist in determining whether a box was lost or stolen.

Sequential Check Numbering.  Like sequentially numbered paper voucher forms, sequentially numbered checks can help control the completeness of the check's processing.  For example, the bank's statement, showing paid checks sorted by check number, becomes a useful indication of completed checks.  But because this is an after-the-fact control (i.e., it detects that a check is missing), sequential check numbering tends to be of secondary importance in relation to the other preventive controls discussed here.

Check Limits.  The system's limitation over the maximum amount of the check can be considered a stop loss control over cash disbursement.  However, in the overall framework of controls established around cash disbursements, check limits are usually not as important as most of the other controls described here.

PERIOD CLOSING CONTROLS

All well-controlled accounts payable departments have certain controls that are exercised during period end.  These controls are designed to help identify errors or irregularities that might have occurred during the period.  They serve as key internal controls over the accuracy of automated accounts payable records.

Generally, period end balancing includes three types of balancing and reconciliation:

1.       Balancing the accounts payable master file to a manual log of control totals.

2.       Reconciling the accounts payable master file to the general ledger.

3.       Bank reconciliation.

Balancing the Accounts Payable Master File.  To help verify that the ac-counts payable master file was correctly carried forward from the beginning of the period and that activity was correctly posted during the period, an accountant should perform a simple reconciliation at the end of each period.  This procedure requires recording batch and other activity in a log, such as the one in Figure 8-9, and, at the end of the period, reconciling this log to the open voucher total.

If these amounts agree, then the procedure is complete.  Otherwise some research is necessary.  Some possible reasons for a mismatch:

·          An error in the arithmetic of the balancing calculation.

·          An unposted batch recorded in the log but not the open voucher report.

·          Invoices that were posted to the accounts payable master file, but not

·          written in the log.

·          Adjustments, discounts, or recurring vouchers not properly accounted for either in the log or the system.

·          A system error during the period such as an incorrect file version being used or a double posting occurring during the period.

The last error condition can be the most difficult to recover from.  Should this occur, the accountant must seek technical assistance of someone in information systems to help identify the problem and follow up with appropriate action.

Reconciling to the General Ledger.  As part of the period end process, an accountant will also reconcile the total open vouchers from the open voucher report to the general ledger accounts payable liability account.  Essentially this balances the subsidiary ledger (the accounts payable master file) to the corresponding general ledger account(s).  Completing this procedure helps ensure that the interface to the general ledger is working properly and that the journal entries shown in the general ledger distribution have been properly posted to general ledger accounts.

This reconciliation involves identifying any reconciling adjustments, such as the voucher and payment transactions posted to future general ledger periods: