Topic:Understanding the Collection Cycle
Now that the auditor has completed his walk-through of the revenue cycle, the next stop is collection cycle.
In understanding this setup, the following essential information shall be the auditor’s primary consideration:
• The mode of collecting customer accounts
• The departments and employees involved in collection
• The documents prepared
• The risk of misappropriation
On a monthly basis, the accounting department prepares and sends notice to customers through a reminder document
that details the customer’s account activity for the month and a statement of all open (unpaid) invoices. This is through a
monthly statement.
THE COLLECTION CYC
LE
Mailroom or Reception
Upon receipt of the payments sent through mail, the receptionist opens the envelope to check its contents. Whether the
payment received was in cash or in check, a remittance advice may also be in it.
What is a remittance advice?
A remittance advice is a document prepared by the paying customer to indicate the specific sales invoice the cash/check is
paying. More importantly, it contains the specific date that the payment was made or sent.
How important is the date on the remittance advice?
If payments mailed are in check, the date in the check only indicates the date it was prepared by the paying customer. The
check may have been delivered at a later time. This is where the remittance advice takes role. Its date is proof of the actual
mailing of the check.
RA date = Date of Paym
ent
Even if no remittance advice is enclosed in the envelope, the receptionist still prepares a list of receipts or collections
received. This list is forwarded to the receivable clerk in the accounting department. On the other hand, the cash/check is
forwarded to the cashier in the treasury department, together with a copy of the remittance list, or a duplicate copy of
the remittance advice.
Alternative to remittance advice
As a substitute, the paying customer may choose to send back the monthly statement previously received, together with
the cash/check. In this case, the monthly statement is referred to as a turnaround document.
Accounting Department
Accounting department records transactions only on the basis of sufficient documentation.
Now that the receivable clerk has received a copy of the remittance advice or list, an entry will be made to book the
collections and update the subsidiary record of the individual customers.
Recall that the accounting department will not receive the actual collection as access to the receipts constitutes
custodianship duty, a function incompatible with recording.
Cashier
Upon receipt of the remittance list and the collections, the cashier makes the deposit. To reduce the risk of theft or
misappropriation, deposits shall be made at the end of the day or the following business day.
Once deposited, the cashier keeps a copy of the deposit slipvalidated by the bank to evidence the transaction.
RiskAreas Needing Consideration
When employees are assigned the duty of depositing cash on a daily basis, 300 plus days in a year, the temptation to steal
is inherent. This provides opportunity for misappropriation.
So what controls should be in place?
As preventive measure against theft, it is good practice to restrict company employees’ access to collections by requesting
customers to deposit their payments directly to the company’s bank account.
Direct payment to bank reduces employee theft.
What’s next?
When the auditor’s assessment of the revenue and collection cycles provides enough evidence that the control activities
are in place and may be functioning effectively, the auditor decides whether to test specific controls or not
NOTHING FOLLOWS
“I survived because the fire inside me burned brighter than the fire around me. Keep going and see where your dreams will take
you.”