Financial Statement Close Process

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Lorraine Carr
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1 Financial Statement Close Process Process Control Objective Risk Control Considerations Segregation of Duties Accounting functions are properly segregated. Unauthorized and inaccurate transactions may be recorded The following functions should be segregated: Authorization of transactions Execution of transactions Recording of transactions Reconciliations Maintenance of master files & tables Access rules adequately support segregation of duties. Master File Maintenance Changes to the general ledger/ consolidation master files and related tables, or similar tools, are properly authorized, accurate and recorded timely Unauthorized additions/changes can be made to the master files/tables New general ledger accounts are approved before entry into the system. Changes to tables are authorized before entry into the system. Edits and validation procedures prevent invalid data from entering the system. System reports of changes to master file/tables are independently verified to the source documents. Master file/table data does not remain accurate Master File/Table data is periodically reviewed by Asset / Liability Estimations and valuations are Estimations and Valuations recorded accurately, completely and on a timely basis. Assets and liabilities may not be properly stated AREAS TO CONSIDER: Investments Accruals Transactions are reviewed (including assumptions for transaction calculations) and properly authorized prior to entry into the system. Supporting schedules are reconciled to the general ledger. Entries/account balances are reviewed against: budgets, source documents, other metrics and reports and compliance with GAAP. Transfers from Sub-ledgers Transfer entries from other systems are accurate, complete and processed on a timely basis. The general ledger may not be accurate and complete. Only appropriate and authorized people can transfer data to the general ledger. All sub-ledger totals by account are compared to the general ledger system. General Ledger Close All valid entries are updated to the appropriate accounts prior to period-end closing. All entries may not be reflected properly in the general ledger. The completed general ledger closing checklist is reviewed by The prior period s closing balance is reconciled to the current period s opening balance. All reconciliations are reviewed by Management reviews all suspense accounts and resolves all items before the close.

2 Process Control Objective Risk Control Considerations Inter-company Accounts Consolidations Inter-company accounts are recorded completely, accurately and in a timely Corporate consolidations are complete and accurate. Inter-company accounts may not be properly eliminated Corporate consolidations are inaccurate Reconciliations of all inter-company accounts are performed and reviewed by The completed consolidation checklist is reviewed by The financial statements in the consolidation package are reconciled to the trial balances from each entity s general ledger, including any post-closing (top-side) adjustments. All consolidating and eliminating entries are reviewed by Unauthorized top-side entries All top-side entries are properly authorized. can be made Only authorized and appropriate individuals can post topside entries. Adequate audit trails exist for all top-side entries. Top-side entries are compared to source documents after they are entered into the system or otherwise reviewed by Preparation of the Financial Statements (Includes the Balance Sheet, Income Statement, Statement of Stockholders Equity and Statement of Cash Flows) Financial statements are Financial statements may be prepared accurately and timely. misstated Management has established and documented a process for preparing and reviewing financial statements based on the accumulation of the relevant data from throughout the company. Applicability of new accounting pronouncements is considered, documented, and communicated to appropriate personnel throughout the company. Financial statement account groupings are prepared consistently with prior periods, and are reviewed by Financial statements are independently reconciled to the appropriate supporting schedules. Final Financial Statements and Disclosures All necessary contents and disclosures are included in the financial statements. Contents or format of financial statements may be incorrect or missing disclosures. Financial statements are tested for clerical accuracy. The Statement of Cash Flows is tested for compliance with SFAS No. 95. The completed disclosure checklist is reviewed by Management and the board of directors review and approve the financial statements, including the related footnotes. The footnotes are reconciled to supporting documentation.

3 Investment Business Process Process Control Objective Risk Control Considerations Segregation of Duties Cash management, investments Unauthorized and fraudulent The following functions should be segregated: and debt management transactions can be recorded. Authorization of transactions functions are properly Execution of transactions segregated. Recording of transactions Confirmations & reconciliations General ledger updates Master File Maintenance Changes to the Master Files are properly authorized, accurate and recorded timely. Unauthorized additions/changes can be made to the master files/tables. Access to treasury related systems is restricted to the appropriate and authorized individuals. Changes to authorization limit tables require approval. Master file/table information may not remain accurate Edits and validation procedures prevent invalid data from entering the system. System reports of changes to master files are independently verified to the source documents. Management periodically reviews the Master File data. Cash Management & Liquidity Only authorized valid cash transactions are recorded completely, accurately and in the proper period. Invalid cash transactions can be processed. (Checks, wire transfers etc.) Cash transactions are reviewed and approved by an appropriate and authorized individual. Authorization limits are established and approved by an appropriate and authorized individual. The ability to execute cash related transactions should be limited to authorized individuals. Cash transactions are not recorded accurately and completely in the correct period. Unauthorized transactions may occur. Cash transactions are reviewed and approved by an appropriate and authorized individual prior to posting to the general ledger. The authority to open, change or close bank accounts is restricted to the appropriate and authorized individuals. Access to cash management systems is restricted to appropriate and authorized individuals. Check signing authority is restricted to the appropriate and authorized individuals. Check signatory limits are established and authorized. Unauthorized overrides may occur The Cash management system prevents the processing of transactions that exceed an individual s assigned authorization level. Additional approvals are required to process transactions in excess of established dollar limits and/or individual authorization limits. The ability to execute wire transfer transactions should be limited to authorized individuals. Unauthorized transactions may occur. Access to process wire transfers is restricted to the appropriate and authorized individuals. Separate individuals must initiate and approve each transaction. System authorization limits are assigned to individuals responsible for approving wire transfers. Unauthorized overrides may occur The wire transfer system prevents the processing of transactions that exceed an individual s assigned authorization level. Additional approvals are required to process transactions in excess of established dollar limits and/or individual authorization limits.

4 Process Control Objective Risk Control Considerations Physical Safeguards Adequate physical controls Negotiable instruments may Access to negotiable instruments is restricted to only authorized over negotiable instruments are be subject to improper use or individuals. maintained. theft. Investments Only authorized valid investment transactions are recorded completely, accurately and in the proper period. Invalid Investment Investment transactions are reviewed and approved by appropriate and transactions can be processed. authorized individual(s). Authorization limits are established and approved by appropriate and authorized individual(s). The ability to execute investment transactions should be limited to authorized individuals. Investment transactions are not recorded accurately and completely in the correct period. Unauthorized transactions may occur. Unauthorized overrides may occur. Investment transaction confirmations are reviewed and approved by appropriate and authorized individual(s) prior to posting to the general ledger. The authority to open, change or close investment accounts is restricted to the appropriate and authorized individuals. The authority to conduct investment transactions is restricted to the appropriate and authorized individuals. Appropriate authorization limits are assigned to individuals responsible for initiating investment transactions. The investment management system prevents the processing of transactions that exceed an individual s assigned authorization level. Additional approvals are required to process transactions in excess of established dollar limits and/or individual authorization limits. Debt Management Inter-company borrowing and related interest are properly authorized, complete, accurate and recorded in the proper period. Unauthorized activity may occur. Inter-company borrowing transactions are not recorded accurately and completely in the correct period. An appropriate and authorized individual approves inter-company borrowing. Journal entry for the transaction is reviewed and approved by an appropriate and authorized individual prior to posting to the general ledger. Outside debt obligations and related interest are properly authorized, complete, accurate and recorded in the proper period. Unauthorized debt payments may be made. Valid debt principal and interest payments may not be processed. The securing of debt is restricted to the appropriate and authorized individuals. Management reviews and approves the loan re-payment report/log to ensure loan payments are made when due and in accordance with the reviews debt covenants. Financial Reporting & Monitoring Postings to the general ledger are recorded accurately and in the correct period Treasury related transactions may not be recorded in the proper period The general ledger accounts are reconciled to third party statements or other support on a timely basis for cash, investment and debt transactions. Financial statements can be misstated Activity may be improperly recorded or processed. Management reports detailing investment activity are reviewed and approved by the appropriate level of Inter-company balances are reconciled and reviewed monthly. Management reports detailing investment activities are reviewed and approved by the appropriate level of Debt statements are reviewed and reconciled to posted entries.

5 Process Control Objective Risk Control Considerations Treasury related transactions may not be recorded in the proper period. Various analytical procedures are performed to identify potential cut-off errors.

6 Contributions Business Process Process Control Objective Risk Control Considerations Segregation of Duties Collections are properly Contributions may not be The following functions should be segregated: segregated completely and accurately Preparation of deposit recorded Making bank deposits Receivables collection Collection record keeping Sub ledger recording General ledger updates Bank reconciliations IT and accounting functions Cash Collection and Application All cash receipts are deposited and recorded completely, accurately and timely Cash may be misappropriated A list of cash receipts is logged and compared to the deposit slip. Restricted endorsements are placed on check remittances upon receipt. Statements are periodically mailed to customers. Cash may be applied to the wrong account Delinquent accounts are reviewed and followed up on. System automatically matches remittances to open customer invoices. A/R manager reviews customer balances on monthly basis to identify unusual activity. Cash receipt may not be recorded accurately and in Contributions h may id not be calculated correctly Bank reconciliations are prepared and reviewed timely. Contribution rates are checked periodically and recalculated every time there is a change in contribution rates. Physical Safeguards Adequate physical controls over cash receipts are maintained. Cash receipts may be subject to misappropriation, loss, or theft Only authorized individuals have access to cash receipts. Financial Reporting & Monitoring Postings to the general ledger are recorded accurately and in the correct period Cash related transactions are improperly classified The general ledger does not accurately reflect the b idi l d Cash related transactions may not be recorded in the proper period Cash receipts held overnight are stored under dual control by authorized individuals. Comparisons are performed against past and expected sales metrics. A reconciliation is prepared of the sub-ledgers to the general ledger and differences are investigated/resolved. Management reviews all system error reports and ensures all necessary corrections are made before totals are transferred to the Various l lanalytical d procedures are performed to identify potential cutoff errors.

7 Benefit Payments Business Process Process Control Objective Risk Control Considerations Segregation of Duties Duties are adequately segregated The following functions should be segregated: Benefits payable may not be completely and accurately recorded Accounts payable Bank reconciliations Sub-ledger recording General ledger updates IT and accounting functions Payment Processing Payments are only made to eligible individuals. Warrants may not be accurate Payments are matched up to a member list prior to processing. Member calculation worksheets are reviewed for accuracy prior to payment. Member option selected is correctly calculated and reviewed and approved prior to payment Member retirement allowance election form is complete Payment is approved for ineligible individuals. Eligibility is determined and payment authorized prior to payment processing. The system prevents the processing of duplicate members. Member has applied for retirement Cash Disbursements Cash disbursements are for valid benefit payments, and are accurately recorded in the proper period. Recurring payments are paid for goods/services not received Unauthorized disbursements may be made Recurring payments are authorized prior to payment processing setup. File control totals are reconciled to ensure the completeness and accuracy of transmission. Claim Schedules are approved for payment before the check is printed. Larger checks require additional authorization. Bank reconciliations are performed on a regular basis. Physical Safeguards Adequate physical controls over benefit payments are maintained. Funds may be subject to misappropriation or theft. Only authorized individuals within the department have access to disbursement checks and signature plates. Disbursement checks and signature plates are stored separately by authorized individuals each under dual control. Only authorized individuals maintain checks prior to pickup by courier service for disbursement to members.

8 Process Control Objective Risk Control Considerations Benefit Payment Comparisons are performed against past and expected transactions are improperly metrics. Financial Reporting and Monitoring Postings to the general ledger are recorded accurately and in the correct period The l general ifi d/ ledger d does not accurately reflect the subsidiary ledger Reconciliations are prepared of the sub-ledgers (e.g., accounts payable, inventory, fixed assets) to the general ledger. Benefit Payment transactions may not be recorded in the proper period Management reviews all system error reports and ensures all necessary corrections are made before totals are transferred to the general ledger. Various analytical procedures are performed to identify potential cut-off errors.

9 Commitments & Contingencies Process Segregation of Duties Control Objective Only authorized Risk Unauthorized or fraudulent Control Considerations The following functions should be segregated: individuals have access to transactions can be recorded. Authorization of transactions perform certain functions Execution of transactions and the combination of Recording of transactions functions does not General ledger updates represent incompatible Contracts Contracts are valid and authorized. Unauthorized contracts can be executed Only authorized individuals can initiate and enter into a binding contract. The legal department or other authorized individual reviews and approves all contracts prior to execution/ final sign-off. Signature authorities are documented and published. Commitments & Contingencies Commitments and contingencies are accurately and timely identified, classified, estimated and disclosed. Commitments and contingencies are not accurately and timely identified, classified, estimated and disclosed. Commitments and Contingencies are identified and approved by appropriate and authorized individual(s). Management reports are prepared and forwarded to financial reporting and senior management Procedures are in place to periodically review the status of all open contingency and commitment situations and update records and presentation as appropriate. Commitments and contingencies Valuation standards are established and approved. are not appropriately valued The valuation of commitments and contingencies is approved by appropriate and authorized individual(s). Litigation Pending litigation is identified, classified, estimated and disclosed Litigation requiring recognition is properly valued Litigation is not identified, classified, estimated and disclosed in an accurate and Inappropriate valuation All pending litigation is reviewed and assessed by management and/or legal counsel. Valuation standards are established and approved by appropriate and authorized individuals. The financial impact of pending litigation is reviewed and approved by appropriate and authorized individuals. Financial statements reflect inaccurate accounting and disclosures. Corporate finance reviews the status of each case with legal counsel and the appropriate accounting and disclosure for each case. A mechanism is in place to periodically review the status of all open litigation situations and update records and presentation as appropriate. Product recalls Product recalls are properly authorized, captured, communicated and accurately recorded in a timely manner. Product recalls are not properly authorized, captured, communicated and accurately recorded in a timely manner. Product recalls are reviewed and approved by an appropriate and authorized person prior to the execution of the recall. The valuation of product recalls is reviewed and approved by appropriate and authorized individuals.

10 Process Control Objective Risk Control Considerations Financial Reporting & Postings to the general Commitment and contingency Comparisons are performed against past and expected metrics. Monitoring ledger are recorded related transactions are accurately and in the improperly classified correct period The general ledger is not consistent with supporting documentation Commitment and contingencies related transactions may not be recorded in the proper period Source documentation and related journal entries are reviewed for consistency with the general ledger. Various analytical procedures are performed to identify potential cut-off errors.

UNIVERSITY OF TOLEDO INTERNAL AUDIT DEPARTMENT MANAGE FIXED ASSETS

UNIVERSITY OF TOLEDO INTERNAL AUDIT DEPARTMENT MANAGE FIXED ASSETS The following control objectives provide a basis for strengthening your control environment for the process of managing mergers and acquisitions. When you select an objective, you will access a list of