Banking and Accounting Controls

It was almost noon when Diego Vilas and Miguel Sema landed at the airport in Lima, Peru. The two auditors cleared customs and met the company controller of EasyMoney Inc., a large multi-national corporation. The controller drove them to the headquarters in the beautiful neighborhood of San Isidro. In the past, the Peruvian subsidiary received its internal auditing services from its Chilean affiliate. Starting with this trip, these services will be provided from auditors based in Argentina.

After several years of civil unrest and government corruption, Peru’s economy had opened its borders and was growing again. Gross Domestic Product was growing at a rate higher than 5% for the first time in 10 years. Partly because of the change in the economy, but also because of a huge re-structuring, the company was expected to grow at rates close to 50% each year.

The re-structuring started with the appointment of Fernando Pelos as the new managing director. At the same time, the 30 year-old Peruvian subsidiary layed off many experienced employees and new management, with little experience, was appointed. Two years later, Mr. Pelos stepped down from his position due to a serious illness. At this point, Adolfo Alonso, the financial manager, took over the managing director responsibilities and also maintained his financial duties. Although he held an MBA in finance from the University of Chicago, he didn’t have much practical accounting experience. In addition, during that year Pedro Balbo, a systems analyst, was appointed treasurer. He also did not have an accounting background but had been with the company for 11 years.

An internal audit of Cash Management had not been performed for two years and was scheduled for this visit. When interviewed by the auditor, Martin Conforti, the accounting clerk in charge of bank reconciliations mentioned that they had not been done recently. Apparently, Lidia Lemos, the cashier, was refusing to provide information about items that had been outstanding for several months.

With this in mind, the auditor asked more questions to gather information about the finance organization and the bank reconciliation process.

Mrs. Lemos was a loyal 20 + years employee at EasyMoney Inc. who used to bring food every day for other company “old timers”. Mrs. Lemos used to work late and take almost no vacation. Actually, she had not taken any vacation in five years. She used to say, “This company is my family,” even though some of the “old timers” had been laid off in the re-structuring project.

The auditor also met Juan Ottone, the office assistant, who was in charge of depositing cash collections. Apparently, he was not required to provide deposit advices to the cashier when deposits were made, and audit reviews confirmed that some deposit advices were missing.

In addition, Mrs. Lemos would cash employees’ personal checks. In conversations with her, the auditor also found that she would follow company procedures for payments to suppliers, but because she was a friend to some of them, she would eventually cash their checks too. She used money from customer collections for these transactions.

Whatever cash was remaining from customer collections, she would deposit in one of six bank accounts. Typically, she would deposit in the account, which she knew was going to be reconciled that month. Also, each day she would prepare cash and bank accounting information, which would then be processed by the Credit and Collections department.

When the auditors wanted to perform a cash count, the cashier indicated that counts were not a common practice at the subsidiary and she only allowed the external auditors to count cash at year-end.

After talking to the cashier and office assistant, the auditors looked at bank reconciliations and found that they were not reviewed and approved by management as required in Corporate Guidelines. Although reconciliations were completed, several large reconciling items remained outstanding for many months. Apparently, Mrs. Lemos was in charge of receiving bank statements but she did not provide them to the accountants on a timely basis. Without providing any training for them, bank reconciliation responsibility had been assigned to three different accounting clerks in one year.

Also in reviewing reconciliations, the auditors noticed a year-end entry of $200,000 to adjust the bank account ledger. They also identified similar entries, which had been recorded each month from August to year-end. These entries were made before reporting financial data to the parent company in the US.

After two long days of meeting people and gathering information, Diego and Miguel discussed the apparent control weaknesses and also planned for where additional detailed audit testing was necessary.

Required

1. Identify controls that provide reasonable assurance over the cash, banking, and accounting functions.

2. What weaknesses in the cash, banking and accounting controls do you believe Diego and Miguel should point out to management?

3. Develop recommendations to correct the reportable conditions identified under Item 2, above. Also include any recommendation(s) you may have to improve operational efficiency.