Documentation of Significant Accounting Processes

Businesses should strive to comply with the documentation requirement of Sarbanes-Oxley.

The Sarbanes-Oxley Act of 2002 ushered in the greatest scrutiny of corporate behavior and financial reporting that had been seen in the United States in years. The act required companies to create internal controls for nearly every accounting function within the firm and document their compliance efforts regarding those internal controls. Documentation is an important component of Sarbanes-Oxley compliance and should be approached with the seriousness it requires.

Revenue Recognition

The concept of revenue recognition relates to the time at which a company recognizes a sale on their books. Sarbanes-Oxley requires that companies keep detailed records regarding when they recognize revenue. Such documents may include deferred revenue documents and bill and hold documents for orders that are held in the warehouse for an extended period. Auditors are trained to compare the company's actual revenue recognition practices with the policies laid out in the internal control matrix.

Inventory Receipts

Companies should ensure that the cost of inventory in their accounting system matches the cost of the associated invoice received from the supplier for the inventory item in question. It is essential for inventory management systems to have the same cost for items as the financial accounting systems being utilized by the company in order to comply with Sarbanes-Oxley requirements.

Accounts Payable

The proper documentation of invoices for accounts payable entries is vital for the passage of a Sarbanes-Oxley audit. The accounting staff should ensure that purchase orders are issued for each purchase and can be traced back to an individual invoice. This applies to many types of purchases, including raw materials, office supplies and even employee expense reports.

Cash Receipts

The receipt of cash for accounts receivable invoices is an integral function of the accounting staff. The process of documentation begins with the original invoice, which is sent to the customer. A copy of the invoice should be kept on record for audit purposes. A copy of the check received from the customer should be retained with the original invoice. In addition to a copy of the original invoice and a copy of the customer's check, the accounting staff should retain a copy of the system-generated cash application audit sheet.

References

• American Institute of CPA's: Summary of the Provisions of the Sarbanes-Oxley Act of 2002
• Revenue Recognition: Auditor's Perspective: An Interview with Mike Schamberger, Assurance Partner at Grant Thornton LLP
• Billing & Oss World: Will Sarbanes-Oxley Force Tighter Integration Between Inventory and Financial Systems?
• American University: Accounts Payable Policy Statement
• Rene Ewing: Cash Receipts Process Documentation