From Les Sparks:
The only way to reduce the samples below the 25 required is to show that actual detection risk, is reduced to such a low level that a sample is no longer necessary. This is a very difficult thing to show for cash disbursements. There are just too many variables in cash disbursements. HUD indicates that CD testing must be performed project by project. That has a tendency to make 25 separate CD samples.
The question is often asked whether or not it is ever possible to test cash disbursements centrally. I think it is a possibility, but only in a very specific set of circumstances. Those circumstances generally require that so much of the disbursement process is performed centrally that it just cannot be tested at the project level. Of course, that will still require our reviewers to buy into the process.
From client:
Thank you for your prompt response. As a follow up, could you please address the following questions?
· Could you please provide an example of how you group the activity of cash disbursements and cash receipts by type to show where certain categories are tested in other sections? Am I misunderstanding that because they are tested elsewhere, you remove them from the population used to make selections for cash disbursements/receipts?
· For cash receipts testing, we pick up to 25 bank deposits and then pick up to 5 items in each deposit for testing. What are your thoughts regarding the size of the secondary sample selection if the majority of the deposits are for tenant rent payments?
From Les Sparks:
We tend to take the cash disbursement from the cash G/L and categorize them by type – mortgage, insurance, repair salaries, materials, etc., we then look at each category to determine where the material risk remaining is. Of course, with HUD, the purpose is to determine that the expenditures were reasonable and necessary so we tend to focus on those areas that represent the highest risk of that problem occurring.