Maintained for Historical Purposes

This resource is being maintained for historical purposes only and is not currently applicable.

Accounting Procedures for Title IV Programs

PublicationDate: 7/1/95
ChapterNumber: 5
ChapterTitle: Accounting Procedures for Title IV Programs
SectionNumber: 4
SectionTitle: Internal Control: Checks and Balances
PageNumbers: 192-202


5.4 Internal Control: Checks and Balances

((Minimum requirements))
To participate in federally funded student financial aid programs, an
institution must be able to demonstrate that adequate checks and
balances are in place in its system of internal control. A system of
internal control should, at a minimum, include:

- separating the functions of authorizing and disbursing Title IV
program funds;

- taking a trial balance (to determine whether accounts are in
balance);

- reconciling cash (a reconciliation between book and bank balances
for cash); and

- reconciling federal funds (a reconciliation between bank accounts
and federally reported balances for cash).

((Separation of functions))
According to regulations, institutions must separate the functions of
authorizing payment of and disbursing Title IV funds. Separation of
functions is a fundamental control concept in financial aid
administration. The financial aid administrator (or office) is charged
with the responsibility for authorizing disbursement by awarding aid
through the need analysis and packaging processes. The awarded-
aid information is then turned over to a business officer (or office)
who, in turn, is responsible for disbursing the aid by applying it to
institutional charges and/or delivering it to students.

A further control in the system is the requirement that the institution
maintain documentation to show that aid was appropriately applied
to institutional charges and that remaining aid was delivered to the
student.

((Regular reconciling activities))
To be effective, taking a trial balance and reconciling cash should be
performed at least monthly. Reconciling federal funds should be
performed no less frequently than quarterly in conjunction with
preparing the Federal Cash Transaction Report--Status of Federal
Cash (ED/PMS 272 Report). All Federal Work-Study, Federal
Perkins Loan, and Federal Direct Loan accounts are required to be
reconciled monthly.

There should be a segregation of functions that provides that the
person within the institution who reconciles cash and reconciles
federal funds does not also receive cash or perform disbursement
functions. The person performing reconciliations should receive
bank statements, Direct Loan reconciliation reports, and ED/PMS
272 Reports directly from the respective sources. Supervisory
approval of the completed reconciliations should be obtained and
evidenced on the forms.

The institution should use its internal or external auditors to
periodically verify that the systems of checks and balances have been
properly designed and are being followed routinely.

5.4.1 Trial Balance

A trial balance is the confirmation of the equality of debit and credit
balances. A trial balance for federal student financial aid programs is
a confirmation that accounts receivable, program expenditures, and
the cash balance equal the amount authorized.

A trial balance worksheet for federal student financial aid programs
appears on pages 198-9.

5.4.2 Reconciliation of Cash

Because cash is more susceptible to manipulation than other assets,
multiple checks and balances are necessary for effective internal
control of cash.

((Bank statements))
Reconciliation of cash is a confirmation that the cash amount shown
in accounting records is in agreement with the amount reflected in
the bank statement. Differences between accounting records and the
bank statement balance can be caused by timing variances, errors, or
unrecorded entries. The results of the reconciliation process can lead
to adjusting entries for:

- bank service charges;

- non-sufficient funds (NSF) checks;

- debit and/or credit memoranda; and

- error corrections.

Reconciliation also provides a means for identifying and correcting
bank errors. The person performing the reconciliation should be
trained to recognize and report:

((Possible sources of errors))
- delays in deposit;

- checks outstanding for long periods of time;

- irregularities in transfers and adjustments; and

- deviations with cancelled checks (payee, signature, or
endorsement).

The prompt and thorough performance of cash reconciliation duties
enhances the system of internal control.

On page 200, there is a worksheet that can be used to reconcile cash
for federal student financial aid programs. If an institution maintains
separate bank accounts for each program, this process should be
performed for each program.

5.4.3 Reconciliation of Federal Funds

Reconciliation of federal funds is a balancing of funds received from
the beginning of a school's participation in a program to the totals
currently recorded in the institution's accounts. In addition, the
reconciliation process should include a year's determination to check
agreement of reported expenditures among the trial balance report,
ED/PMS 272 Report, Institutional Payment Summary, FISAP,
Federal Direct Loan reconciliation report, and the audit report.
Differences among these records should be resolved.

One of the purposes of an audit is to check that all reconciliations
have been performed. Institutions should not view the audit as a
time to perform reconciliations.

The form on page 201 can be used for reconciliation of federal
funds.

5.4.3.1 Monthly Direct Loan Reconciliation

((Reconciliation period))
When an institution initially signs up to participate in the William D.
Ford Federal Direct Loan Program (Direct Loan Program), a decision
must be made as to the "as-of-date" each month that the institution
will use to reconcile loan records with the Direct Loan Servicing
Center (Servicing Center). Reconciliation must be performed each
month using the same "as-of-date." In the Direct Loan Program,
there are two types of transactions to be reconciled:

- cash transactions and

- loan transactions that affect cash.

((Cash reconciliation))
The first is the cash transaction. The institution must reconcile cash
drawdowns and returns of excess cash with the Servicing Center.
The reconciliation requires that the institution's financial accounting
system and other systems, such as the student account receivable
system, financial aid system, and the Direct Loan system, all be
reconciled.

((Loan record reconciliation))
The second is loan transactions that have affected cash
disbursements, cancellations, and adjustments that are matched with
the Servicing Center. The loan transaction process is actually a
data-verifying and editing process, primarily between the school's
Direct Loan system and Servicing Center records. This process
matches disbursements, adjustments, and cancellations to Servicing
Center files.

((Unreconciled records))
*26*
The institution receives a monthly report from the Servicing Center
indicating which loans are reconciled and which loans are not
reconciled. The report provides error messages indicating the reason
the loan records are not reconciled. A loan must be "booked" (the
Servicing Center must have received an origination record,
promissory note, and a first disbursement record) to be reconciled. If
a loan is not "booked," it will not reconcile. Normally, unreconciled
items result from timing errors, such as a batch of loan data that was
not included in a month-end close or a batch of loan data that was
shipped to the Servicing Center at the end of the month and rejected.
The institution's reports from the Direct Loan software and Servicing
Center reports are used to compare the data in the two systems.

5.4.4 Other Checks and Balances

There are a number of other types of checks and balances that can be
built into a system for administering student financial aid. Some
important types are:

- input controls,

- subsidiary records reconciliation, and

- a clear audit trail.

((Input controls))
INPUT CONTROLS: As input transactions are being entered into a
school's financial aid system, a record of the number of entries and
the dollar amount of entries should be recorded. This type of batch
control is necessary whether manual or automated systems are
involved. After all updates for a processing cycle have been
completed, the updated totals should be checked to ensure that all
batches (entries) have been entered. This type of control serves two
purposes: It ensures that batches are not lost, and it provides control
against unauthorized transactions being entered into the system.

((Subsidiary records reconciliation))
SUBSIDIARY RECORDS RECONCILIATION: All accounts
should be backed up by subsidiary ledger detail. Although taking a
trial balance can be used to ensure that all accounts balance in the
aggregate, it does not guarantee that there is sufficient evidence that
subsidiary records exist to support the totals in each account. Errors
can exist when changes or corrections are made to control accounts
without corresponding adjustments being made to subsidiary records.
Reconciliations between accounts and subsidiary records detail
should be performed at least monthly and should be conducted on a
more frequent basis during periods of high transaction volume. As
mentioned earlier, most Title IV programs require monthly
reconciliations.

((Clear audit trail))
CLEAR AUDIT TRAIL: A key element in any system of checks
and balances is maintaining a clear (easily followed) audit trail.
Records of all transactions entered into the system must be
maintained. Adequate documentation requires proper approval of all
transactions, a record of who was responsible for entering the
transaction, when the transaction was prepared and posted, and a
complete record of the transaction itself.

[[The sample documents on pages 198-201 are currently unavailable
for viewing. Please reference your paper document for
additional information.]]


*26* Refer to the April 1995 Direct Loan Reconciliation Guide for
further details on monthly Direct Loan reconciliation.

Last Modified: 06/30/1995