University Housing $($Housing$)$ is an auxiliary service enterprise of the State University consisting of two dormitory complexes, housing $1,284$ students, operated by the University under capital leases with private companies. The leases are for periods of $30$ and $40$ years and require annual lease payments of $$1,750,000.$

The University accounts for University Housing operations as part of the Auxiliary Trust Fund, which includes other auxiliary operations in addition to Housing. Each auxiliary function is accounted for separately. As an auxiliary enterprise, University Housing is a self$-$supported operation and does not receive state funding.

The University has exercised an option, pursuant to the lease agreements, to acquire one of the two housing complexes and is studying several courses of action. It is also considering refinancing the lease obligation at a lower rate for the other complex in order to reduce lease payments. The Vice President for Business and Finance requested Internal Audit to conduct an audit of the housing operation. This audit would allow for review of the internal control structure in place and development of recommendations to enhance existing controls.

You will assist the auditor assigned to the revenues and collections cycle in determining the findings and issuing recommendations.

Internal Control Review

The auditor obtained the following information after a review of relevant documents and discussions with the Director of Housing, the housing Fiscal Assistant, the University Controller and the Head Cashier. To confirm understanding of the process, the auditor performed a transaction walk$-$through.

$$ Housing has a central office that handles all resident contracts, room assignments, billings, and monitoring of payments and outstanding balances. Each housing complex has a coordinator in charge of daily matters related to the operation of the complex.

$$ The University Controller's Office $($Controller$)$ maintains the official accounting records of the university. Although the Fiscal Assistant in housing initiates transactions such as billings and receivable adjustments, these are then recorded by the Controller's Office. A monthly general ledger is produced by the University Controller's Office.

$$ In addition to the official account receivable system maintained by Controller, Housing has a manual ledger card system to keep track of student payments. A card is kept for each resident to reflect all charges and payments. The cards are maintained by the housing Fiscal Assistant.

$$ All collections are handled by the University Cashier's Office $($Cashier$).$ Cashier sends a copy of the receipt to Housing together with a daily list of all transactions affecting Housing. Housing's Fiscal Assistant records payments in the student's ledger card and agrees information on the transaction list to supporting documentation

$$ Cashier records the collection in the computer, which produces a numbered receipt. At the end of the day, the cash registers are balanced and the deposit is prepared. An armored car service takes the deposit to the bank. Controller reconciles the deposit per Cashier to the deposit per the bank and investigates any differences.

$$ Housing fees are due at the beginning of each term. Before handing the room key to the student during check$-$in$,$ the complex coordinator verifies that the student is included on the list of students with signed contracts and also on the list of students that have paid at least $50\%$ of the semester's rent fees $($see automatic deferral explained below$).$

$$ Residents have the option of automatically deferring up to $50\%$ of the housing fees until the midpoint of the semester. At that time, the housing Fiscal Assistant prepares billings for those students who had partially deferred payment of the rent fee. The billings prepared by the Fiscal Assistant are sent to Controller where they are entered into the computer and recorded in the accounts receivable system.

$$ After the billing for the second half of the payment is due, a list is printed of all past due receivables. The Director sends the students a notice indicating that they have seven days to pay or will be evicted. Students with past due accounts are not allowed to register for a new term, obtain transcripts, or graduate.

$$ Adjustments to the accounts receivable system originate with the housing Fiscal Assistant. After careful investigation, the Fiscal Assistant prepares an adjustment input form, which is entered by Controller's into the computer and adjusts the accounts receivable system. The Fiscal Assistant also posts the adjustment to the resident's ledger card.

TESTS OF INTERNAL CONTROLS

Several tests were conducted to determine whether key controls identified during the internal control evaluation were in effect. The following is a list summarizing the results of the tests performed:

$1.$ A sample of residents was selected. For each re