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Internal Controls

BY Matthew Los, CPA
04/17/2014 - 3:06pm

Internal control is a system of policies and procedures that operate within accounting, necessary to reduce the risk of fraud.  Without any controls/oversight in place, it is like leaving the door unlocked with the cash register drawer open, hoping that no one will steal any money.  Even employees who are honest can be tempted when they see large sums of money in front of them.  Also, without internal controls, a business owner can never know if their information is complete, accurate or reliable.  Time should be taken to set-up, implement and review these policies and procedures.

Internal Controls – Policies and Procedures

When you have a small office and limited staff, it’s easy to have the mentality that the segregation of duties is impossible.  However, it is important to remember that you don’t want one person doing it all.  Below is a short list of policies and procedures that you should consider implementing: Cash Receipts and Accounts Receivable

     o Have at least two people involved in depositing cash receipts/accounts receivable payments.  This allows for cross–checking of information and can also help eliminate cash receipt fraud. For instance: 

         • When cash comes in the door, the cash/checks should be logged onto a slip for deposit.  You can have the receptionist open the mail, log the checks (make a copy of the log) and give them to the bookkeeper to enter into the books.  The bookkeeper can then make the deposit to the bank.   The owner should check the log and compare it against the deposit.

     o Some banks now offer check scanning capabilities where the checks can be scanned at the office and immediately deposited into the account.  The images of the checks can then be maintained electronically.

     o All write-offs and credit memos should be approved in writing by management and filed with the original invoice.

Cash Disbursements and Accounts Payable

     o All requests for check or cash disbursements should include the original invoice or receipt.  The invoice should clearly show what is being purchased and the purchase amount.  Specify the individual (by title, not name) who is authorized to approve cash or check disbursements.

     o Consider having a check signing threshold that requires two people to sign a check if it exceeds a certain amount (i.e. $5,000).  An appropriate threshold   depends on the company.

     o Consider the use of purchase orders for purchases over a certain amount.  This threshold would vary depending on the size of business.  All purchase orders should be approved and then matched up with any incoming invoices and receipt of the goods and/or services.  

     o Create an approved vendor list.  This prevents employees from setting up a fictitious vendor, and then sending in legitimate-looking bills to be paid.  Create a policy whereby management must approve a vendor before any business can be done with that vendor.

     o Check signors should not be the same people who are preparing the checks.  When reviewing the checks for signing, the check signor should compare the check amount and payee to supporting documentation.

     o Print out a check register of all checks paid and verify completeness.  Make sure that all checks per the register, have been reviewed and signed and that there are no additional checks.

     o Have someone other than the one who prepared the checks mail them.  Checks mailed by the same person could get “lost” and “replaced”  - perhaps to a different payee than was authorized.  This segregation of duties can be accomplished in an easy way by having the check signor also put the check and stubs in the vendor envelopes, seal them for mailing and then give them to the postal carrier.  This prevents anyone from changing a check after it has been signed.

     o Avoid issuing “emergency” checks!  If absolutely necessary, create a log for such checks and require receipts to be brought back to support the check and review frequently.

If you have questions about internal controls and accounting policies, please give us a call; we would be happy to help.