The first step in developing effective internal controls is to identify those areas where abuses or errors are likely to occur. Two common areas are cash receipts and disbursements, and payroll.
The following questions and suggestions reflect common controls related to each area and should be used to review your own internal accounting controls and determine which areas require further action.
Cash receipts and disbursements
Are the duties of receiving funds, disbursing funds, writing checks, signing checks and reconciling bank accounts separated? To reduce fraud, consider signing checks when needed rather than signing them in advance, as well as ensuring checks are signed by authorized signers. And require two signatures for amounts over a predetermined cutoff.
Are checks restrictively endorsed when received, and are cash receipts deposited promptly? Is adequate employee fidelity bond insurance maintained? Do you prohibit checks payable to cash?
Are there adequate controls over non-check disbursements such as debit memos and wire transfers (for example, passwords for individuals authorized to make transfers, etc.)? Are employees with cash disbursement and bank reconciliation duties required to take vacations, and are other employees required to perform those functions when an employee is absent?
Are all disbursements, except those from petty cash, made by pre-numbered check? Do you keep blank checks in a secure location? Are voided checks canceled and retained?
Does someone other than the person responsible for the bank reconciliation receive and review bank statements and related enclosures, and are those bank accounts reconciled regularly and reviewed by the owner/manager or another appropriate person?
Are checks prepared only after proper matching of supporting documentation and approval? Do you make payments from only original invoices? Is supporting documentation canceled when the check is prepared and marked with the check number and date?
Is the clerical accuracy of supporting documentation checked? Does the check signer review all supporting documentation?
Are persons preparing payroll independent of other payroll and personnel duties (e.g., timekeeping, distribution of checks, hiring employees) and restricted from access to other payroll data or cash? Is there restricted access to blank payroll checks?
Are employees with payroll responsibilities required to take vacations, and are other employees required to perform those functions when an employee is absent? Are prenumbered payroll checks used, the sequence accounted for and unissued checks controlled?
Do you reconcile payroll registers and the general ledger to gross and net pay amounts per the payroll tax returns? Is there a year-end reconciliation of total W-2 wages to the general ledger and payroll register wages paid? Is there a periodic general review of payroll registers by the owner or manager or other appropriate person?
Does the owner or manager or other appropriate person periodically compare actual to budgeted payroll and investigate significant variances?
Are there adequate authorization and documentation procedures regarding changes in employment (additions and terminations), in salary and wage rates, and in amounts of payroll deductions? Do you require adequate authorization and approval procedures regarding vacation, holiday and sick leave compensation? Are there adequate timekeeping and attendance records and procedures?
Are procedures in place to ensure that payroll taxes and other withholdings, such as 401(k) and cafeteria plan withholdings, are remitted in a timely manner? Do you have procedures in place to ensure that payroll tax returns are filed when due? What about procedures to ensure that year-end W-2 and 1099 forms are prepared accurately?
Is access to personnel files restricted to appropriate persons? Do you use direct deposit whenever possible? Are background checks performed on new employees?
Other areas to consider
Are financial statements prepared and reviewed by appropriate persons? Are employees properly trained and supervised?
Are responsibilities and expectations clearly communicated? Are employees encouraged to suggest ways of improving controls?
These questions are not all-inclusive, but rather a reminder of some basic controls to be considered. No internal control system can completely eliminate the risk of fraud; however, applying these questions to your business may help reduce that risk to an acceptable level. Lori Mallard (firstname.lastname@example.org) is a senior associate with Tauber & Balser, P.C. in the accounting and audit department. She has more than 15 years of experience in both public and private accounting with a concentration in assurance and attestation. She has developed expertise in auditing and consulting for not-for-profit organizations. Reach her at (404) 814-4918.