Internal Control Needed To Safeguard Your Business Assets
Richard L. Goldstein, MBA, CPA
year many business owners discover that their assets are not as
well protected as they thought when they become victims to employee
theft. This is particularly true in small-business environments
where a single employee manages all the finances. Often there are
no "checks and balances" to verify that transactions are
accurate. Most employee thefts are perpetrated by highly trusted
employees in key positions, involving substantial sums of money.
proper, consistent procedures are not in place, employees can learn
to manipulate the accounting system to their benefit. Whether they
take money from the company or their mistakes are undiscovered,
the end result can greatly impact your companys management
discussions, financial reports, and tax filings.
once year financial records have been altered, discovering problems
is extremely difficult. Most standard accounting practices are not
designed to uncover internal problems such as embezzlement.
on your CPA to protect against acts of one employee is a dependence
that is false comfort. A review or compilation engagement is
not designed nor intended to uncover or search for defalcations.
In conducting a review or compilation the CPA does not gather evidence
that may be necessary to uncover a defalcation. Also, the CPA concentrates
on large transactions and major accounts that, if in error, could
have a material effect on the companys financial statements.
For this reason, an employee who tampers with a number of small
accounts over an extended period will usually escape detection.
people holding key financial positions may have gained an understanding
of the review and compilation process and its inherent limitations.
Therefore, they are in a position to access the companys assets
by methods not subject to detection.
odds are that you will probably never experience a major defalcation.
Yet, statistics are high that at least one of our clients will be
victimized every few years.
the best way to safeguard your agency's assets is to recognize and
improve weakness in your internal procedures. Defalcations are more
likely to be discovered when there is an appropriate separation
of duties between asset handling and recording functions. It is
also critical that you exercise managerial oversight. The following
business practices can help you minimize potential internal control
Related duties should be assigned to different people: Certain
accounting functions are designed to cross-reference each other
for accuracy, writing/signing checks, ordering/paying/receiving
materials, handling cash/recording cash, etc. These procedures
can reveal inconsistencies in your records in a timely manner.
Reconcile and scrutinize your bank statements every month.
A bank statement can tell you a lot about your business if you
review the information in a timely manner. Actions you should
do on a monthly basis include the following:
Receive the unopened bank statement directly and open it up
b. Scan the front and back of all canceled checks.
Question the purpose of all transfers.
d. Compare payroll checks with employee records, and ask questions.
Never sign a check without inspecting original supporting documentation
including the invoice, shipping documents and the purchase order.
Cancel all supporting documentation after signing a check.
c. Never sign a check that is not completely filled in.
d. Verify the names of your vendors.
4. Protection of Valuables
Keep blank checks and the signature stamp secure. (Better yet,
do not use a signature stamp.)
b. Deposit all cash and checks daily.
Get fidelity bond insurance for all accounting and key employees.
d. Backup all computer files on a regular basis and store the
backup at a secure, remote location.
e. Periodically, change computer system passwords.
Watch out for changes in employee behavior:
a. Always verify employee references before hiring.
Be aware of substance abuse, changes in lifestyle, living beyond
means, possessiveness of work.
are some of the internal controls that can help you reveal many
discrepancies. Your CPA can help you develop and implement any of
these important internal controls.
Internal Control/Defalcation Checklist
Segregation of Duties
Is the person who handles cash also responsible for recording
b. Does the person who pays or orders inventory also receive
Are two or fewer people responsible for reviewing financial
statements each month?
d. Is your review of financial journals sporadic?
2. Bank Reconciliations:
Do you reconcile the bank statement on a timely basis, at least
once a month?
b. Do you review any adjustments and verify reconciling items?
c. Are reconciliations performed by one person and reviewed
Is the person who writes checks restricted from signature authority?
e. Do you review canceled checks and endorsements on a monthly
f. Do you compare payroll checks with your current employee
g. Do you question funds transferred between bank accounts?
h. Do you track the number of credit card bills you sign each
Do you ever sign blank checks?
Do you ever sign checks without original supporting documentation?
c. Have funds ever been transferred between accounts without
review or verification?
Do you ever sign checks for new business vendors without knowing
or verifying their name and association with your company?
4. Employees: [Know your employees and be aware of changes
in their behavior.]
Are any employees extremely possessive of their work records
and reluctant to share their tasks?
b. Are any employees apprehensive about taking a vacation and
time off, and are also the first one in the office and last
Have you noticed a substantial change in the lifestyle of any
d. Do any of your employees have a possible substance abuse
e. Are any of your employees living beyond their means?
f. Have you ever hired an employee without checking references?
g. Do you permit accounting personnel to work longer than a
year without taking a vacation?
h. Do you have any accounting staff that has not been bonded?
Safeguard Assets: Are blank checks and signature stamps
Do you restrictively endorse all checks?
b. Do you deposit all cash and checks daily?
Do you maintain a list of office furniture, equipment, and vehicles?
d. Do you back up all computer files on a regular basis and
store the backup in a remote location?
e. Do you have password restrictions for your systems?
f. Do you maintain adequate insurance coverage on all assets
including business interruption insurance?
Procedures in a Review Engagement
conducting a review engagement, the accountant performs procedures
consisting of inquiries of company personnel and analytical procedures
applied to financial statement data. Generally, the accountant does
not gather evidence as he or she does in an audit.
procedures include evaluations of financial information made by
a study of plausible relationships among both financial and non-financial
data. A basic premise underlying the application of analytical
procedures is that plausible relationships among data exist. Analytical
procedures may help identify potential material misstatements. The
results of such procedures should be used as a basis for making
additional inquiries and obtaining additional information. Using
analytical procedures includes not only calculating ratios and trends,
but also analyzing the results and identifying fluctuations and
rules for applying analytical procedures are found in SSARS No.
1 and include the following:
a) Compare financial statements from year to year, for comparable
b) Compare financial statements with budgeted/forecasted information
for comparable periods.
c) Study relationships of the elements of the financial statements
that would be expected to conform to a predictable pattern based
on an entitys experience.
are three (3) types of analytical procedures:
Trend analysis: Study the change in accounts over time.
Reasonableness tests: estimating a financial statement amount
or the change in an amount from the prior year and comparing it
to the existing financial statement amount.
c) Ratio analysis: Studying the relationship between two financial
the analytical procedures identify significant fluctuations and
lead the accountant to believe that information may be incorrect,
incomplete or otherwise unsatisfactory,
No. 1 requires the accountant to perform the additional procedures
he or she deems necessary to achieve limited assurance that no material
modifications should be made to the financial statements.
applying analytical procedures in a review engagement, the accountant
may achieve both effectiveness and efficiency by using the following
of account balances
no analytical procedures if the risk of understatement is low.
Significant other accounting procedures have already been
whether the existing evidence is adequate and whether any
material errors are likely to occur. Analytical procedures
are usually not needed.
Significant other procedures have not been applied. Analytical
procedures should be applied:
procedures should be applied:
Develop expectations using historical trends.
b. Compare the actual balance to the expected balance. If
the result is close, no additional procedures are applied.
c. If the result is a large difference, material errors
could exist. Inquiry about valid business reasons for the
difference should be made.
d. Other analytical procedures should be applied if needed.
:: back to articles & resources