|
Click Here
for more Articles
|
|
|
|
Internal
Control - A Preventive Maintenance Program
|
|
by:
John Day
|
You read about this in every newspaper in
every town in the entire country: Some bookkeeper, trusted by the owner
of a small business, embezzles thousands of dollars. If the theft
doesn’t put owner out of business, it certainly causes a major headache.
The reason we hear of these cases so often is that, in a small
business, there may only be the owner and a bookkeeper. The owner
doesn’t like doing the books, doesn’t understand them, and relies on
this one person to take care of things. The bookkeeper, who is usually
having personal financial difficulties, takes a small amount of money
intending to pay it back. No one seems to notice, so more is taken.
Over a period of time, it starts to mount up to a lot of money.
This is where the concept of “internal control” comes in. Essentially,
every business should have, at some level, an internal control system
in place to protect against losses, both intentional and unintentional.
This is because “internal control” systems will: 1) protect cash and
other assets; 2) promote efficiency in processing transactions; and, 3)
ensure reliability of financial records. An internal control system
consists primarily of policies and procedures designed to provide
reasonable assurance that these three objectives will be achieved. The
size and complexity of the business will determine the extent of the
internal control system.
Regardless of size, one of the most important aspects of an internal
control system is the concept of separation of duties. Separating
duties makes it more difficult for theft and errors to go undetected.
It is highly unusual for two employees to “collude” in an effort to
steal from the company.
I worked as an internal auditor for a newspaper chain for three years.
My job was to walk in to the newspaper offices unannounced and go
directly to the cash boxes, count them, and verify receipts. One of my
most important audit steps was to make sure the internal control
procedures were in place and working properly. Here are a few
suggestions for internal control procedures regarding handling of cash:
- Allow only specific designated individuals to handle cash.
- Give responsibility for bookkeeping to an individual who does not
handle cash.
- Use numbered receipts to document all payments.
- Make all bank deposits promptly.
- The person who prepares the bank reconciliation should be different
than the one handling cash.
- If possible, the person who makes the bank deposit should be
different than the one who handles the cash and the one who prepares
the bank reconciliation.
- Make deposits intact with no amounts withdrawn to pay expenses.
- Keep cash and checkbook in a locked drawer or cash register.
- Since tills will never be 100% correct all the time, establish a
tolerance level for overages and shortages to determine the point at
which corrective measures will be triggered.
- Make all disbursements by check, except minimal amounts paid from
petty cash.
- Make certain every payment is related to a paper document, such as a
voucher, to ensure that a paper trail exists for all disbursements.
- Conduct random surprise counts of petty cash and cash drawers.
- Count inventory and other assets frequently and compare with company
books.
An internal control system set up early as a preventative measure is
more efficient than establishing a corrective system in reaction to a
loss. If it so happens, that there is just you and the bookkeeper in
your small business, you need to learn how to do some of the
bookkeeping tasks so you can spot check the bookkeeper’s work. That, in
itself, is an excellent preventative measure.
About the author:
John W. Day, MBA is the author of two courses in accounting basics:
Real Life Accounting for Non-Accountants (20-hr online) and The HEART
of Accounting (4-hr PDF). Visit his website at http://www.reallifeaccounting.comto
download for FREE his 3 e-books pertaining to small business accounting
and his monthly newsletter on accounting issues.
Circulated by Article Emporium
|
|
